<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8099 33-0730363
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
</TABLE>
3540 HOWARD WAY
COSTA MESA, CALIFORNIA 92626-1417
(714) 436-4800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JACK D. MASSIMINO
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
3540 HOWARD WAY
COSTA MESA, CALIFORNIA 92626-1417
(714) 436-4800
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
------------------------------
COPIES TO:
C. JAMES LEVIN, ESQ.
O'MELVENY & MYERS LLP
400 SOUTH HOPE STREET
LOS ANGELES, CALIFORNIA 90071-2899
(213) 669-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
OR, IF LATER, UPON THE EFFECTIVE TIME OF THE FHP MERGER
--------------------------
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
--------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED(1) BE REGISTERED PER UNIT(1) PRICE(1)(2) FEE(1)
<S> <C> <C> <C> <C>
COMMON STOCK, $.01 PAR VALUE(3)............. 2,767,500 $21.50 $59,501,250 $18,031
RIGHTS TO PURCHASE COMMON STOCK............. 2,767,500 -- -- --
</TABLE>
(1) CALCULATED PURSUANT TO RULE 457(O).
(2) ESTIMATED SOLELY FOR THE PURPOSE OF COMPUTING THE AMOUNT OF THE REGISTRATION
FEE PURSUANT TO RULE 457(A).
(3) THIS REGISTRATION STATEMENT ALSO INCLUDES RIGHTS IN RESPECT OF SUCH COMMON
STOCK PURSUANT TO THE STOCKHOLDER RIGHTS AGREEMENT BETWEEN THE COMPANY AND
AMERICAN STOCK TRANSFER & TRUST COMPANY.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
2,767,500 SHARES
TALBERT MEDICAL MANAGEMENT HOLDINGS
CORPORATION
[LOGO]
COMMON STOCK
--------------------------
In connection with the merger of FHP International Corporation ("FHP") and
PacifiCare Health Systems, Inc. ("PacifiCare"), transferable rights ("Rights")
to subscribe for 92.25% of the shares of Common Stock of Talbert Medical
Management Holdings Corporation, a Delaware corporation ("TMMHC" and, together
with its subsidiaries and affiliated medical groups, the "Company", unless
otherwise noted), for $21.50 per share (the "Subscription Price") are being
delivered to the common and preferred stockholders of FHP (the "Offering") as
part of the consideration payable in the merger. FHP stockholders will receive
Rights based on the number of shares of FHP Common Stock and FHP Preferred Stock
held of record at the effective time of the merger (the "Effective Time"), which
is currently anticipated to be on or about January , 1997. Based on current
expectations concerning the number of shares of FHP Common Stock that will be
outstanding as of the Effective Time, FHP stockholders are expected to receive
one Right for every 21.34381 shares of FHP Common Stock and one Right for every
26.46474 shares of FHP Preferred Stock. Rights holders may purchase one share of
the Company's Common Stock with each Right and also may subscribe for additional
shares of the Company's Common Stock in accordance with the Additional
Subscription Privilege described under "The Offering--Additional Subscription
Privilege." The Rights will be evidenced by transferable subscription
certificates. Prior to the Offering, there has not been a public market for the
Common Stock of the Company. See "The Offering" for factors that were considered
in determining the Subscription Price. Proceeds of the Offering will be used to
repay indebtedness to FHP incurred in the Company's acquisition of FHP's equity
interest in Talbert Medical Management Corporation and Talbert Health Services
Corporation.
The Rights will be exercisable only during the subscription period, which
will expire at 5:00 P.M., Eastern Standard Time, on the thirtieth day after the
Effective Time or such other time as the commencement of the Offering is legally
permissible (the "Expiration Date"), which is currently anticipated to be on or
about February , 1997. The Rights will be valueless thereafter. Holders of
Rights are encouraged to consider carefully with their tax and financial
advisors the exercise or sale of the Rights prior to their expiration, since
they become valueless once they expire. Failure to take any action with respect
to the Rights could have adverse tax and financial consequences. See "The
Offering--Certain Federal Income Tax Consequences."
The Company has applied to have the Rights and the Common Stock approved for
quotation on the Nasdaq National Market under the symbols "TMMCR" and "TMMC,"
respectively. Trading in the Rights will cease on the Expiration Date.
AN INVESTMENT IN THE COMMON STOCK IS SUBJECT TO SUBSTANTIAL RISK OF LOSS.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC COMPANY(1)
<S> <C> <C>
Per Share............................................................... $21.50 $21.50
Total................................................................... $59,501,250 $59,501,250
</TABLE>
(1) Does not include expenses of the Offering payable by FHP estimated at
$ .
------------------------
The date of this Prospectus is , 1997
<PAGE>
TALBERT MEDICAL CENTERS
The following maps indicate the location of each medical center currently
operated by the Company:
[MAP] OF SOUTHERN CALIFORNIA MEDICAL CENTERS
[MAP] OF UTAH MEDICAL CENTERS
[MAP] OF ARIZONA MEDICAL CENTERS
[MAP] OF NEW MEXICO MEDICAL CENTERS
[MAP] OF NEVADA MEDICAL CENTERS
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
The Company, through its wholly-owned subsidiary, Talbert Medical Management
Corporation, a Delaware corporation ("TMMC"), organizes and manages physician
and dentist practice groups that contract with health maintenance organizations
("HMOs") and other payors to provide health care services to their members. As
of September 30, 1996, TMMC had management services agreements with ten
affiliated practice groups and directly operated one practice group
(collectively, the "Talbert Medical Groups") employing approximately 360
physicians and 80 dentists and providing care through 52 medical, dental and/or
vision centers (the "Medical Centers") located in southern California, Utah,
Arizona, New Mexico and Nevada. Together with the Talbert Medical Groups, TMMC
managed over 303,000 capitated enrollees as of September 30, 1996, and
generated, for the year ended December 31, 1995, revenues of more than $495
million.
Under a managed care system, HMOs and other payors arrange to provide health
care for their members either by employing physicians and other health care
professionals directly (the "staff model") or by contracting with independent
groups (the "contracted care model"). Under the contracted care model, HMOs
often use "capitation" payments (i.e., payments based solely on the number of
members enrolled with the medical group) to control costs and minimize risk.
However, most physicians practice individually or in small groups that often do
not have the administrative capacity, risk management expertise or information
systems necessary to manage capitation arrangements with multiple payors.
Physician practice management companies ("PPMCs"), such as TMMC, have
evolved recently to provide these services, freeing physicians to focus on the
practice of medicine. TMMC provides a broad range of practice management
services to the Talbert Medical Groups, including (i) provider contract
negotiation and administration, (ii) Medicare risk management, (iii) management
information systems (development, implementation and maintenance), (iv) medical
management (claims administration, utilization and case management, quality
assurance and risk management, and physician credentialing and recruitment), and
(v) support services (including nursing, billing, collection and accounting).
Ancillary clinical services (including pharmacy, radiology, optometry,
laboratory, home health, hospice, rehabilitation and physical therapy) are
provided by Talbert Health Services Corporation, a Delaware corporation
("THSC"), which is also a wholly-owned subsidiary of the Company. TMMC provides
services under a management services agreement with each Talbert Medical Group,
and in return is reimbursed for certain clinic operating expenses and receives a
management fee based on the Talbert Medical Group's revenues after deducting
certain reimbursed clinic operating expenses (except in California, where the
management fee is based on the Talbert Medical Group's gross revenues, and in
New Mexico, where TMMC directly employs the physicians in the Talbert Medical
Group). TMMC currently has management services agreements with four physician
practice groups and six dental practice groups. All of the present Talbert
Medical Groups were formerly a part of FHP's staff model operations. Over time,
the Company intends to seek acquisitions of or affiliations with additional
practice groups in new and existing markets.
TMMC represents the Talbert Medical Groups in obtaining and negotiating
provider agreements with HMOs and other payors. Under a typical provider
agreement, a Talbert Medical Group is responsible for managing all
physician-related covered medical care for each member of the HMO enrolled with
the Talbert Medical Group, in exchange for a prepaid monthly capitation payment
for each such enrollee. Provider agreements generally include shared risk
arrangements and other financial incentives designed to encourage the provision
of high-quality, cost-effective health care. The Talbert Medical Groups and TMMC
currently have a total of 11 provider agreements with FHP, which accounted for
nearly 100% of the Company's revenues for the nine months ended September 30,
1996. The financial results of the Talbert
3
<PAGE>
Medical Groups are combined with those of the Company for financial reporting
purposes because the assets and non-medical operations of the Talbert Medical
Groups are substantially controlled by TMMC. See "Consolidated Financial
Statements--Note 1." TMMC has recently entered into provider agreements with a
number of other payors on behalf of certain of the Talbert Medical Groups, and
expects to further diversify its payor base following its separation from FHP
(as described below).
The following table sets forth the number of Medical Centers, affiliated
physicians, and capitated enrollees for each of the states in which TMMC does
business:
<TABLE>
<CAPTION>
CAPITATED
MEDICAL AFFILIATED ENROLLEES
CENTERS PHYSICIANS (1) (1)
------------- ----------------- ------------
<S> <C> <C> <C>
California.............................. 24 206 132,463
Utah.................................... 7 80 109,652
Arizona................................. 14 41 31,460
New Mexico.............................. 5 27 25,504
Nevada.................................. 2 6 4,706
--
--- ------------
Total................................. 52 360 303,785
--
--
--- ------------
--- ------------
</TABLE>
- ------------------------
(1) As of September 30, 1996.
SEPARATION FROM FHP
The Company's predecessor businesses formed a part of the staff model
operations of FHP, and had been active in managed care since 1961. Since January
1, 1996, TMMC and THSC have operated as subsidiaries of FHP, providing practice
management and ancillary clinical services to the medical groups that formerly
were a part of FHP's staff model operations and that provide health care to
approximately 15.7% of FHP's members. In July 1996, FHP determined to pursue a
tax-free spin-off of TMMC and THSC in the belief that they would be more
attractive to other payors if they operated independently from FHP.
Soon after FHP's decision to spin off TMMC and THSC, FHP agreed to merge
with PacifiCare. FHP and PacifiCare have agreed to abandon the tax-free spin-off
of TMMC and THSC, and instead to proceed with the separation of TMMC and THSC
from FHP concurrent with the merger of FHP and PacifiCare (the "FHP Merger"). To
effect this separation, FHP has agreed to sell its 92.25% equity interest in
both TMMC and THSC to the Company at the closing of the FHP Merger (the
"Acquisition"). In exchange, FHP will receive rights to purchase 92.25% of the
Company's Common Stock, plus a note (the "Talbert Note") for $59,501,250, the
estimated proceeds of the Offering if fully subscribed. By virtue of the FHP
Merger, shares of FHP Common Stock and FHP Preferred Stock will be converted, in
part, into the Rights, which confer upon the holders, collectively, the right to
purchase 92.25% of the Company's Common Stock. The Company will sell to FHP any
shares of Common Stock unsubscribed in the Offering in exchange for cancellation
of any remaining indebtedness under the Talbert Note.
If the Offering is not fully subscribed, the unsubscribed portion of the
Common Stock will be reacquired by FHP (and, therefore indirectly by the holding
company that will own 100% of FHP and PacifiCare as a result of the FHP Merger
("PacifiCare Holdings")). The Company and FHP have entered into a standstill
agreement with respect to any Common Stock obtained by FHP following the
Acquisition (the "Standstill Agreement"). The Standstill Agreement provides,
among other restrictions, that if FHP reacquires 20% or less of the Company's
outstanding Common Stock after the consummation of the Offering, FHP (i) will
vote its shares of Common Stock in accordance with the votes of the non-FHP
stockholders, (ii) will not acquire additional shares of Common Stock, (iii)
will be subject to certain restrictions with respect to its ability to solicit
proxies, make acquisition proposals, become a member of a "group" (as defined in
federal securities laws), or otherwise use its holdings of Common Stock to seek
to exercise control over the Company's management, and (iv) will be entitled to
certain registration rights.
4
<PAGE>
TMMC will continue to provide practice management services to the Talbert
Medical Groups following the Acquisition. The Talbert Medical Groups will
continue to provide care to enrolled members of FHP under their existing
provider agreements until the Effective Time. Pursuant to the terms of the FHP
Merger, FHP and the Talbert Medical Groups were required to renegotiate their
existing provider agreements to reflect rates based on market capitation rates.
New provider agreements covering FHP members (the "New FHP Provider Agreements")
will take effect as of the Effective Time. The New FHP Provider Agreements do
not provide the subsidies included in the existing provider agreements with FHP
and are expected to adversely affect the Company's per enrollee revenue and
expenses. See "Relationship with FHP and PacifiCare Following the
Offering--Provider Agreements."
FHP will provide certain administrative services to the Company on an
interim basis. FHP also will continue to lease to the Company certain Medical
Center facilities and equipment. See "Relationship with FHP and PacifiCare
Following the Offering."
Prior to the Acquisition, TMMC will receive, in connection with the FHP
Merger, a capital contribution sufficient to increase its net worth to
approximately $59 million (the "Capital Contribution"). The amount of the
Capital Contribution is currently anticipated to be approximately $68 million,
but will not exceed $70 million.
THE OFFERING
<TABLE>
<S> <C>
Subscription Price................ $21.50 per share of Common Stock.
Basic Subscription Privilege...... Based on current expectations concerning the number of
shares of FHP Common Stock that will be outstanding as
of the Effective Time, FHP stockholders are expected to
receive one Right for every 21.34381 shares of FHP
Common Stock and one Right for every 26.46474 shares of
FHP Preferred Stock held of record at the Effective Time
(currently anticipated to be on or about January ,
1997). Each holder of Rights will be entitled to
purchase one share of Common Stock for each Right held.
The Rights are evidenced by transferable subscription
certificates (the "Subscription Certificates").
Additional Subscription
Privilege....................... Persons who exercise their Basic Subscription Privilege
may purchase additional shares (subject to proration and
the limits on exercise described below) from any shares
remaining unsubscribed after the exercise of the Basic
Subscription Privilege.
Exercise Cap...................... Rights may not be exercised to the extent that the
holder would become the beneficial owner of more than 8%
of the shares of Common Stock outstanding. However,
holders of FHP Common Stock or FHP Preferred Stock who
are the beneficial owners of FHP Common Stock (on an
as-if-converted basis) in excess of 8% of the
outstanding shares of FHP Common Stock (on an as-
if-converted basis) as of the Effective Time (the "FHP
Ownership Percentage") may exercise Rights to the extent
that their beneficial ownership of Common Stock does not
exceed their FHP Ownership Percentage.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Subscription Procedure............ Rights may be exercised by delivery of the related
Subscription Certificate properly completed and
accompanied by full payment for all shares of Common
Stock subscribed for pursuant to the Basic Subscription
Privilege and the Additional Subscription Privilege to
American Stock Transfer & Trust Company (the
"Subscription Agent"), on or before the Expiration Date.
In the event of a proration of shares of Common Stock to
persons exercising the Additional Subscription
Privilege, the Subscription Agent will promptly refund,
without interest, the amount of any overpayment.
Expiration Date................... The thirtieth day following the Effective Time or such
other time as the commencement of the Offering may be
legally permissible (currently anticipated to be on or
about February , 1997), at 5:00 P.M., Eastern Standard
Time.
Transferability of Rights......... The Rights are transferable, but no assurance can be
given that an active trading market will develop, or if
a market develops, that it will continue until the
expiration of the Rights.
Proceeds of the Offering.......... If fully subscribed, the Offering will result in
proceeds of approximately $59.5 million. The proceeds of
the Offering will be used entirely to repay indebtedness
to FHP incurred in the Acquisition. Prior to the
Acquisition, TMMC will receive, in connection with the
FHP Merger, the Capital Contribution, to increase its
net worth to approximately $59 million.
Listing........................... Application has been made for quotation of the Rights
and the Common Stock on the Nasdaq National Market under
the symbols "TMMCR" and "TMMC," respectively. Trading in
the Rights will cease on the Expiration Date.
Fractional Rights................. No fractional Rights will be issued to FHP stockholders.
The Subscription Agent will determine the aggregate
number of fractional Rights that would have been issued
to FHP stockholders had fractional Rights been issued.
The Subscription Agent will sell, if practicable, the
nearest whole number of Rights and remit the net
proceeds, if any, to FHP stockholders based on the
number of fractional Rights they would have received.
</TABLE>
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data sets forth, for the
periods and dates indicated, summary consolidated financial data of the Company
and its subsidiaries (including the Talbert Medical Groups) derived from the
historical consolidated financial statements of its predecessors. The
consolidated statement of operations data presented below for the years ended
December 31, 1993, 1994 and 1995, and the consolidated balance sheet data at
December 31, 1994 and 1995 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus. The consolidated statement of operations data for the years ended
December 31, 1991 and 1992, and the nine months ended September 30, 1995 and
1996, and the consolidated balance sheet data at December 31, 1991, 1992 and
1993, and September 30, 1995 and 1996 are derived from unaudited consolidated
financial statements of the Company and its subsidiaries that are not included
herein. The summary consolidated financial data presented below are qualified by
reference to the consolidated financial statements included elsewhere in this
Prospectus and should be read in conjunction with such financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1991 (1) 1992 (1) 1993 (1) 1994 (1) 1995 (1) 1995 (1) 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue (2)(3).............. $ 352,553 $ 402,599 $ 470,883 $ 503,338 $ 495,699 $ 379,365 $ 351,235
Expenses
Affiliated medical
services................ 128,224 153,387 170,690 173,230 173,417 132,051 103,504
Purchased medical
services................ 69,459 84,307 110,582 124,083 121,570 94,133 85,851
Dental services........... 13,970 16,128 20,129 28,955 31,379 24,544 20,443
Optometry, pharmacy and
other primary health
care services........... 52,999 70,702 86,985 96,275 102,412 77,395 80,181
Clinic operations......... 76,992 78,662 80,853 87,253 85,585 68,235 49,207
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of health
care.................. 341,644 403,186 469,239 509,796 514,363 396,358 339,186
Marketing, general and
administrative.......... 20,606 22,569 24,002 26,675 29,698 22,188 19,622
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss.............. (9,697) (23,156) (22,358) (33,133) (48,362) (39,181) (7,573)
Interest income (4)......... -- -- -- -- -- -- 1,199
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before income tax
benefit................... (9,697) (23,156) (22,358) (33,133) (48,362) (39,181) (6,374)
Income tax benefit.......... (3,873) (9,244) (8,924) (13,553) (19,754) (16,005) (2,604)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss (5)................ $ (5,824) $ (13,912) $ (13,434) $ (19,580) $ (28,608) $ (23,176) $ (3,770)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss per common and common
equivalent share (6)...... $ (1.94) $ (4.64) $ (4.48) $ (6.53) $ (9.54) $ (7.73) $ (1.26)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1991 (1) 1992 (1) 1993 (1) 1994 (1) 1995 (1) 1995 (1) 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (5)......... $ (18,105) $ (17,937) $ (18,087) $ (18,742) $ (18,638) $ (18,101) $ (10,779)
Total assets (5)............ 10,614 14,003 18,926 23,087 23,178 19,779 51,731
Long-term obligations....... -- -- -- -- -- -- --
Stockholders' deficit
(5)(7).................... (17,425) (17,276) (17,475) (18,113) (17,886) (17,519) (3,670)
</TABLE>
- ------------------------
(1) Reflects financial information relating to the historical staff model
operations of FHP prepared in part from separate records maintained by
subsidiaries of FHP. This information also reflects certain assumptions
regarding the allocation of certain revenue and expense items and certain
balance sheet accounts, many of which could be material, where separate
records were not utilized. See "Consolidated Financial Statements--Note 2."
(2) Revenue is derived from prepaid capitation fees for ambulatory services,
plus patient co-payments and fee-for-service payments. The Company did not
incur any hospital risk for the periods presented.
(3) Nearly 100% of revenue is received pursuant to existing provider agreements
with FHP. The New FHP Provider Agreements will take effect as of the
Effective Time. The pro forma financial data presented elsewhere herein
reflect, in part, the effects of the New FHP Provider Agreements as if such
agreements had been in effect for the periods indicated.
(4) Prior to January 1, 1996, all available cash balances, and the interest
income on such cash balances, were retained by FHP.
(5) Does not reflect the Capital Contribution to be made prior to the
Acquisition and the resulting compensation expense, nor the compensation
expense related to the options granted by the Board of Directors in November
1996, as reflected in the pro forma financial data presented elsewhere
herein.
(6) Loss per common and common equivalent share is computed based on 3,000,000
common shares outstanding at September 30, 1996 for all periods presented.
Options to acquire shares of Common Stock granted in September 1996 were not
dilutive.
(7) Prior to January 1, 1996, stockholders' deficit fluctuated as a result of
various intercompany transactions with FHP. On January 1, 1996, FHP
recapitalized TMMC, resulting in the elimination of a deficit of
$17,886,000.
8
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data for
the year ended December 31, 1995 and the nine months ended September 30, 1996,
and the pro forma condensed consolidated balance sheet data at September 30,
1996, present the results of operations and financial position of the Company
for and as of the periods indicated as if the following events had occurred, on
January 1, 1995 with respect to the unaudited consolidated statement of
operations data, or on September 30, 1996 with respect to the unaudited
consolidated balance sheet data: (i) the New FHP Provider Agreements had taken
effect; (ii) the Capital Contribution had been received and certain related
compensation expense had been recognized; and (iii) stock options granted to
management in November 1996 (the "November 1996 Options") had been granted and
certain related compensation expense had been recognized. These developments are
described further below.
In November 1996, the Company renegotiated the Talbert Medical Groups'
provider agreements with FHP. The New FHP Provider Agreements, which become
effective as of the Effective Time, will result in significantly lower revenues
and higher expenses per enrollee based on assumed capitation rates reflected in
the historical financial statements included elsewhere in this Prospectus. The
accompanying unaudited pro forma condensed consolidated statement of operations
data includes the pro forma effect of the New FHP Provider Agreements as if they
had been in effect during the year ended December 31, 1995 and the nine months
ended September 30, 1996. See "Relationship with FHP and PacifiCare Following
the Offering."
Just prior to the Offering, FHP is expected to contribute approximately $68
million to TMMC, which is expected to result in a stockholders' equity balance
of approximately $59 million. In connection with the Capital Contribution, the
Company will recognize as stock compensation expense approximately $5.3 million
(assuming a Capital Contribution of $68 million) relating to the shares of
Common Stock owned by management and others who will not be making a capital
contribution. This expense will be recognized ratably over the vesting period of
the restricted shares of Common Stock held by management and others.
Approximately 25% of such restrictions lapsed in July 1996 and the remainder are
assumed to lapse ratably each July through 1999. Approximately $1.3 million of
the stock compensation expense is expected to be recognized on the date of the
Capital Contribution in connection with previously issued restricted shares for
which restrictions have already lapsed. See "Certain Transactions."
In November 1996, the Board of Directors authorized the issuance of options
with respect to 39,636 shares of the Company's Common Stock to management at an
exercise price of $10.00 per share. The November 1996 Options vest 40% on
December 31, 1996 and 15% each January 1 from 2000 to 2003. Based on an assumed
fair value of the Common Stock of $29.17 per share on the date of grant, the
grant of the November 1996 Options gives rise to deferred compensation expense
of approximately $760,000, of which approximately $304,000 will be recognized in
December 1996. The accompanying unaudited pro forma condensed consolidated
financial data assume the granting of these options on January 1, 1995. See
"Management--Stock Incentive Plan."
The accompanying unaudited pro forma condensed consolidated financial data
is provided for informational purposes only and does not purport to present the
consolidated financial position or results of operations of the Company had the
New FHP Provider Agreements, the Capital Contribution and the grant of the
November 1996 Options occurred on the dates specified, nor are they necessarily
indicative of the results of operations that may be expected in the future.
9
<PAGE>
The unaudited pro forma condensed consolidated financial data should be read
in conjunction with the historical consolidated financial statements, and the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------- ----------------------------------------
HISTORICAL (1) ADJUSTMENTS AS ADJUSTED HISTORICAL ADJUSTMENTS AS ADJUSTED
-------------- ------------ ----------- ----------- ------------ -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue................... $ 495,699 $ (36,258)(4) $ 459,441 $ 351,235 $ (26,284)(4) $ 324,951
Expenses
Affiliated medical
services.............. 173,417 -- 173,417 103,504 -- 103,504
Purchased medical
services.............. 121,570 6,887(4) 128,457 85,851 5,287(4) 91,138
Dental services......... 31,379 -- 31,379 20,443 -- 20,443
Optometry, pharmacy and
other primary health
care services......... 102,412 10(4) 102,422 80,181 6(4) 80,187
Clinic operations....... 85,585 -- 85,585 49,207 -- 49,207
-------------- ------------ ----------- ----------- ------------ -----------
Total cost of health
care.............. 514,363 6,897 521,260 339,186 5,293 344,479
Marketing, general and
administrative........... 29,698 1,622(5)(6) 31,320 19,622 988(5) 20,610
-------------- ------------ ----------- ----------- ------------ -----------
Operating loss............ (48,362) (44,777) (93,139) (7,573) (32,565) (40,138)
Interest income........... -- 1,870(7) 1,870 1,199 -- 1,199
-------------- ------------ ----------- ----------- ------------ -----------
Loss before income
taxes.................... (48,362) (42,907) (91,269) (6,374) (32,565) (38,939)
Income tax provision
(benefit) (2)............ (19,754) 19,754 -- (2,604) 2,604 --
-------------- ------------ ----------- ----------- ------------ -----------
Net loss.................. $ (28,608) $ (62,661) $ (91,269) $ (3,770) $ (35,169) $ (38,939)
-------------- ------------ ----------- ----------- ------------ -----------
-------------- ------------ ----------- ----------- ------------ -----------
Loss per common and common
equivalent share (3)..... $ (9.54) $ (20.88) $ (30.42) $ (1.26) $ (11.72) $ (12.98)
-------------- ------------ ----------- ----------- ------------ -----------
-------------- ------------ ----------- ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------
HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA(8):
Working capital................................................. $ (10,779) $ 68,000 $ 57,221
Total assets.................................................... 51,731 68,000 119,731
Long-term obligations........................................... -- -- --
Stockholders' equity (deficit).................................. (3,670) 62,730 59,060
</TABLE>
- --------------------------
(1) Reflects financial information relating to the historical staff model
operations of FHP prepared in part from separate records maintained by
subsidiaries of FHP. This information also reflects certain assumptions
regarding the allocation of certain revenue and expense items and certain
balance sheet accounts, many of which could be material, where separate
records were not utilized. See "Consolidated Financial Statements--Note 2."
(2) No pro forma income tax benefit has been provided because it is not certain
when the Company will generate sufficient taxable income to realize such
benefit. Historically, the Company's tax losses were utilized in FHP's
consolidated tax returns.
(3) Loss per common and common equivalent share is computed based on 3,000,000
common shares outstanding at September 30, 1996 for all periods presented.
Options to acquire Common Stock granted in September 1996 were not dilutive.
(4) Adjusted to reflect the effect of the New FHP Provider Agreements. The new
capitation rates established in the New FHP Provider Agreements are expected
to result in significantly lower revenues and higher expenses per enrollee.
(5) Adjusted to reflect the amortization of stock compensation expense as if the
Capital Contribution of $68,000,000 had been made at January 1, 1995. The
actual Capital Contribution by FHP will be the amount necessary to
10
<PAGE>
eliminate the Company's deficit at the Effective Time and to provide a
stockholders' equity of approximately $59,000,000, but will not exceed
$70,000,000. Amortization of deferred stock compensation expense assumes the
restrictions on the shares issued to management lapse ratably over the
four-year period starting January 1, 1995.
(6) Adjusted to reflect compensation expense of $304,000 arising from the grant
of the November 1996 Options at an exercise price of $10.00 per share for
shares whose fair market value on the date of grant was assumed to be $29.17
per share. Assumes the options were granted on January 1, 1995 and that
options with respect to 40% of the shares vested during 1995.
(7) Adjusted to reflect assumed interest earnings, at an assumed average
investment return of 5.5% of the Capital Contribution of $68,000,000, as if
made on January 1, 1995.
(8) Adjusted to reflect the assumed impact on balance sheet data as if the
Capital Contribution of $68,000,000 was made and the related stock
compensation expense of $1,318,000 and deferred stock compensation expense
of $3,952,000 were recognized as of September 30, 1996.
11
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS LISTED BELOW IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK.
SUBSTANTIAL OPERATING LOSSES; CAPITAL REQUIREMENTS
FHP's staff model operations, which comprise the Company's predecessor
businesses, have experienced substantial operating losses over the last five
years arising, in part, from the increased competition of contracted care model
HMOs. For the nine months ended September 30, 1996, the Company incurred losses
before income tax benefit of $6.4 million, compared to $39.2 million for the
nine months ended September 30, 1995. The Company incurred losses before income
tax benefit of $48.4 million for the year ended December 31, 1995, and $33.1
million for the year ended December 31, 1994. Subsidies from FHP have offset
losses incurred in these and in prior periods, but FHP will not provide such
subsidies following the Offering. The renegotiation of the New FHP Provider
Agreements, required pursuant to the terms of the FHP Merger, will result in a
material decrease in revenues per enrollee for the year ending December 31,
1997. See "Prospectus Summary--Unaudited Pro Forma Condensed Consolidated
Financial Data." Although management believes this decrease will be offset, in
part, by continuing operating improvements, management nevertheless believes
that it is likely that the Company will incur substantial losses during 1997 and
1998, and will not generate positive cash flow for those periods. Future
operating results will depend on the Company's ability to attract and retain
substantial numbers of additional enrollees and physician practice groups and to
control costs. There can be no assurance that the Company will generate positive
cash flows or profits in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Prior to the Company's acquisition of TMMC, TMMC will receive, in connection
with the FHP Merger, the Capital Contribution to increase its net worth to
approximately $59 million. The Company intends to use these funds to fund
operating losses and for working capital and other general corporate purposes.
However, there can be no assurance that these funds will be sufficient for the
Company's capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON FHP
The Company and the Talbert Medical Groups derive nearly all of their
revenues from provider agreements with payors, such as HMOs. Prior to 1996, FHP
was the only payor to have contracts with the Talbert Medical Groups. For the
years ended December 31, 1993, 1994 and 1995, and for the nine months ended
September 30, 1996, FHP members accounted for nearly 100% of the Company's
revenue. The Company intends to reduce its dependence on FHP by seeking payors
for the Talbert Medical Groups in addition to those already served, but there
can be no assurance that additional provider agreements can be obtained or if
obtained, would result in significant numbers of additional enrollees. Moreover,
the loss of any FHP contracts, subsequent renegotiation of the terms of FHP's
contracts, or the failure to regain or retain FHP's members, could have a
material adverse effect on the Company. See "Business--The Company." In
addition, the loss by FHP of a significant number of the members who are
enrolled with the Talbert Medical Groups, including, without limitation, any
loss of members resulting from the FHP Merger, could have a material adverse
effect on the Company. In that regard, FHP has indicated that its competitors
may use the announcement of the FHP Merger to solicit employer groups currently
served by FHP. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company has historically relied upon FHP to provide certain
administrative and other services. FHP will provide certain information services
on an interim basis following the Offering. The Company will rely on third
parties to provide other services formerly received from FHP, which services may
not be available at comparable rates. See "Relationship with FHP and PacifiCare
Following the Offering."
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<PAGE>
CONTRACTED RATE DECREASE
FHP's existing provider agreements with the Talbert Medical Groups provide a
subsidy to offset, in part, the Talbert Medical Groups' operating losses. As of
the Effective Time, these provider agreements will be replaced with the New FHP
Provider Agreements that do not provide for this support. Management therefore
anticipates that the Company will incur substantial operating losses in 1997 and
1998. Although the Capital Contribution in connection with the FHP Merger is
intended, in part, to offset the projected shortfall in cash flows from the
change to the New FHP Provider Agreements, there can be no assurance that this
amount will be sufficient for the Company's capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Relationship with FHP and PacifiCare Following the
Offering--Provider Agreements."
CAPITATED NATURE OF REVENUE
For the nine months ended September 30, 1996, approximately 100% of the
Company's revenue related to provider agreements under which the Talbert Medical
Groups received a prepaid monthly capitation fee for each member enrolled with
the Group and certain utilization-based incentive payments, in exchange for
assuming the responsibility to provide specified medical services to enrollees.
Because the Company's revenue is derived from these fees, its success depends in
large part on the effective management of health care costs, including
controlling utilization of specialty care physicians and other ancillary
providers and purchasing services from third-party providers at competitive
prices. In addition, as capitation fees are based on a percentage of premiums
received by payors such as HMOs, any decreases in premiums could result in lower
capitation fees being paid to the Talbert Medical Groups. An unusually high
number of catastrophic claims (such as organ transplants and costly premature
births) in a given period may cause substantial additional health care costs.
Although management believes that the Company's cost control measures, which
include risk-sharing arrangements between the Talbert Medical Groups and the
payors with which they contract, as well as with administrative and medical
review of health care delivery services, will help mitigate these effects, such
costs may periodically affect the Company's results of operations. Changes in
health care practices, Medicare reimbursements, revised treatment protocols, new
technologies, inflation, epidemics, disasters and other factors affecting the
delivery and cost of health care that are or may be beyond the Company's control
may adversely affect the Company's operating results. See "Business."
LIMITED OPERATING HISTORY; NEW BUSINESS STRATEGY
Although FHP's staff model operations have been in existence since 1961, the
Company did not begin operating as a separate entity until January 1996. The
Company therefore has a very limited operating history as a PPMC. The Company,
TMMC, THSC and the Talbert Medical Groups are seeking to transform themselves
from a captive staff model operation to an independent contracted care business.
The success of this new business strategy will depend on the Company's ability
to adapt its practices and culture to the contracted care environment. Among
other challenges, the Company must attract and retain substantial numbers of
capitated enrollees to the Talbert Medical Groups from additional payors, manage
the delivery of health care to enrollees in a cost-efficient manner under
market-based contracts, and respond to developments in a highly competitive and
rapidly changing industry. There can be no assurance that the Company will be
able to address these challenges successfully.
DEPENDENCE ON PRIMARY CARE PHYSICIANS
Primary care physicians are an integral part of the Talbert Medical Groups,
as they provide and manage medical services offered to enrollees. The Company's
growth depends, in part, on its ability to retain existing primary care
physicians and attract additional ones. Beginning in January 1997, the Company
intends to implement a revised physician compensation program that will include
a greater emphasis on performance-based incentives. As a result of the revised
compensation system, the New FHP
13
<PAGE>
Provider Agreements, or other developments, there can be no assurance that
physicians presently in the Talbert Medical Groups will not leave, that the
Company will be able to attract additional primary care physicians into the
Talbert Medical Groups or that the Company will not have to increase or
guarantee the payments receivable by affiliated physicians. To the extent that
primary care physicians leave, or additional primary care physicians do not
join, the Talbert Medical Groups or payments to physicians are increased, the
Company's results of operations may be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
OPEN ENROLLMENT PERIODS; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results are subject to seasonal fluctuations. HMOs
typically have "open enrollment" periods from time to time for commercial
customers, during which new members may enroll or existing members may renew or
leave the HMO. Transfers of enrollees from one payor to another, particularly
during open enrollment periods, could impact quarterly results. A substantial
portion of FHP's current commercial membership is subject to open enrollment
programs occurring in January and February 1997. Any failure by FHP to maintain
or increase commercial enrollment in the Company's markets during this period
could have a significant adverse effect on the Company's future revenues,
earnings, cash flows and financial position.
The Company's costs fluctuate quarterly, based on the overall health of its
patient population. Enrollees, particularly seniors, typically require more care
during the winter months. Because capitation payments are not adjusted on a
seasonal basis to account for fluctuations in required care, the Company's costs
may increase in proportion to its revenues during such periods. Quarterly
results also may be affected by significant differences between actual and
estimated amounts receivable or payable for payor "shared risk" arrangements and
provider "incurred but not yet reported" claims ("IBNR"), that are adjusted
periodically, in the case of "shared risk" arrangements, as settlements are made
and, in the case of IBNR, as actual claims adjustments occur.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon the services of certain of its executive
officers for management and implementation of strategy. The loss to the Company
of the services of any of these executive officers could have a material adverse
effect upon the Company's future operations. The Company has entered into change
of control employment agreements with certain of its key personnel to provide
compensation assurances to such officers in the event of a change of control of
the Company. See "Management-- Change of Control Employment Agreements." The
Company has not purchased key-man life insurance with respect to such
individuals.
COMPOSITION OF BOARD OF DIRECTORS AND MANAGEMENT; POTENTIAL CONFLICTS OF
INTEREST
The Company's Board of Directors includes eight current directors of FHP,
including Jack R. Anderson and Joseph F. Prevratil. Messrs. Anderson and
Prevratil have been designated by FHP to be directors of PacifiCare Holdings
following the FHP Merger. Most of the Company's senior management is also
comprised of former FHP executives. All of the Company's directors and executive
officers will receive PacifiCare Holdings common or preferred stock in exchange
for their FHP Common Stock or FHP Preferred Stock in the FHP Merger. These
individuals may encounter conflicts of interest to the extent that the interests
of the Company diverge from those of FHP, PacifiCare or PacifiCare Holdings. See
"Management."
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE PRICE VOLATILITY
Prior to the Offering there has been no public market for the Rights or the
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained in the future, or that the
14
<PAGE>
market price of the Common Stock will not decline below the Subscription Price.
The Subscription Price was determined through negotiation between FHP and
PacifiCare, and may not be indicative of the market price of the Common Stock
after the Offering. See "The Offering." From time to time after the Offering,
the market price of the Common Stock could be subject to significant
fluctuations in response to such factors as quarterly operating results, general
trends in the economy, the financial markets or the health care industry,
changes in estimates of the Company's earnings or financial position, the impact
of health care reform proposals and other developments affecting the Company or
its competitors, many of which are beyond the Company's control.
MANAGEMENT OF GROWTH
The Company's strategy involves growth through the development of practice
groups in existing and new markets, as well as selected acquisitions and
affiliations in such markets. There can be no assurance that the Company will be
able to grow in existing or new markets or successfully identify, complete and
integrate future acquisitions. Further, there can be no assurance that the
Company will be able to maintain and develop an adequate infrastructure to
support future growth. See "Business."
POSSIBLE DILUTIVE EFFECT OF USING COMMON STOCK FOR FUTURE ACQUISITIONS OR
AFFILIATIONS
The Company's expansion strategy includes acquisitions of, and affiliations
with, additional practice groups and practice management companies. Such
acquisitions or affiliations may be consummated using newly issued shares of
Common Stock as consideration. The issuance of additional shares of Common Stock
may have a dilutive effect on the Company's tangible net book value or earnings
per share following such issuance.
COMPETITION
The managed care industry is highly competitive. The industry also is
subject to continuing changes in the ways services are provided and providers
are selected and paid. As prepaid medical care continues to grow, the Company
may encounter increased competition, including competition for enrollees,
primary care physicians, community health care resources and management
personnel. This competition also may have the effect of reducing capitated
payments received by providers from payors. FHP, the Company's principal source
of capitated enrollees, has experienced significant competition with respect to
its staff model commercial enrollment programs in California in recent periods,
which has been responsible, in part, for declines in the Company's capitated
enrollment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Certain companies are expanding their presence in the physician practice
management industry. A number of companies provide broad management services to
primary, multi-specialty and specialty physician groups, while other companies
provide claims processing, utilization review and other more focused management
services. Certain of the Company's competitors are significantly larger, have
access to greater resources, have greater experience in providing administrative
services and have longer established relationships with buyers of these
services. No assurance can be given that the Company's strategy will allow it to
compete favorably in obtaining payor contracts for its affiliated medical groups
or expanding or maintaining its position in existing or new markets. See
"Business--Competition."
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation. Changes in the regulations or reinterpretations of existing
regulations may significantly affect the Company.
The laws of certain states in which the Company operates or may operate in
the future do not permit general business corporations to practice medicine,
exercise control over physicians who practice medicine or engage in certain
business practices such as fee-splitting with physicians. The Talbert Medical
Groups
15
<PAGE>
currently operate in certain states through professional corporations. The
Company believes that it neither engages in the corporate practice of medicine
in states where it is prohibited from doing so, nor controls the practice of
medicine by physicians within the Talbert Medical Groups. See "Business." The
Company believes that it is in compliance with applicable regulatory
requirements. No assurance can be given, however, that regulatory authorities,
courts or parties with which the Company does business will not assert that the
Company is engaged in the corporate practice of medicine and seek relief
prohibiting the Company or its affiliates from carrying on their respective
businesses or voiding existing contractual relationships. If such assertions are
made, the Company may be required to sever or restructure payor contracts or its
management services agreements with the Talbert Medical Groups. Any such
severing or restructuring could have a material adverse effect on the Company.
The Company is subject to federal legislation regulating certain activities
to induce Medicare or Medicaid business and restricting referrals of business to
entities in which physicians have a financial interest. The laws of all of the
states in which the Company offers its services also regulate the business of
insurance. The Company believes it is in compliance with the laws governing
Medicare, Medicaid, physician referrals and insurance, but if it were determined
to be in violation of any such law, the Company could be subject to significant
fines or other penalties and could be required to restructure its operations in
a material manner. "See Business--Government Regulation."
HEALTH CARE REFORM
Diverse legislative and regulatory initiatives have been proposed at both
the federal and state levels to address both the continuing increases in health
care costs and the lack of health care insurance for many people. Among other
legislation, Congress has considered major reductions in the rate of increase of
Medicare and Medicaid spending as part of efforts to balance the federal budget.
State legislatures also have discussed restructuring Medicaid programs and
adopting "any willing provider" legislation. Certain of the proposals, if
adopted, could have a material adverse effect on the Company. See "Business--
Government Regulation."
POTENTIAL CLAIMS AFFECTING THE COMPANY'S INDUSTRY; INSURANCE
In recent years physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
medical malpractice, bad faith denial of services and other claims for recovery
in connection with alleged injuries or misconduct. Many of these lawsuits
involve large claims and substantial defense costs. The Company maintains
professional malpractice and general liability insurance on behalf of itself and
the Talbert Medical Groups in amounts deemed appropriate by management based on
the nature and risks of the Company's business. Although the Company currently
is not a party to any material litigation relating to the practice of medicine,
there can be no assurance that the Company will not become involved in such
litigation in the future, that claims arising from such litigation will not
exceed the Company's insurance coverage or that such coverage will continue to
be available. See "Business--Risk Management Program."
CLASSIFICATION OF PHYSICIANS AS INDEPENDENT CONTRACTORS
Physicians and other health care professionals not employed directly by the
Talbert Medical Groups are regarded as independent contractors. The Talbert
Medical Groups and the Company do not withhold federal or state income taxes,
make federal or state unemployment tax payments or provide workers' compensation
insurance with respect to these independent contractors. The payment of
applicable taxes is regarded as the responsibility of each independent
contractor. The Company believes that its classification of these health care
professionals as independent contractors is proper for federal and state tax
purposes. A contrary determination by federal taxing authorities, or a change in
existing law, could have a material adverse effect on the Company's operating
results. Congress is considering, in connection with health care
16
<PAGE>
reform, certain measures that would modify the rules for classifying workers as
independent contractors. The Company cannot predict the impact of such measures
on the Company.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Rights, the Company's Certificate of Incorporation
and Bylaws, Delaware law and the agreements to which the Company is a party
could, together or separately, discourage potential acquisition proposals, delay
or prevent a change in control of the Company and limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock.
See "Description of Capital Stock--Certain Anti-Takeover Effects" and
"Relationship with FHP and PacifiCare Following the Offering--Provider
Agreements."
POSSIBLE CONTROLLING INTEREST OF FHP
FHP may acquire a controlling interest in the Company if the Company is
unable to raise sufficient funds through the Offering to repay a significant
portion of its indebtedness under the Talbert Note. If FHP retains a substantial
equity interest in the Company following consummation of the Offering, other
payors may be discouraged from contracting with the Company. If FHP holds in
excess of 20% of the Company's outstanding Common Stock, certain restrictions
otherwise applicable to FHP's activities as a stockholder of the Company will
cease. If FHP holds in excess of 50% of the Company's outstanding Common Stock,
certain agreements between the Company and FHP will be null and void. Under the
New FHP Provider Agreements, the consent of FHP and PacifiCare is required for a
proposed change in control of TMMC or a Talbert Medical Group for a period of
two years from the Effective Time, which consent cannot be unreasonably
withheld. See "Relationship with FHP and PacifiCare Following the Rights
Offering."
17
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THE COMPANY
The Company was incorporated in Delaware in November 1996 to serve as a
holding company for TMMC and THSC in connection with their separation from FHP
as a result of the FHP Merger. The Company's principal executive offices are
located at 3540 Howard Way, Costa Mesa, California 92626-1417 and its telephone
number at that address is (714) 436-4800.
BACKGROUND
The Company's predecessor businesses formed a part of the staff model
operations of FHP, which had been active in managed care since 1961. In June
1995, FHP announced a plan to restructure its operations, which included the
transformation of its staff model operations into a PPMC, an ancillary clinical
services provider and a number of affiliated professional corporations. TMMC and
THSC were formed as subsidiaries of FHP to provide physician practice management
and ancillary clinical services, respectively, to the practice groups. A number
of professional corporations were organized in California, Utah, Arizona and
Nevada to succeed to FHP's staff model provider practice and become the Talbert
Medical Groups in those states. In New Mexico, TMMC directly employs the former
FHP physicians and acts as the Talbert Medical Group for that state.
SEPARATION FROM FHP
In July 1996, FHP determined to pursue a tax-free spin-off of TMMC and THSC
in the belief that they would be more attractive to other payors if they
operated independently from FHP. Soon after this decision, FHP agreed to merge
with PacifiCare. FHP and PacifiCare have agreed to abandon the tax-free spin-off
of TMMC and THSC, and instead to proceed with the separation of TMMC and THSC
from FHP concurrent with the FHP Merger. To effect this separation, the
following transactions will occur:
- The management and other investors will exchange their aggregate 7.75%
equity interests in TMMC and THSC for an equivalent interest in the
Company.
- TMMC will receive the Capital Contribution (currently anticipated to be
approximately $68 million) to increase its net worth to approximately $59
million, pursuant to the FHP Merger. The Capital Contribution will not
exceed $70 million.
- The Company will purchase from FHP its 92.25% equity interest in TMMC and
THSC in exchange for Rights to purchase 92.25% of the Company's Common
Stock, plus the Talbert Note.
- By virtue of the FHP Merger, shares of FHP Common Stock and FHP Preferred
Stock will be converted, in part, into the Rights, which confer upon the
holders, collectively, the right to purchase 92.25% of the Company's
Common Stock.
- Rights holders may, through the exercise of their Rights, purchase the
Company's Common Stock through the Offering.
- The Company will use the proceeds of the Offering to repay indebtedness
under the Talbert Note. If the Offering is not fully subscribed, the
Company will sell to FHP any unsubscribed shares of Common Stock in
exchange for cancellation of any remaining indebtedness under the Talbert
Note.
Following the separation from FHP as described above, TMMC and THSC will
continue to provide practice management and ancillary clinical services to the
Talbert Medical Groups. The Talbert Medical Groups will continue to provide
health care to FHP members under the New FHP Provider Agreements that will take
effect as of the Effective Time. FHP will continue to have various ongoing
relationships with the Company and its subsidiaries and affiliates. See
"Relationship with FHP and PacifiCare Following the Offering."
18
<PAGE>
THE OFFERING
BASIC SUBSCRIPTION PRIVILEGE
Upon the FHP Merger, shares of FHP Common Stock and FHP Preferred Stock
outstanding as of the Effective Date will be converted, in part, into the
Rights. Based upon current expectations concerning the number of shares of FHP
Common Stock that will be outstanding as of the Effective Date, FHP stockholders
are expected to receive one Right for every 21.34381 shares of FHP Common Stock
and one Right for every 26.46474 shares of FHP Preferred Stock held on the
Effective Date. These exchange ratios assume that options with respect to
approximately 888,000 shares of FHP Common Stock will be exercised prior to the
Effective Time. Pursuant to the Amended and Restated Agreement and Plan of
Reorganization among FHP, PacifiCare, PacifiCare Holdings, and the other parties
thereto with respect to the FHP Merger (the "FHP Merger Agreement"), PacifiCare
may offer to cash out these options, and if any FHP option holder accepts such
offer, these exchange ratios would be adjusted accordingly. The Rights are
evidenced by transferable Subscription Certificates. Each Right entitles the
holder to purchase one share of Common Stock for $21.50 per share. Rights
holders are entitled to subscribe for all, or any whole number of, the shares of
Common Stock underlying their Rights (the "Basic Subscription Privilege").
ADDITIONAL SUBSCRIPTION PRIVILEGE
Each Rights holder who subscribes in full for all shares of Common Stock
that the holder is entitled to purchase pursuant to the Basic Subscription
Privilege will be entitled to purchase additional shares of Common Stock at the
Subscription Price from any unsubscribed shares remaining after the exercise,
sale or expiration of all Basic Subscription Privileges (the "Additional
Subscription Privilege"). However, if the total number of shares of Common Stock
subscribed for pursuant to the Basic Subscription Privilege and the Additional
Subscription Privilege exceeds the total number of shares underlying the Rights,
the number of shares available for subscription pursuant to the Additional
Subscription Privilege will be allocated, on a pro rata basis, to the nearest
whole share, among those exercising the Additional Subscription Privilege on the
basis of their relative subscriptions pursuant to the Additional Subscription
Privilege.
EXERCISE CAP
Rights may not be exercised to the extent that the holder would become the
beneficial owner of more than 8% of the shares of Common Stock outstanding.
However, holders of FHP Common Stock or FHP Preferred Stock with an FHP
Ownership Percentage in excess of 8% as of the Effective Time may exercise
Rights to the extent that their beneficial ownership of Common Stock does not
exceed their FHP Ownership Percentage.
SUBSCRIPTION EXPIRATION DATE
The Rights will expire at 5:00 P.M., Eastern Standard Time, on the
Expiration Date. After the Expiration Date, the Rights will be void and
valueless. The Company is not obligated to honor any subscriptions received by
the Subscription Agent after the Expiration Date, regardless of when such
subscriptions were sent.
19
<PAGE>
SUBSCRIPTION AGENT
The Subscription Agent is American Stock Transfer & Trust Company. The
address to which Subscription Certificates and payment of the Subscription Price
should be delivered, whether by hand, by mail or by overnight courier, is:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Carolyn O'Neill
Any questions or requests for assistance concerning the method of
subscribing for shares of Common Stock should be directed to the Subscription
Agent at (718) 921-8200.
HOW TO EXERCISE RIGHTS
Rights holders may exercise the Basic Subscription Privilege and the
Additional Subscription Privilege by delivering to the Subscription Agent at its
offices listed under "Subscription Agent," prior to 5:00 P.M., Eastern Standard
Time, on the Expiration Date, a properly completed and executed Subscription
Certificate, together with full payment of the aggregate Subscription Price in
U.S. dollars, by check or bank draft drawn upon a U.S. bank, or postal,
telegraphic or express money order, payable to American Stock Transfer & Trust
Company, as Subscription Agent. However, if at or prior to 5:00 P.M., Eastern
Standard Time, on the Expiration Date, the Subscription Agent has received full
payment of the Subscription Price for shares of Common Stock subscribed for
pursuant to the Basic Subscription Privilege and the Additional Subscription
Privilege, together with a written guarantee from a bank, a trust company, or a
member firm of the New York Stock Exchange, Inc., other national securities
exchanges, or the National Association of Securities Dealers, Inc. that a
Subscription Certificate with respect to the shares of Common Stock will be
delivered to the Subscription Agent prior to 5:00 P.M., Eastern Standard Time,
on the third day following the Expiration Date, the subscription will be
accepted, subject to timely receipt of the duly completed Subscription
Certificates. In the event of a proration of shares of Common Stock to persons
exercising the Additional Subscription Privilege, the Subscription Agent will
promptly refund, without interest, the amount of any overpayment. The
instructions that accompany the Subscription Certificate should be read
carefully and followed in detail.
COMPLETED SUBSCRIPTION CERTIFICATES AND THE RELATED PAYMENT SENT TO THE
OFFICE OF THE SUBSCRIPTION AGENT MUST BE RECEIVED BEFORE 5:00 P.M., EASTERN
STANDARD TIME, ON THE EXPIRATION DATE. DO NOT SEND SUBSCRIPTION CERTIFICATES OR
PAYMENTS TO THE COMPANY OR FHP. SUBSCRIBERS WILL NOT HAVE ANY RIGHT TO REVOKE
THE EXERCISE OF THEIR RIGHTS AFTER DELIVERY OF THEIR SUBSCRIPTION CERTIFICATES
TO THE SUBSCRIPTION AGENT, UNLESS IN THE SOLE JUDGMENT OF FHP, THERE IS A
MATERIAL AMENDMENT TO THE OFFERING AND THE RIGHT IS EXERCISED BEFORE SUCH
AMENDMENT.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDER, NOT THE COMPANY, FHP OR THE SUBSCRIPTION AGENT. IF SENT BY
MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED
TO ENSURE RECEIPT BY THE SUBSCRIPTION AGENT PRIOR TO 5:00 P.M., EASTERN STANDARD
TIME, ON THE EXPIRATION DATE.
Record holders of shares of FHP Common Stock and FHP Preferred Stock, such
as brokers, trusts or depositaries for securities, who hold the shares for the
account of others, should notify the respective beneficial owners of the shares
as soon as possible to ascertain the beneficial owners' intentions and
instructions with respect to the related Rights. Based upon the instructions
received from the beneficial
20
<PAGE>
holders, the record holders should complete the Subscription Certificates and
submit them with the applicable payment.
All questions regarding the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by FHP, in its sole discretion, whose
determination will be final and binding. FHP reserves the absolute right to
reject any subscription if such subscription is not in proper form or if the
acceptance thereof or the issuance of shares of Common Stock pursuant thereto
could be deemed unlawful. FHP in its sole discretion may waive any defect or
irregularity, permit a defect or irregularity to be corrected within such time
as it may determine or reject the purported exercise of any Rights.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as FHP determines in
its sole discretion. FHP, the Company and the Subscription Agent will not be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates nor will any of them incur any
liability for failure to give such notification.
DELIVERY OF CERTIFICATES
Certificates for shares of Common Stock issuable on exercise of the Basic
Subscription Privilege and the Additional Subscription Privilege will be mailed
as soon as practicable after the subscriptions have been accepted by the
Subscription Agent, but not prior to the Expiration Date. Certificates for
shares of Common Stock issued pursuant to the exercise of the Basic Subscription
Privilege and the Additional Subscription Privilege will be registered in the
name of the Rights holder exercising such privilege.
PURCHASE, SALE OR TRANSFER OF RIGHTS
Rights may be purchased or sold through ordinary investment channels,
including brokers. Application has been made for the quotation of the Rights on
the Nasdaq National Market under the symbol "TMMCR."
If any Rights represented by the Subscription Certificate received by the
Subscription Agent are not used in the exercise of the Basic Subscription
Privilege, the Subscription Agent will, if practicable, sell such excess Rights
and will remit the net proceeds, if any, to the subscriber, provided appropriate
instructions are received.
FRACTIONAL RIGHTS
No fractional Rights will be issued to FHP stockholders. The Subscription
Agent will determine the aggregate number of fractional Rights that would have
been issued to FHP stockholders had fractional Rights been issued. The
Subscription Agent will sell, if practicable, the nearest whole number of Rights
and remit the net proceeds, if any, to FHP stockholders based on the number of
fractional Rights they would have received.
FOREIGN AND CERTAIN OTHER STOCKHOLDERS
Subscription Certificates will not be mailed to stockholders whose addresses
are outside the United States and Canada or who have an A.P.O. or F.P.O.
address, but will be held by the Subscription Agent for their account. To
exercise such Rights, stockholders must notify the Subscription Agent by 11:00
A.M., Eastern Standard Time, on the third day prior to the Expiration Date, at
which time (if no instructions have been received) the Rights represented
thereby will be sold, if feasible, and the net proceeds if any, remitted to such
stockholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The initial holders of the Rights will have a tax basis in the Rights equal
to their fair market value as of the Effective Time, and the holding period (for
determination of short-term or long-term gains and
21
<PAGE>
losses) of the Rights will commence as of the Effective Time. Upon a sale of the
Rights, the selling holder will recognize short-term gain or loss equal to the
difference between the selling price and the basis, and that gain or loss will
be capital in nature if the Rights are (and the Common Stock obtainable on
exercise of the Rights would be) a capital asset in the hands of the seller. If
the Rights are not exercised or sold, the holder will have a short-term loss
equal to the basis in the Rights.
No gain or loss will be recognized on exercise of the Rights. The tax basis
of the Common Stock obtained on exercise of the Rights will equal (i) the
exercise price under the Rights plus (ii) the basis of the Rights in the hands
of the exercising holder (either the fair market value as of the Effective Time,
or the amount paid to purchase the Rights after the Effective Time). The holding
period of the Common Stock will commence on the exercise of the Rights. Upon a
subsequent sale of the Common Stock, the seller will recognize gain or loss
equal to the difference between the selling price and the basis of the Common
Stock. The gain or loss will be capital in nature if the Common Stock represents
a capital asset in the hands of the holder, and will be long-term if the sale
occurs more than one year after exercise of the Rights.
Under current federal income tax law, the highest tax rate on ordinary
income and short-term capital gains is 39.6%, and long-term capital gains are
subject to a maximum tax rate of 28%. A sale of Common Stock acquired as a
result of exercise of the Rights generally should constitute long-term capital
gain if the stock is held for more than one year after exercise. However,
because of certain provisions in the law relating to the "phase-out" of personal
exemptions and certain limitations on itemized deductions, the federal income
tax consequences to a particular taxpayer of receiving additional amounts of
ordinary income or capital gain may be greater than would be indicated by
application of the stated tax rates to the additional amount of income or gain.
A separate discussion of certain federal income tax consequences associated
with the receipt of the Rights is included in the joint proxy
statement/prospectus filed by FHP and PacifiCare on Schedule 14A with respect to
the FHP Merger and certain other matters. See "Additional Information."
OTHER MATTERS
The Offering is not being made in any states or other jurisdictions in which
it is unlawful to do so, nor are FHP or the Company selling or accepting any
offers to purchase any shares of the Common Stock from Rights holders who are
residents of such states or other jurisdictions. FHP may delay the commencement
of the Offering in certain states or other jurisdictions in order to comply with
the securities law requirements of such states or other jurisdictions. It is not
anticipated that there will be any changes in the terms of the Offering. FHP
may, if it so determines in its sole discretion, decline to make modifications
to the terms of the Offering requested by certain states or other jurisdictions,
in which event Rights holders resident in such states or other jurisdictions
will not be eligible to participate in the Offering.
22
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial data for the Company set forth in this Prospectus
include the accounts of TMMC, THSC and the Talbert Medical Groups. Consolidation
of the Talbert Medical Groups is considered necessary to present fairly the
financial position and results of operations of the Company because the Company
has direct or indirect unilateral and perpetual control over the assets and
non-medical operations of the Talbert Medical Groups. See "Business--The
Company." Financial data provided in this Prospectus for periods and dates prior
to January 1, 1996 is presented for FHP's staff model operations. The financial
statements of the staff model operations have been prepared in part from
separate records maintained by subsidiaries of FHP, and reflect certain
assumptions regarding the allocation of certain revenue and expense items and
certain balance sheet accounts, many of which could be material, where separate
records were not utilized. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
USE OF PROCEEDS
Assuming the Rights are fully exercised, the proceeds to the Company from
the sale of the Common Stock pursuant to the Rights are estimated to be
approximately $59.5 million. FHP will pay the expenses of the Offering, which
are currently estimated to be approximately $ . All of the proceeds of the
Offering will be used to repay indebtedness to FHP incurred in the Acquisition.
See "Relationship with FHP and PacifiCare Following the Offering--Acquisition
Agreement."
DIVIDEND POLICY
The declaration and payment of dividends by the Company are subject to the
discretion of its Board of Directors. It is the current policy of the Company to
retain earnings, if any, to finance the operations and expansion of the
Company's business. Any determination as to the payment of dividends in the
future will depend upon, among other things, general business conditions, the
Company's earnings, financial condition, capital needs and other factors deemed
pertinent by the Company's Board of Directors, including the limitations, if
any, on the payment of dividends under state law and under any then-existing
agreements with others. The Company does not anticipate paying any dividends in
the near future.
23
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company and
its subsidiaries as of September 30, 1996, and as adjusted to give effect to the
Acquisition and the Offering. This table should be read in conjunction with the
consolidated financial statements of the Company and its subsidiaries and the
notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL AS ADJUSTED(1)
--------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity (deficit):
The Company's Preferred Stock, par value $.01 per share;
1,200,000 shares authorized; no shares issued and
outstanding.................................................. $ -- $ --
The Company's Common Stock, par value $.01 per share;
15,000,000 shares authorized; 3,000,000 shares issued and
outstanding.................................................. 30 30
Additional paid-in capital (1)................................. 70 68,070
Retained earnings (deficit) (1)(2)............................. (3,770) (5,267)
Deferred stock compensation expense (1)........................ -- (3,952)
--------- -------
Total stockholders' equity (deficit)......................... $ (3,670) $ 58,881
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Adjusted to reflect the recognition of deferred stock compensation expense
of approximately $5,270,000 assuming a Capital Contribution of $68,000,000
and the amortization of $1,318,000 of the deferred stock compensation
expense relating to the vesting of certain of the restricted shares of
Common Stock held by management.
(2) Adjusted to reflect the recognition of stock compensation expense of
approximately $179,000, net of tax benefit of $125,000, as a result of the
grant of the November 1996 Options.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data sets forth, for the
periods and dates indicated, selected consolidated financial data of the Company
and its subsidiaries (including the Talbert Medical Groups) derived from the
historical consolidated financial statements of its predecessors. The
consolidated statement of operations data presented below for the years ended
December 31, 1993, 1994, and 1995, and the consolidated balance sheet data at
December 31, 1994 and 1995 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus. The consolidated statement of operations data for the years ended
December 31, 1991 and 1992 and the nine months ended September 30, 1995 and
1996, and the consolidated balance sheet data at December 31, 1991, 1992 and
1993, and September 30, 1995 and 1996 are derived from unaudited consolidated
financial statements of the Company and its subsidiaries that are not included
herein. The summary consolidated financial data presented below are qualified by
reference to the consolidated financial statements included elsewhere in this
Prospectus and should be read in conjunction with such financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1991 (1) 1992 (1) 1993 (1) 1994 (1) 1995 (1) 1995 (1) 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue (2)(3).............. $ 352,553 $ 402,599 $ 470,883 $ 503,338 $ 495,699 $ 379,365 $ 351,235
Expenses
Affiliated medical
services................ 128,224 153,387 170,690 173,230 173,417 132,051 103,504
Purchased medical
services................ 69,459 84,307 110,582 124,083 121,570 94,133 85,851
Dental services........... 13,970 16,128 20,129 28,955 31,379 24,544 20,443
Optometry, pharmacy and
other primary health
care services........... 52,999 70,702 86,985 96,275 102,412 77,395 80,181
Clinic operations......... 76,992 78,662 80,853 87,253 85,585 68,235 49,207
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of health
care.................. 341,644 403,186 469,239 509,796 514,363 396,358 339,186
Marketing, general and
administrative.......... 20,606 22,569 24,002 26,675 29,698 22,188 19,622
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss.............. (9,697) (23,156) (22,358) (33,133) (48,362) (39,181) (7,573)
Interest income (4)......... -- -- -- -- -- -- 1,199
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before income tax
benefit................... (9,697) (23,156) (22,358) (33,133) (48,362) (39,181) (6,374)
Income tax benefit.......... (3,873) (9,244) (8,924) (13,553) (19,754) (16,005) (2,604)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss (5)................ $ (5,824) $ (13,912) $ (13,434) $ (19,580) $ (28,608) $ (23,176) $ (3,770)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss per common and common
equivalent share (6)...... $ (1.94) $ (4.64) $ (4.48) $ (6.53) $ (9.54) $ (7.73) $ (1.26)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1991 (1) 1992 (1) 1993 (1) 1994 (1) 1995 (1) 1995 (1) 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (5)......... $ (18,105) $ (17,937) $ (18,087) $ (18,742) $ (18,638) $ (18,101) $ (10,779)
Total assets (5)............ 10,614 14,003 18,926 23,087 23,178 19,779 51,731
Long-term obligations....... -- -- -- -- -- -- --
Stockholders' deficit
(5)(7).................... (17,425) (17,276) (17,475) (18,113) (17,886) (17,519) (3,670)
</TABLE>
- ------------------------
(1) Reflects financial information relating to the historical staff model
operations of FHP prepared in part from separate records maintained by
subsidiaries of FHP. This information also reflects certain assumptions
regarding the allocation of certain revenue and expense items and certain
balance sheet accounts, many of which could be material, where separate
records were not utilized. See "Consolidated Financial Statements--Note 2."
(2) Revenue is derived from prepaid capitation fees for ambulatory services,
plus patient co-payments and fee-for-service payments. The Company did not
incur any hospital risk for the periods presented.
(3) Nearly 100% of revenue is received pursuant to existing provider agreements
with FHP. The New FHP Provider Agreements will take effect as of the
Effective Time. The pro forma financial data presented elsewhere herein
reflect, in part, the effects of the New FHP Provider Agreements as if such
agreements had been in effect for the periods indicated.
(4) Prior to January 1, 1996, all available cash balances, and the interest
income on such cash balances, were retained by FHP.
(5) Does not reflect the Capital Contribution to be made prior to the
Acquisition and the resulting compensation expense, nor the compensation
expense related to the options granted by the Board of Directors in November
1996, as reflected in the pro forma financial data presented elsewhere
herein.
(6) Loss per common and common equivalent share is computed based on 3,000,000
common shares outstanding at September 30, 1996 for all periods presented.
Options to acquire shares of Common Stock granted in September 1996 were not
dilutive.
(7) Prior to January 1, 1996, stockholders' deficit fluctuated as a result of
various intercompany transactions with FHP. On January 1, 1996, FHP
recapitalized TMMC, resulting in the elimination of a deficit of
$17,886,000.
26
<PAGE>
The following table sets forth, for the periods indicated, the percentage of
revenue represented by the following items:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses
Affiliated medical services................ 36.2 34.4 35.0 34.8 29.5
Purchased medical services................. 23.5 24.7 24.5 24.8 24.4
Dental services............................ 4.3 5.8 6.3 6.5 5.8
Optometry, pharmacy, and other primary
health care services..................... 18.5 19.1 20.7 20.4 22.8
Clinic operations.......................... 17.2 17.3 17.3 18.0 14.0
----------- ----------- ----------- ----------- -----------
Total cost of health care................ 99.7 101.3 103.8 104.5 96.6
Marketing, general and administrative...... 5.1 5.3 6.0 5.8 5.6
----------- ----------- ----------- ----------- -----------
Operating loss............................... (4.7) (6.6) (9.8) (10.3) (2.2)
Interest income.............................. 0.3
----------- ----------- ----------- ----------- -----------
Loss before income tax benefit............... (4.7) (6.6) (9.8) (10.3) (1.8)
Income tax benefit........................... (1.9) (2.7) (4.0) (4.2) (0.7)
----------- ----------- ----------- ----------- -----------
Net loss..................................... (2.9)% (3.9)% (5.8)% (6.1)% (1.1)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TMMC, THSC and the Talbert Medical Groups, subsidiaries and affiliates of
the Company, commenced operations on January 1, 1996, and were formed as part of
a plan announced by FHP in June 1995, to restructure its operations (the
"Restructuring Plan"). The Restructuring Plan included the transformation of
FHP's staff model operations (except for FHP's staff model operations in Guam)
into a PPMC (now known as TMMC), an ancillary clinical services provider (now
known as THSC) and a number of affiliated medical and dental provider practice
groups (now known as the Talbert Medical Groups). TMMC and THSC were originally
formed as subsidiaries of FHP. The Talbert Medical Groups comprise a number of
new professional corporations organized in California, Utah, Arizona and Nevada
to succeed to FHP's staff model business in each of those states. In New Mexico,
TMMC directly employs physicians and effectively acts as the Talbert Medical
Group in that state. Approximately 4,000 of FHP's employees, including health
care professionals, became employees of TMMC, THSC or the Talbert Medical
Groups.
FHP's staff model operations had no separate legal status prior to the
organization of TMMC, THSC and the Talbert Medical Groups. However, through its
subsidiaries FHP had offered health care services to FHP members as a staff
model HMO since 1961. Effective January 1, 1996, and pursuant to its management
services agreements with the Talbert Medical Groups, TMMC began providing a
broad range of practice management services in return for a management fee. At
the same time, the Talbert Medical Groups became responsible for managing all
physician-related covered medical care for each FHP member enrolled with a
Talbert Medical Group in exchange for a prepaid monthly capitation payment for
each such member. The Talbert Medical Groups are not limited to serving only FHP
members. However, they have continuously served FHP members who received their
health care in the former FHP staff model operations.
The consolidated financial statements for the Company include the financial
statements of TMMC, THSC and the Talbert Medical Groups. The Company effectively
controls the Talbert Medical Groups by means other than equity ownership and
consolidation of the Talbert Medical Groups is necessary to present fairly the
financial position and results of operations of the Company. Control of the
Talbert Medical Groups by TMMC is perpetual rather than temporary by virtue of:
(i) the length of the original terms of the relevant management and other
agreements; (ii) the successive extension period provided by the agreements;
(iii) the continuing investment of capital by TMMC; (iv) the employment of the
majority of nonphysician personnel by TMMC; (v) the nature of the services
provided to the Talbert Medical Groups by TMMC; and (vi) the provisions of a
share control agreement entered into by each Talbert Medical Group stockholder
and TMMC. The financial statements of the former FHP staff model operations have
been prepared, in part, from separate records maintained by subsidiaries of FHP,
and reflect certain assumptions regarding the allocation of certain revenue and
expense items and certain balance sheet accounts, many of which could be
material, where separate records were not utilized. See "Consolidated Financial
Statements--Note 2."
RESULTS OF OPERATIONS
REVENUE
The Company derives substantially all of its revenue from capitated provider
agreements, with the balance derived from enrollee co-payments and
fee-for-service revenue. Revenues are net of an allowance for doubtful accounts.
Nearly all revenues are generated from payments under existing provider
agreements with FHP. Pursuant to these agreements, every month FHP pays each
Talbert Medical Group a fixed percentage of FHP's premium revenue, based on the
number of commercial and senior enrollees covered by the Talbert Medical Group.
Unlike capitated revenue, co-payments and fee-for-service revenue represent
payments received directly from patients for services rendered.
28
<PAGE>
The Company believes FHP will continue to be the primary source of capitated
revenue for the forseeable future. The Talbert Medical Groups currently have
four capitated physician agreements and six capitated dental agreements with
FHP. TMMC also has a capitated physician agreement with FHP for New Mexico. The
Talbert Medical Groups also have recently established contractual relationships
with a total of nine other HMOs in California, Arizona, New Mexico and Utah. The
Company will seek to diversify the Talbert Medical Groups' payor base following
separation from FHP. Management believes new payor contracts are essential to
future revenue growth.
The Talbert Medical Groups' senior enrollee revenue is generated from
premiums paid to FHP by the Health Care Financing Administration ("HCFA"). Under
FHP's agreement with HCFA, seniors enroll and disenroll individually throughout
the year. FHP seniors served by the Talbert Medical Groups have individually
selected the Talbert Medical Groups for their health care. FHP receives senior
premium rate increases from HCFA on January 1 of each year and the contracted
percentage of the increase is passed to the Talbert Medical Groups pursuant to
their provider agreements with FHP. Revenue per senior enrollee is substantially
higher than revenue per commercial enrollee because senior enrollees use
substantially more health care services, thereby incurring a higher cost for
services provided. In September of each year, HCFA announces the annual Medicare
rate increases that will become effective on January 1 of the subsequent year.
These rate increases vary geographically and become the basis for determining
the amounts that HCFA will pay to HMOs that provide coverage to Medicare
recipients. For 1996 FHP received an average rate increase of 5.1%. Based upon
HCFA's September 1996 announcement, the Company currently estimates that FHP
will receive an average senior premium rate increase of 5.7% effective January
1, 1997 in the Company's markets. There can be no assurance that such annual
rate increases will continue.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUE. Revenue decreased $28.1 million, or 7.4%, to $351.2 million for
the nine months ended September 30, 1996, from $379.4 million for the nine
months ended September 30, 1995. This decrease primarily reflects a 5.4% decline
in capitated enrollment, from 321,128 at September 30, 1995 to 303,785 at
September 30, 1996. Reductions in capitated enrollment in California during this
period were responsible for approximately $13.3 million of the decline in
revenue. Arizona's average monthly capitated enrollment also declined between
these periods as a result of a restructuring of FHP's health care delivery
systems in Arizona. Effective July 1, 1995, approximately 36,100 enrollees in
Arizona were no longer capitated by FHP to the Talbert Medical Group in Arizona
(the "Arizona Group"), although the enrollees continued to receive their health
care from the Arizona Group. In lieu of receiving a monthly capitation payment
for these enrollees, the Arizona Group billed FHP for medical services on a
fee-for-service basis. The change reduced the Arizona Group's average monthly
capitated enrollment by 19.9%, and reduced net revenue by approximately $11.7
million. However, the restructuring also reduced the Arizona Group's liability
for services provided outside its Medical Centers, resulting in a decline of
approximately $14.6 million in the total cost of health care for the Arizona
Group for the nine months ended September 30, 1996.
AFFILIATED MEDICAL SERVICES EXPENSE. Affiliated medical services expense
consists of expenses related to staff physicians, nursing, laboratory and x-ray
services, and malpractice insurance, that are provided by the Company.
Affiliated medical services expense declined $28.5 million, or 21.6%, to $103.5
million (29.5% of revenues) for the nine months ended September 30, 1996 from
$132.1 million (34.8% of revenues) for the nine months ended September 30, 1995.
This decline primarily reflected lower physician and malpractice costs resulting
from reductions in physician staffing levels. In California and Arizona,
affiliated medical services expense was reduced by $19.1 million and $2.8
million, respectively, through reductions in physician staffing, outsourcing of
certain physician specialist services, and corresponding reductions in
associated support services. In Utah, physician staffing was reduced in
accordance with declines in enrollment, resulting in a $6.6 million reduction in
physician costs.
PURCHASED MEDICAL SERVICES EXPENSE. Purchased medical services expense
consists of expenses related to physician specialists and related services that
are provided outside the Company's Medical Centers. Purchased medical services
expense declined $8.3 million, or 8.8%, to $85.8 million for the nine months
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ended September 30, 1996, compared to $94.1 million for the nine months ended
September 30, 1995. As a percentage of revenues, purchased medical services
expense decreased to 24.4% from 24.8%. The restructuring in Arizona contributed
approximately $7.2 million toward the reduction, while declines in enrollment in
Utah resulted in a further reduction of $4.6 million. These favorable reductions
were partially offset by a $2.7 million increase in purchased medical services
expense in California, attributable principally to the expansion of home health
services and increased outsourcing of certain physician specialty services.
DENTAL SERVICES EXPENSE. Dental services expense declined $4.1 million, or
16.7%, to $20.4 million (5.8% of revenues) for the nine months ended September
30, 1996, from $24.5 million (6.5% of revenues) for the nine months ended
September 30, 1995. The reduction was largely attributable to declines in
enrollment in California and Arizona.
OPTOMETRY, PHARMACY AND OTHER PRIMARY HEALTH CARE SERVICES
EXPENSE. Optometry, pharmacy and other primary health care services expense
increased $2.8 million, or 3.6%, to $80.2 million (22.8% of revenues) for the
nine months ended September 30, 1996, from $77.4 million (20.4% of revenues) for
the nine months ended September 30, 1995. Higher utilization of these services
in California was responsible for $3.9 million of the increase, which was
partially offset by a reduction of $1.9 million resulting from lower utilization
in Arizona.
CLINIC OPERATIONS EXPENSE. Clinic operations expense declined $19.0
million, or 27.9%, to $49.2 million (14.0% of revenues) for the nine months
ended September 30, 1996, from $68.2 million (18.0% of revenues) for the nine
months ended September 30, 1995. Closures of clinics in California accounted for
$10.6 million of the decline. Also, clinic operations expense in Utah and
Arizona declined by $3.2 million and $1.3 million, respectively, reflecting
primarily reductions in physician support staff.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative ("MG&A") expense declined $2.6 million, or 11.7%, to $19.6
million (5.6% of revenues) for the nine months ended September 30, 1996, from
$22.2 million (5.8% of revenues) for the nine months ended September 30, 1995.
The decline was attributable primarily to reductions in administrative personnel
undertaken as part of the Company's cost savings efforts.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE. Revenue declined $7.6 million, or 1.5%, to $495.7 million for the
year ended December 31, 1995, from $503.3 million for the year ended December
31, 1994. The decrease was primarily attributable to reductions in capitated
enrollment, which declined by 37,305, or 10.4%, to 321,588 at December 31, 1995
from 358,893 at December 31, 1994. California and Utah experienced revenue
reductions of $15.2 million and $5.6 million, respectively, primarily resulting
from declines in enrollment. These reductions were partially offset by revenue
increases in Nevada and New Mexico of $6.6 million and $3.3 million,
respectively. Revenue in Arizona increased by a net $3.3 million. This reflected
a $7.4 million increase in revenue attributable to an increase in senior
enrollment in proportion to other enrollees of the Arizona Group. Capitation
rates received for senior enrollees are higher than for commercial enrollees.
This revenue increase was partially offset by a revenue reduction of $4.1
million attributable to a decline in the average monthly capitated enrollment of
17.2% that was generated principally by the restructuring of FHP's health care
delivery system in Arizona.
AFFILIATED MEDICAL SERVICES EXPENSE. Affiliated medical services expense
increased slightly to $173.4 million for the year ended December 31, 1995, from
$173.2 million for the prior year, reflecting primarily increased malpractice
premiums and higher utilization of affiliated laboratory and x-ray services. As
a percentage of revenue, affiliated medical services expense increased to 35.0%
in 1995 from 34.4% in 1994.
PURCHASED MEDICAL SERVICES EXPENSE. Purchased medical services expense
declined to $121.6 million (24.5% of revenues) for the year ended December 31,
1995, from $124.1 million (24.7% of revenues) for the year ended December 31,
1994. Reductions in California and Arizona of approximately $4.1 million
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and $2.1 million, respectively, were attributable primarily to lower enrollment
levels. Enrollment growth in New Mexico and Nevada produced an increase of $4.4
million, while higher utilization in Utah resulted in an increase of $1.5
million.
DENTAL SERVICES EXPENSE. Dental services expense increased to $31.4 million
for the year ended December 31, 1995, compared to $29.0 million for the year
ended December 31, 1994, reflecting expanded benefit coverage in California and
Utah. As a percentage of revenue, dental services expense increased slightly to
6.3% from 5.8%.
OPTOMETRY, PHARMACY AND OTHER PRIMARY HEALTH CARE SERVICES
EXPENSE. Optometry, pharmacy and other primary health care services expense
increased to $102.4 million (20.7% of revenues) for the year ended December 31,
1995, compared to $96.3 million (19.1% of revenues) for the year ended December
31, 1994. Pharmacy costs in Arizona, New Mexico and Nevada increased by a total
of $3.7 million, primarily resulting from higher prescription utilization due to
increased enrollment. Behavioral health expense increased $1.3 million,
primarily due to expanded benefit coverage in California and Utah. Optometry
costs increased by $1.9 million, reflecting increased enrollment in New Mexico
and expanded optometry benefits in Arizona.
CLINIC OPERATIONS EXPENSE. Clinic operations expense declined to $85.6
million for the year ended December 31, 1995, from $87.3 million for the year
ended December 31, 1994, reflecting closures of clinics and associated staff
reductions due to lower enrollment. As a percentage of revenues, clinic
operations expense remained flat at 17.3% of revenues in 1995 and 1994.
MG&A EXPENSE. MG&A expense increased to $29.7 million (6.0% of revenues)
for the year ended December 31, 1995, from $26.7 million (5.3% of revenues) for
the year ended December 31, 1994, reflecting the first full year of
administrative costs incurred in 1995 for the new Nevada operations.
YEAR ENDED DECEMBER 31, 1994 AND 1993
REVENUE. Revenue increased $32.4 million, or 6.9%, to $503.3 million for
the year ended December 31, 1994, compared to $470.9 million for the year ended
December 31, 1993. The increase largely resulted from an increase in capitated
enrollment of 29,851 enrollees, or 9.1%, to 358,893 at December 31, 1994 from
329,042 at December 31, 1993. Revenue in Arizona increased by $25.5 million,
primarily due to the addition of 14,600 new enrollees. Increased enrollment in
California also was primarily responsible for $7.1 million of increased revenue.
The commencement of operations in Nevada in November 1994 also generated $1.1
million of incremental revenue.
AFFILIATED MEDICAL SERVICES EXPENSE. Affiliated medical services expense
increased to $173.2 million for the year ended December 31, 1994, from $170.7
million for the year ended December 31, 1993, reflecting higher physician costs
in California and Utah. As a percentage of revenue, affiliated medical services
expenses decreased to 34.4% in 1994 from 36.2% in 1993.
PURCHASED MEDICAL SERVICES EXPENSE. Purchased medical services expense
increased $13.5 million, or 12.2%, to $124.1 million (24.7% of revenue) for the
year ended December 31, 1994, compared to $110.6 million (23.5% of revenue) for
the year ended December 31, 1993. The increase reflects higher utilization of
outside specialty services primarily attributable to increased enrollment in
Arizona, California and Nevada.
DENTAL SERVICES EXPENSE. Dental services expense increased $8.9 million, or
44.3%, to $29.0 million for the year ended December 31, 1994, from $20.1 million
for the year ended December 31, 1993, reflecting higher enrollment as well as
the expansion of dental services in Arizona. As a percentage of revenue, dental
services expense increased to 5.8% in 1994 compared to 4.3% in 1993.
OPTOMETRY, PHARMACY AND OTHER PRIMARY CARE HEALTH SERVICES
EXPENSE. Optometry, pharmacy and other primary care health services expense
increased $9.3 million, or 10.7%, to $96.3 million (19.1% of revenues) for the
year ended December 31, 1994, from $87.0 million (18.5% of revenues) for the
year ended December 31, 1993. Pharmacy and optometry costs increased $6.8
million and $2.7 million, respectively, primarily attributable to increased
enrollment.
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CLINIC OPERATIONS EXPENSE. Clinic operations expense increased $6.4
million, or 7.9%, to $87.3 million (17.3% of revenues) for the year ended
December 31, 1994, from $80.9 million (17.2% of revenues) for the year ended
December 31, 1993. The increase primarily resulted from the establishment of a
new Medical Center in Nevada.
MG&A EXPENSE. MG&A expense increased to $26.7 million (5.3% of revenues)
for the year ended December 31, 1994, from $24.0 million (5.1% of revenues) for
the year ended December 31, 1993, largely due to additional enrollment
administration costs.
LIQUIDITY AND CAPITAL RESOURCES
LIMITED FUTURE CASH FLOWS AND CAPITAL CONTRIBUTION
The Company generates cash flow principally from monthly capitation payments
from HMOs for their members who are serviced by the Talbert Medical Groups.
FHP's staff model operations, which comprise the Company's predecessor
businesses, experienced substantial operating losses over the last five years.
Subsidies from FHP have offset losses incurred in these periods, but FHP will
not provide such subsidies following the Offering. The New FHP Provider
Agreements, executed pursuant to the terms of the FHP Merger, will result in
lower revenues and higher expenses per enrollee. Management therefore
anticipates that the Company will incur substantial losses in 1997 and 1998 and
will not generate positive cash flow for those periods.
Management plans to stabilize the Company's financial condition through
revenue enhancements and cost reductions. Enhancing revenues is believed by
management to be essential, even if cost reductions are successfully
implemented. The Company's revenue enhancement plans focus on attracting new
capitated Medicare and commercial enrollees by entering into provider agreements
with payors other than FHP. Declining enrollment has created excess health care
service capacity, and the Company believes additional revenue opportunities can
be achieved with relatively lower associated incremental costs. Management
anticipates that independence from FHP will make the Talbert Medical Groups more
accessible to other payors and new capitated enrollees. However, there can be no
assurance that the Talbert Medical Groups will be able to secure additional
payor contracts or to attract new capitated enrollees. Continued enrollment
decline would adversely impact operating results. The Company's cost reduction
plans focus primarily on continuing improvements in the cost of health care and
controlling general and administrative expenses. Effective January 1, 1997, the
Talbert Medical Groups will implement a new physician compensation program
designed to be competitive with compensation programs in effect in other
independent physician group practices. Physicians will no longer receive only
fixed salaries. Instead, approximately 20% of each physician's salary (based on
current salary levels) will be placed at risk. Funds derived from pharmacy and
hospital risk pools, as well as from reductions in purchased medical services,
will be included in an incentive pool. The incentive pool will be distributed to
physicians based on their individual performance. Performance criteria include
quality of care, patient satisfaction, cost-effectiveness and other factors.
Management believes the revised physician compensation program will align
physician incentives with the provision of quality medical care.
Prior to the Acquisition, TMMC will receive, in connection with the FHP
Merger, the Capital Contribution to increase its net worth to approximately $59
million. The amount of the Capital Contribution is currently anticipated to be
approximately $68 million, but will not exceed $70 million. The Company intends
to use the Capital Contribution to fund operating losses and for working capital
and other general corporate purposes.
The Company does not have a credit facility in place and there can be no
assurance that the Company will be able to obtain such a facility in the future.
The Company also does not have significant tangible assets, other than computer
equipment and tenant improvements. It therefore does not anticipate that credit
facilities would be readily available to it without significant improvements in
its results of operations and cash flows.
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CAPITAL REQUIREMENTS
The Company has budgeted approximately $5 million for information systems
capital expenditures and related activities in 1997. The Company believes that
its existing cash resources, together with the Capital Contribution, will be
sufficient to meet the Company's anticipated expansion and working capital needs
for the next several years, based on current projections. However, this belief
assumes that the Company's enrollment trends do not worsen, that expenses do not
increase in excess of anticipated amounts and that competitive pressures or
other factors do not further depress revenues. In addition, there are other
factors that individually or collectively may have a significant adverse effect
on the Company and impair its ability to operate successfully in the future. For
a discussion of certain of these other factors, see "Risk Factors."
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BUSINESS
OVERVIEW
The Company, through TMMC, organizes and manages physician and dentist
practice groups that contract with HMOs and other payors to provide health care
services to their members. As of September 30, 1996, TMMC had management
services agreements with four physician groups representing approximately 333
primary and specialty care physicians operating in southern California, Utah,
Arizona and Nevada. TMMC also directly employed 27 primary and specialty care
physicians operating in New Mexico. In addition, TMMC had management services
agreements with six dental groups representing approximately 80 dentists in
southern California, Utah and Arizona. In support of these Talbert Medical
Groups, TMMC operates 52 Medical Centers and employs a health care staff of more
than 3,000 individuals. Through its management services agreements with the
Talbert Medical Groups, TMMC managed over 303,000 capitated enrollees as of
September 30, 1996.
The Company believes that HMOs and other payors see primary care physicians
as increasingly important participants in the delivery of managed health care.
Payors rely on primary care physicians to assume more responsibility for the
cost-effective management of patient care, including optimizing the amount of
care provided on an out-patient basis, ensuring efficient utilization of
specialists and hospitals, encouraging preventive care practices and monitoring
the progress of patients throughout their course of treatment.
The Company, through TMMC, uses its experience in managed care to advise the
Talbert Medical Groups in managing their patient populations. TMMC offers a
broad range of practice management services, including (i) provider contract
negotiation and administration, (ii) Medicare risk management, (iii) management
information systems (development, implementation and maintenance), (iv) medical
management (claims administration, utilization and case management, quality
assurance and risk management, and physician credentialing and recruitment), and
(v) support services (including nursing, billing, collection and accounting).
Ancillary clinical services (including pharmacy, radiology, optometry,
laboratory, home health, hospice, rehabilitation and physical therapy) are
provided through THSC. The provision of these services enables physicians to
focus on the practice of medicine.
THE MANAGED HEALTH CARE INDUSTRY
BACKGROUND
Medical services traditionally have been provided on a fee-for-service
basis, with insurance companies paying all or a portion of the fees. Over the
past decade, the cost of medical services generally has risen at a higher rate
than the consumer price index. HCFA estimated health care expenditures in the
United States for 1995 at approximately $1 trillion, representing more than 15%
of gross national product ("GNP"), up from approximately $665 billion, or 12.2%
of GNP, in 1990.
HEALTH MAINTENANCE ORGANIZATIONS
As a result of escalating health care costs, employers, insurers and
governmental entities have sought cost-effective approaches to the delivery of
and payment for health care services. HMOs and other managed health care
organizations have emerged as integral components in this effort. Like
traditional indemnity health care plans, HMOs and other managed health care
organizations typically assume most of the financial risk for the delivery of
medical care. Unlike traditional indemnity health care plans, however, HMOs seek
to reduce the cost of medical services through volume discounts from their
provider networks and through the management of medical services, including the
implementation of techniques such as utilization and technology reviews and
quality assurance programs.
HMOs enroll members by entering into contracts with employer groups or
directly with individuals to provide a broad range of health care services for a
fixed monthly premium, with minimal or no deductibles
34
<PAGE>
or co-payments required of the members. HMOs, in turn, typically contract
directly with physicians, hospitals and other health care providers to deliver
medical care to their members. These contracts provide for payment to the
provider on either a discounted fee-for-service or per diem basis, or through
capitation based on the number of members covered, regardless of the amount of
necessary medical care required within the covered benefits.
By capitating payments to physicians, HMOs effectively have begun to shift
to physicians a significant portion of the economic risk of providing health
care. These shared risk arrangements exert more pressure on the physician to
manage medical treatments without diminishing the quality of medical care.
Payors also are shifting administrative responsibilities to physicians,
including requiring physicians to obtain authorization for tests and surgical
procedures and respond to additional oversight from payors. These administrative
burdens are exacerbated by the proliferation of HMOs, which has forced
physicians to comply with multiple formats for claims processing, credentialing
and other administrative reporting requirements. As a result, physicians'
operating expenses and the number of hours devoted to non-medical activities
have increased. In order to relieve these economic and administrative burdens,
physicians have turned to third parties, such as PPMCs, to manage economic risk
and perform non-medical management tasks associated with the practice of
medicine.
PHYSICIAN PRACTICE MANAGEMENT COMPANIES
PPMCs were created to relieve certain of the economic and administrative
burdens imposed on physicians by payors. PPMCs provide management, claims
payment and other administrative services to physicians. PPMCs also help
physician groups by negotiating capitation rates and other incentive
arrangements with payors. These arrangements can take a number of forms, but
often separate payments to the medical group into two categories: (i) a
capitation payment to cover certain services; and (ii) participation in budgeted
shared risk pool to cover other services (such as pharmacy or hospital
services). The capitation payment remains the same regardless of utilization,
and thus the medical group has an incentive to optimize utilization,
particularly with respect to specialty care or other services provided outside
the medical group. The budgeted shared risk pool also provides incentives to the
medical group to optimize utilization of particular services. For example, a
budgeted shared risk pool for hospitalization would allow the medical group to
share in the savings that result from improved utilization of hospital services.
THE COMPANY
The Company anticipates that managed care will continue to play an important
role in the delivery of and payment for health care services. In particular, the
Company believes that to deliver high-quality, cost-effective health care,
primary care physicians must have incentives to manage patient care, including
referrals to specialty care physicians and other medical care service providers.
The Company expects that as the importance of the primary care physician's role
is recognized, more HMOs will embrace the management of health care services
through these physicians. As primary care physicians expand their role in not
only providing medical care, but also in managing its delivery, the Company
believes that these physicians will require the assistance of PPMCs like TMMC to
help them manage their practices and negotiate payor contracts.
THE TALBERT MEDICAL GROUPS
The Company's affiliated practice groups currently consist of four physician
groups and six dental groups. TMMC also directly employs physicians in New
Mexico. All of the Talbert Medical Groups were formerly part of FHP's staff
model operations. TMMC provides practice management services to each of the
Talbert Medical Groups pursuant to a management services agreement. TMMC's
management services agreements generally provide for TMMC to be reimbursed for
certain clinic operating expenses and to receive a management fee based on the
revenues of each Talbert Medical Group after deducting certain reimbursed clinic
operating expenses. In California, TMMC's management fee is based on the gross
revenues of the Talbert Medical Groups in California.
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THE MEDICAL CENTERS. TMMC operates 52 Medical Centers located in five
states. The Medical Centers are staffed largely by primary care physicians, who
practice family, internal and pediatric medicine, and obstetrics-gynecology.
Most of the Medical Centers offer a broad range of outpatient health care
services, including medical, dental, vision, pharmacy, radiology and/or
laboratory services.
The following table sets forth the number of Medical Centers and affiliated
physicians for each of the states in which the Company does business.
THE TALBERT MEDICAL GROUPS
<TABLE>
<CAPTION>
MEDICAL AFFILIATED
CENTERS PHYSICIANS (1)
------------- -----------------
<S> <C> <C>
California........................................................... 24 206
Utah................................................................. 7 80
Arizona.............................................................. 14 41
New Mexico........................................................... 5 27
Nevada............................................................... 2 6
--
---
Total.............................................................. 52 360
--
--
---
---
</TABLE>
- ------------------------
(1) As of September 30, 1996.
OUTSIDE PROVIDERS. Covered health care benefits that are unavailable at the
Medical Centers are provided through contracts with outside providers on a
discounted fee-for-service, sub-capitated, or fixed monthly fee basis. Members
are referred to these providers in accordance with the pre-authorization
guidelines of the relevant payor.
PAYOR RELATIONSHIPS
The Company's revenue is largely dependent on the number of enrollees for
whom the Talbert Medical Groups receive monthly capitation payments. The table
below sets forth the number of capitated enrollees for each of the states in
which the Company does business:
CAPITATED ENROLLEES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------- --------------------------
1993 1994 1995 1995 1996
--------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
California................... 145,667 150,125 145,986 146,117 132,463
Utah......................... 131,273 138,588 122,596 126,800 109,652
Arizona...................... 29,132 43,748 21,954(1) 17,579(1) 31,460(1)
New Mexico................... 22,970 23,472 26,738 26,389 25,504
Nevada....................... -- 2,960 4,314 4,243 4,706
--------- --------- ------------ ------------ ------------
Total...................... 329,042 358,893 321,588 321,128 303,785
--------- --------- ------------ ------------ ------------
--------- --------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Reflects the restructuring of approximately 36,100 capitated enrollees of
the Arizona Group to a fee-for-service basis effective July 1, 1995. The
Company subsequently undertook a program to reconvert such enrollees from a
fee-for-service to a capitated basis.
Currently, FHP is the primary payor for the Talbert Medical Groups,
accounting for nearly 100% of capitated enrollees and revenues for the nine
months ended September 30, 1996 and 1995, and for the years ended December 31,
1995, 1994 and 1993. The Company believes FHP will continue to be the primary
source of capitated revenue for the forseeable future. See "Risk
Factors--Contracted Rate Decrease."
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TMMC has, however, recently established contractual relationships with the
following payors on behalf of one or more of the Talbert Medical Groups:
- Blue Cross Blue Shield (Arizona)
- BPS HMO Inc. (California)
- Foundation Health Corporation (California)
- HMO California (California)
- Health Net (California)
- Maxicare (California)
- PacifiCare California (California)
- Blue Cross (New Mexico)
- United Health Plan (Utah)
In addition, TMMC is currently negotiating contracts with a number of other
payors. TMMC has negotiated 18 preferred provider organization ("PPO") contracts
on behalf of one or more of the Talbert Medical Groups. Under a typical PPO
contract, the payor agrees to list one of the Talbert Medical Groups on its
panel of authorized practice groups. PPO arrangements provide a wider choice of
practice groups to the payor's members, and thus often do not result in as
consistent a revenue stream as capitated agreements. These new payor
relationships do not yet constitute a significant source of revenues for TMMC.
TMMC expects to continue to diversify the Talbert Medical Groups' payor base
following its separation from FHP. TMMC believes its prior diversification
efforts were impeded by its subsidiary relationship with FHP, which a number of
other payors regarded as a direct competitor.
MANAGEMENT SERVICES
TMMC provides a wide array of management services to the Talbert Medical
Groups. TMMC's services include: (i) provider contract negotiation and
administration; (ii) Medicare risk management; (iii) comprehensive management
information systems; (iv) medical management (claims administration, utilization
and case management, quality assurance and risk management, and physician
credentialing and recruitment); and (v) support services (including nursing,
billing, collection and accounting). Ancillary clinical services (including
pharmacy, radiology, optometry, laboratory, home health, hospice, rehabilitation
and physical therapy) are provided through THSC.
PROVIDER CONTRACTING. TMMC represents the Talbert Medical Groups in
obtaining and negotiating provider agreements with HMOs and other payors. Under
a typical capitation agreement with one of the Talbert Medical Groups, the Group
is responsible for managing all physician-related covered medical care for each
enrollee in exchange for a prepaid monthly capitation payment per member
enrolled with the Talbert Medical Group. Capitation agreements generally include
shared risk arrangements and other financial incentives designed to encourage
the provision of high-quality, cost-effective health care. TMMC has also
represented the Talbert Medical Groups in negotiating discounted fee-for-service
agreements. Under these arrangements, the Talbert Medical Groups bill the payor
for services rendered rather than receive a monthly capitation payment.
When negotiating or renewing payor contracts, TMMC analyzes a number of
specific factors that affect capitated rates, the shared risk pool and the
breadth of covered benefits. These factors include, but are not limited to, the
demographic risk profile of the member pool, its cost history, the existence of
ceilings on required coverage, and fee-for-service equivalent charges. TMMC
undertakes these analyses in order to assess the economic opportunity and risk
exposure associated with the contract, and then conducts the negotiations on
behalf of its affiliated medical group.
MEDICARE RISK MANAGEMENT. Many payors have contracted with the federal
government to provide health care for Medicare beneficiaries under full risk
capitation arrangements. Under these types of
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<PAGE>
contracts, the payor receives a monthly per capita payment for each enrollee
that is equal to 95% of HCFA's adjusted average per capita cost. TMMC benefits
from 13 years of experience and expertise in implementing and managing Medicare
risk programs. TMMC's Medicare contracting expertise helps assess the Talbert
Medical Groups' economic opportunity and exposure under such contracts. TMMC's
administrative expertise provides the Talbert Medical Groups with the design and
implementation of clinical systems capable of meeting the needs of the Medicare
population.
MANAGEMENT INFORMATION SYSTEMS. TMMC maintains a comprehensive, on-line
database that provides inpatient and outpatient utilization statistics and
patient encounter reporting and tracking. The Company believes that the
availability of timely information on utilization patterns improves primary care
physician productivity and effectiveness. Medical management information systems
("MIS") play an integral role in TMMC's management of specialty care physicians
and hospital utilization by enabling TMMC's medical directors and utilization
nurses to monitor encounter data, case management decisions and patient
outcomes. In addition, MIS help TMMC perform various administrative functions,
including insurance verification, accounts payable and receivable, financial
reporting and claims payment. The MIS also include a customer service
documentation system that helps TMMC resolve patient concerns and evaluate
patient and physician satisfaction.
CLAIMS ADMINISTRATION. TMMC's claims processing capabilities include
determination of eligibility, identification of appropriate benefits and
assurance of prior authorization. TMMC also provides critical elements of most
effective economic claim adjudication and medical claims review. In addition,
TMMC performs fee-for-service billing and ensures coordination of benefits for
recoveries from primary and secondary insurers.
UTILIZATION MANAGEMENT. TMMC has established a utilization management
program that assists physicians in the Talbert Medical Groups in providing
high-quality, cost-effective care. All referrals to specialty care physicians
and all hospital admissions, with the exception of emergencies, require prior
approval by utilization management committees. TMMC provides information to the
utilization management committees, but does not participate in their
deliberations, nor does TMMC directly engage in the practice of medicine or
exert control over decisions regarding medical care. Utilization management
committees also establish guidelines for routine referrals that can be
authorized by committee staff. The committees help ensure that all necessary
pre-approvals are obtained, benefits are fulfilled, "best medical practice"
alternatives are followed, appropriate providers are used and hospitalization is
properly utilized. A case manager coordinates with hospital nurses and primary
care physicians for discharge planning and the use of alternatives to
hospitalization. The program also focuses on preventive medicine and the
development of alternatives to more costly tests, procedures, surgeries,
hospitalizations or referrals to specialty care physicians.
CASE MANAGEMENT. Case management is a clinical and administrative process
by which health care services are identified, coordinated, implemented and
evaluated on an ongoing basis for members experiencing health problems. These
problems include chronic disability, complex medical issues or problems
involving long-term care or disease management. Case management involves the
coordination of a variety of services, including, in many instances, home
nursing, home infusion and the provision of durable medical equipment. This
approach is intended to provide coordinated and comprehensive care for patients
throughout the course of treatment, while reducing hospitalization referrals.
QUALITY ASSURANCE AND RISK MANAGEMENT. The Talbert Medical Groups maintain,
as a service to both physicians and payors, a comprehensive quality assurance
program designed to assess patient outcomes. The quality assurance program
incorporates peer review, patient satisfaction surveys, medical records
auditing, continuing medical staff development and regular continuing medical
education seminars to meet or exceed the requirements of accrediting
organizations and state law. Medical staff development also includes training
and support programs to encourage the application of identified "best medical
practices."
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TMMC has an established risk management program to oversee the management of
malpractice claims. See "--Risk Management Program."
PHYSICIAN CREDENTIALING AND RECRUITMENT. As a service to payors, TMMC
verifies that the credentials of physicians in the Talbert Medical Groups meet
the minimum requirements specified in payor contracts. In addition, TMMC assists
the Talbert Medical Groups in recruiting physicians. The recruitment process
includes a lengthy series of interviews and reference checks incorporating a
number of credentialing and competency protocols. All of the Talbert Medical
Groups' physicians are licensed to practice medicine in the state where they
provide medical services and are generally either board certified or board
eligible.
SUPPORT SERVICES. The Company provides support services covering all
aspects of ambulatory clinic management, including nursing, reception,
scheduling, billing, collection, accounting, enrollment information management
and licensing maintenance.
ANCILLARY CLINICAL SERVICES. THSC provides pharmacy, radiology, optometry,
laboratory, home health, hospice, rehabilitation and physical therapy services
in many of the Medical Centers.
EXPANSION STRATEGY
The Company's strategy is to develop high quality, cost efficient health
care delivery systems by acquiring or contracting with additional primary and
specialty care physicians in selected geographic markets. The Company's strategy
in its existing markets focuses on three elements: contracting with new payors,
developing additional fee-for-service business and expanding its physician
practice base.
NEW PAYORS. The Company believes that after its separation from FHP, third
party payors previously deterred by its subsidiary affiliation with FHP will be
more willing to contract with the Talbert Medical Groups. This would diversify
the Talbert Medical Groups payor base as well as increase their capitated
enrollment.
INCREASED FEE-FOR-SERVICE. Prior to the separation from FHP, the Talbert
Medical Groups provided little or no fee-for-service business. Through increased
marketing activities and promotional events undertaken by each Medical Center,
the Company believes it can develop greater fee-for-service business at the
Talbert Medical Groups.
NEW PHYSICIAN PRACTICES. The Company intends to expand its physician base
in existing markets through the acquisition of, or affiliation with, individual
physicians or groups in those markets.
The Company also has identified other geographic markets for expansion,
based on internally developed criteria. The Company may expand into these
markets through the acquisition of, or affiliation with, individual and group
primary and specialty care physicians.
CONTRACTUAL RELATIONSHIPS
PROVIDER AGREEMENTS. TMMC represents the Talbert Medical Groups in
obtaining and negotiating provider agreements with payors, such as FHP. Under
most provider agreements, the Talbert Medical Group receives a prepaid monthly
capitation payment for each payor member who selects a primary care physician
employed by the Talbert Medical Group. These capitation payments are
administered by TMMC pursuant to a management services agreement with the
Talbert Medical Group. To encourage efficient utilization of hospital and
related services as well as to maintain the quality of care, the Talbert Medical
Groups are obligated to comply with the utilization management policies and
quality management programs of the payor.
MANAGEMENT SERVICES AGREEMENTS. Under TMMC's contracts to manage the
Talbert Medical Groups (the "Management Services Agreements"), TMMC is obligated
to provide a range of practice management services, including facilities,
non-professional personnel and support staff, billing and collection, and
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negotiation of managed care and provider contracts. As compensation for its
services, TMMC is entitled to reimbursement of certain clinic operating
expenses, as well as a percentage of each Talbert Medical Group's revenues net
of reimbursed clinic operating expenses (except in California, where the
management fee is based on the Talbert Medical Group's gross revenues). The
Talbert Medical Groups are solely and exclusively in control of and responsible
for all aspects of the practice of medicine and the delivery of medical
services. TMMC receives a limited power of attorney from the Talbert Medical
Groups for ease of administration, but each Talbert Medical Group retains full
authority of approval over all provider and payor contracts and credentialing.
The Management Services Agreements generally have terms of twenty years, with
two automatic renewals of ten years each (at TMMC's option), and may be
terminated by either party for cause upon written notice of between 30 to 180
days.
PHYSICIAN EMPLOYMENT AGREEMENTS. The Talbert Medical Groups generally enter
into employment agreements with their physicians (the "Physician Employment
Agreements") for their professional medical services. The physicians also may
provide medical services outside the Talbert Medical Groups if such services do
not interfere with their full commitment to the Talbert Medical Group. The
Physician Employment Agreements typically have terms of approximately one year,
and are automatically renewed for one year. After the one year automatic
renewal, further renewals must be mutually agreed by the parties. The contracts
generally can be terminated upon 60 days written notice by either party. To
date, the Physician Employment Agreements have provided for fixed salaries,
subject to negotiation on an annual basis. Effective January 1, 1997, the
Talbert Medical Groups will adopt a new physician compensation system that
places a certain portion of physician compensation at risk and includes other
financial incentives to encourage high-quality, cost-effective care. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SHARE CONTROL AGREEMENTS. TMMC has entered into agreements with the sole
shareholder (in each case also the chief of staff) of each of the Talbert
Medical Groups (the "Share Control Agreements") that provide for the sole
shareholder to vote the shares of the Talbert Medical Group as to matters other
than those affecting the delivery of medical care, in a manner approved by TMMC.
COMPETITION
The health care industry is highly competitive and is subject to continuing
changes in the way services are provided and providers are selected and paid.
The Company competes with other companies, including PPMCs, that provide
management services to health care providers. The Talbert Medical Groups compete
with any provider entity in their markets that contracts with payors for the
provision of prepaid physician health care services. Certain competitors are
significantly larger and better capitalized than the Company, and have longer
established relationships with buyers of such services than does the Company.
GOVERNMENT REGULATION
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. Generally, regulation of health care companies is
increasing.
There have been diverse legislative and regulatory initiatives at both the
federal and state levels to address, among other things, the continuing
increases in health care costs and the lack of health care coverage for many
people. Several bills have been introduced in Congress to reform the nation's
health care system. These bills include elements such as guaranteed issuance and
renewability of health insurance; subsidies for individuals who are uninsured or
underinsured; mandates on employers to provide health coverage for their
employees; medical savings accounts; mandatory or voluntary regional health
alliances or purchasing cooperatives; minimum or standardized health benefit
packages; limitations on premiums; medical liability reforms; amendment of the
antitrust laws to benefit providers; mandatory or optional single-payor systems
for all or part of the population; and changes in federal tax, Medicare and
Medicaid
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laws and the Employee Retirement Income Security Act of 1974. To varying
degrees, many of the bills contemplate the involvement of state governments in
the regulation and implementation of federal health care reform legislation.
Various states are considering forms of single-payor systems, restructuring
of Medicaid programs and the adoption of "any willing provider" legislation that
could require managed care companies to contract with any medical provider who
agrees to the terms of the company's standard provider contract and payment
schedule. Any legislation along these lines that becomes law could adversely
affect the Company's business.
The Company is unable to predict how existing federal or state laws and
regulations may be changed or interpreted, what additional laws or regulations
affecting its businesses may be enacted or proposed, when and which of the
proposed laws will be adopted or what effect the new laws and regulations will
have on its businesses. However, certain of the proposals, if adopted, could
have a material adverse effect on the Company's business, while others, if
adopted, could potentially benefit the Company's business. Although the effects
of many proposals cannot yet be determined, the Company remains committed to
participate in the debate over health care reform and in the restructuring of
the health care system.
The laws of the states where the Company currently operates generally
specify who may practice medicine and limit the scope of relationships between
medical practitioners and other parties. Under these laws, the Company is
prohibited from practicing medicine or exercising control over the provision of
medical services. In order to comply with these laws, the Talbert Medical Groups
are organized so that all physician services are offered by physicians employed
by or under contract with the professional corporations affiliated with the
Company. Other than in New Mexico, the Company itself does not employ practicing
physicians as practitioners. The Company does not, in any state, exert control
over physician decisions regarding medical care or represent to the public that
it offers medical services. The Company believes that the services it provides
to the Talbert Medical Groups do not constitute the practice of medicine under
applicable laws.
Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate HMOs and other managed care organizations with which the physician
groups may have contracts. Many states require regulatory approval, including
certificates of need, before establishing or expanding certain types of health
care facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs. Some
states also require licensing of third party administrators. In connection with
its existing operations and its expansion into new markets, the Company believes
it is in compliance with all applicable laws, regulations and interpretations,
but there can be no assurance that they will not change in the future or that
additional laws and regulations will not be enacted. The ability of the Company
to operate profitably will depend in part upon the Company and its affiliated
physician groups obtaining and maintaining all necessary licenses, certificates
of need and other approvals and operating in compliance with applicable health
care regulations.
The laws of all states prohibit physicians from splitting fees with
non-physicians and many states prohibit non-physician entities (such as the
Company) from practicing medicine and, in certain circumstances, from employing
physicians directly. The Company believes its current and planned activities do
not constitute fee-splitting, the practice of medicine or the direct employment
of physicians as contemplated by these laws. There can be no assurance, however,
that interpretations or enforcement of these laws will not force changes in the
Company's relationships with its facilities and physicians. In addition,
statutes in some states could restrict expansion of the Company's operations to
those jurisdictions.
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services, or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service, in each
case, reimbursable under Medicare or Medicaid. Pursuant to this anti-kickback
law, the federal government has recently announced a policy of
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increased scrutiny for joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
costs. In addition, federal legislation currently restricts the ability of
physicians to refer patients for clinical laboratory or certain other designated
health services to entities in which they have an ownership interest or other
compensation arrangement. Many states, including those in which the Company
presently does business, have similar anti-kickback and anti-referral laws.
A violation of the federal anti-kickback statute generally requires several
elements: (i) the offer, payment, solicitation, or receipt of remuneration; (ii)
the intent to induce referrals; and (iii) the ability of the parties to make or
influence referrals of patients for services reimbursable under Medicare or
Medicaid programs or to provide items or services reimbursable under such
programs. Noncompliance with, or violation of, the federal anti-kickback
legislation can result in exclusion from Medicare and Medicaid programs and
civil and criminal penalties. With respect to the self-referral prohibition, the
entity and the referring physician are prohibited from receiving Medicare or
Medicaid reimbursement for services rendered. Similar penalties are provided for
violation of state anti-kickback and anti-referral laws. The federal government
has promulgated "safe harbor" regulations that identify certain business and
payment practices deemed not to violate the federal anti-kickback statute.
Although the Company's business does not fall within certain of the current or
proposed safe harbors, the Company believes that its operations substantially
comply with such statutes and regulations.
The Company believes that its business arrangements do not involve the
referral of patients to entities with whom referring physicians have an
ownership interest or compensation arrangement within the meaning of federal and
state anti-referral laws, because referrals are made directly to other providers
rather than to entities in which referring physicians have an ownership or
compensation arrangement. The Company further believes its compensation
arrangements with physicians fall within various exceptions to state and federal
anti-referral laws, including exceptions for ownership or compensation
arrangements with certain managed care organizations and for physician incentive
plans that limit referrals. In addition, the Company believes that the methods
used to acquire existing physician practices and to recruit new physicians do
not violate anti-kickback and anti-referral laws and regulations.
If any of the Company's business arrangements were found to violate
anti-kickback or anti-referral laws, it could have a material adverse effect on
the Company's results of operations. The Company does not believe that its
operations generally are likely to be challenged or, if challenged, are likely
to be subject to an enforcement action.
Laws in all states regulate the business of insurance. Generally, the
business of insurance is defined to include the acceptance of financial risk.
Certain of the shared risk arrangements entered into by the Company could
possibly be characterized by some states as the business of insurance. The
Company, however, believes that the acceptance of capitation payments by a
health care provider does not constitute the conduct of the business of
insurance. Many states also regulate the establishment and operation of networks
of health care providers. Generally, these laws do not apply to the hiring and
contracting of physicians by other health care providers. There can be no
assurance that regulators of the states in which the Company operates would not
apply these laws to require licensing of the Company's operations as an insurer
or provider network. The Company believes that it is in compliance with these
laws in the states in which it does business, but there can be no assurance that
future interpretations of insurance laws and health care network laws by the
regulatory authorities in these states will not require licensing or a
restructuring of some or all of the Company's operations.
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RISK MANAGEMENT PROGRAM
The Company's management services include the provision of professional
liability insurance coverage for its affiliates. The Company maintains
professional liability insurance on a claims-made basis in amounts deemed
appropriate by management, based upon historical claims and the nature and risk
of its business. The Company's policy currently provides this coverage to the
Talbert Medical Groups through a professional liability policy in the amount of
$2 million per claim, and $12 million in the aggregate per policy year. The
Company has renewed its policy through February 15, 1997. However, there can be
no assurance that a future claim or claims will not exceed the limits of
available insurance coverage, that any insurer will remain solvent and able to
meet its obligations to provide coverage for any claim or claims, or that
coverage will continue to be available or available with sufficient limits on a
commercially reasonable basis to insure adequately the Company's operations.
Since January 1, 1996, substantially all claims have been made within 12 months
of incurrence, and no settlements have exceeded policy limits.
Physicians not directly employed by the Talbert Medical Groups are required
by contract to carry certain minimum amounts of professional liability insurance
coverage. These amounts generally correspond to statutory or customary minimums
in the physician's practice area.
In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits alleging medical malpractice, bad
faith denial of services and other claims for recovery in connection with
alleged injuries or misconduct. Many of these lawsuits involve large claims and
substantial defense costs. The Company has significant operations in California,
where very large jury awards have been sustained by other companies for claims
alleging negligent or fraudulent withholding of approval for necessary medical
services. The Company monitors these kinds of cases in each jurisdiction and
considers litigation possibilities in the review and implementation of its risk
management programs.
Due to the nature of its business, the Company and some of its physicians
and officers from time to time may become involved as defendants in medical
malpractice lawsuits, and are subject to the attendant risk of substantial
damage awards. A significant source of potential liability in this regard is the
negligence of health care professionals employed or contracted by the Company
and its affiliates. See "Risk Factors-- Potential Claims Affecting the Company's
Industry; Insurance."
EMPLOYEES
At September 30, 1996, the Company had approximately 3,500 full-time
equivalent employees, including approximately 470 employees of the Talbert
Medical Groups. None of the Company's or the Talbert Medical Groups' employees
are subject to collective bargaining agreements. Management believes that its
employee relations are good.
PROPERTIES
The Company leases the facilities for its 52 Medical Centers, which range in
size from approximately 2,000 to 75,000 square feet. Monthly payments range from
$1,000 to $75,000. The facilities for 49 of the 52 Medical Centers are leased or
sub-leased under the Master Lease Agreement with FHP. See "Relationship with FHP
and PacifiCare Following the Offering--Master Lease Agreement." The Company
leases approximately 60,000 square feet in Costa Mesa, California for its
corporate headquarters and California regional office. Monthly rental payments
are approximately $51,700. The Company's other regional offices are contained in
the Medical Centers, except in Phoenix, Arizona, where a separate 12,600
square-foot regional office is leased for monthly payments of $5,040.
LEGAL PROCEEDINGS
During the ordinary course of business, the Company and its subsidiaries
have become a party to pending and threatened legal actions and proceedings.
Management of the Company is of the opinion, taking into account its insurance
coverage, that the outcome of the currently known legal actions and proceedings
will not, singly or in the aggregate, have a material effect on the consolidated
financial position of the Company and its subsidiaries.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jack D. Massimino................................ 47 President, Chief Executive Officer and Director
Gloria L. Austin................................. 42 Senior Vice President
Becky J. Behlendorf.............................. 48 Vice President, Information Systems
Jennifer M. Gutzmore, M.D........................ 45 Vice President, Health Care Services
Regina B. Lightner............................... 46 Vice President, Marketing
Walter R. Stone.................................. 45 Vice President, Finance and Treasurer
Jack R. Anderson................................. 71 Chairman and Director
Richard M. Burdge, Sr............................ 69 Director
Warner Heineman.................................. 74 Director
Van B. Honeycutt................................. 52 Director
Robert W. Jamplis, M.D........................... 76 Director
Robert C. Maxson, Ed.D........................... 60 Director
Joseph F. Prevratil.............................. 58 Director
Westcott W. Price III............................ 57 Director
</TABLE>
JACK D. MASSIMINO has been President, Chief Executive Officer and a director
of the Company since November, 1996, and has held the same positions with TMMC
since December 1995. Mr. Massimino previously served FHP as Executive Vice
President since 1993, and added the responsibility of Chief Operating Officer in
1994. He also served in other executive positions since joining FHP in 1988,
including Senior Vice President and Vice President for Corporate Development.
Mr. Massimino is a director of the American Graduate School for International
Business World Business Advisory Council, and the Orange County Business
Committee for the Arts.
GLORIA L. AUSTIN has been Senior Vice President of the Company since
November 1996, and has held the same position with TMMC since December 1995. Ms.
Austin previously served as Senior Vice President of FHP's former staff model
operations from July 1995, and Senior Vice President, Health Care Delivery from
February 1995. She has also served in several executive capacities in FHP's
California and Utah regional operations, including Associate Vice President,
Utah Region Administration and Regional Vice President, Los Angeles. Ms. Austin
joined FHP in 1978.
BECKY J. BEHLENDORF has been Vice President, Information Systems of the
Company since November 1996, and has held the same position with TMMC since
January 1996. Ms. Behlendorf previously served as a strategic information
systems consultant to Beverly Enterprises, an owner and operator of skilled
nursing facilities, from July 1995 to January 1996. She was Associate Vice
President of Strategic Systems of Tenet Health Care from July 1993 to July 1995.
Prior to July 1993, Ms. Behlendorf spent 12 years with IBM in a variety of
technical and marketing positions, including three years as a health care
marketing manager, most notably as Brand Manager of Enterprise Systems.
JENNIFER M. GUTZMORE, M.D. has been Vice President, Health Care Services of
the Company since November 1996, and has held the same position at TMMC since
July 1995. Dr. Gutzmore previously served in a number of senior medical
management positions at FHP, including Senior Medical Director for Utilization
Management from February to July 1995, Senior Medical Director of Fountain
Valley Hospital from September 1994 to February 1995, Senior Medical Director of
Medicare from September 1992 to September 1994, and Senior Medical Director for
Health Care Delivery for FHP's southern California staff model operations from
March 1991 to September 1992. Dr. Gutzmore joined FHP in 1985.
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REGINA B. LIGHTNER has been Vice President, Marketing of the Company since
November 1996, and has held the same position with TMMC since April 1996. Ms.
Lightner served as Vice President of Government Health Care programs at CIGNA
Health Care from July 1994. She was Associate Vice President Region Sales and
Marketing at FHP from March 1990. She was Corporate Associate Vice President of
Sales at FHP from April 1988, and Director of Commercial Sales from February
1986. Ms. Lightner joined FHP in 1985.
WALTER R. STONE has been Vice President, Finance and Treasurer of the
Company since November 1996, and has held the same positions with TMMC since
December 1995. Mr. Stone was previously Corporate Vice President, Finance at FHP
since August 1992. He was Regional Vice President for FHP's staff model
operations from 1990 to 1992, and Regional Vice President for FHP's California
contracted care operations from 1988 to 1990. Mr. Stone joined FHP in 1980.
JACK R. ANDERSON has been Chairman and a director of the Company since
November 1996. Mr. Anderson will be appointed a director of PacifiCare in
connection with the FHP Merger. He has been a director of FHP since June 1994
and Chairman of the FHP Board of Directors since June 1995. He previously served
as Chairman of the Board of Directors of TakeCare, Inc. from 1988 to June 1994.
He has been President of Calver Corporation, a health care consulting and
investing firm, and a private investor since 1982. Mr. Anderson is a director of
Horizon Mental Health Management, Inc. and United Dental Care, Inc.
RICHARD M. BURDGE, SR. has been a director of the Company since November
1996. Mr. Burdge serves as the Chairman of the Compensation Committee. He has
been a director of FHP since July 1994. Mr. Burdge retired in 1984 as Executive
Vice President of CIGNA Corporation, a position he held from 1982 to 1984. He
served as Senior Executive Vice President of INA Corporation from 1980 to 1982
and as Executive Vice President of INA Corporation from 1975 to 1980. He also
served as President and Chief Operating Officer of the American Stock Exchange
from 1972 to 1975. Mr. Burdge is a director of First Commonwealth, Inc.
WARNER HEINEMAN has been a director of the Company since November 1996. Mr.
Heineman serves as the Chairman of the Audit Committee and as a member of the
Finance Committee. He has been a director of FHP since 1990. He has been a
senior advisor to First Business Bank since 1992. From 1989 to 1992, he served
as senior vice president of Bank of Los Angeles. Mr. Heineman also served as a
Senior Vice President of City National Bank from 1981 to 1988. In 1981 he
retired as Vice Chairman and Director of Union Bank after 38 years of service.
Mr. Heineman is a trustee of Southwestern University School of Law, a member of
the Board of Advisors of UCLA Medical Center and the Board of Visitors of UCLA
School of Medicine, a director of the FHP Foundation, Alexander Haagen
Properties, Inc. and the Countrybaskets Index Funds, Inc.
VAN B. HONEYCUTT has been a director of the Company since November 1996. Mr.
Honeycutt serves as a member of the Audit Committee. He has been a director of
FHP since November 1995. He has been President and Chief Executive Officer of
Computer Sciences Corporation since April 1995, and served as president and
chief operating officer of Computer Sciences Corporation from 1993 to 1995.
Computer Sciences Corporation is a publicly-traded company listed on the New
York Stock Exchange that provides information technology consulting, systems
integration and outsourcing services to industry and government. From 1987 to
1993, he served as corporate vice president and president of Computer Sciences
Corporation's Industry Services Group.
ROBERT W. JAMPLIS, M.D. has been a director of the Company since November
1996. Dr. Jamplis serves as a member of the Compensation Committee. He has been
a director of FHP since August 1995. Dr. Jamplis served as a director of
TakeCare, Inc. and two of its HMO subsidiaries prior to FHP's acquisition of
TakeCare, Inc. in 1994. He has been President and Chief Executive Officer of the
Palo Alto Medical Foundation since 1981, was named Executive Director of the
Palo Alto Clinic in 1966 and joined the Clinic in 1954. Dr. Jamplis has written
extensively and held leadership positions with numerous
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medical, academic and business organizations. He is a director of the Children's
Hospital at Stanford, the Santa Barbara Medical Foundation Clinic and the
American Cancer Society-California Division.
ROBERT C. MAXSON, ED.D. has been a director of the Company since November
1996. Dr. Maxson serves as a member of the Audit Committee. He has been a
director of FHP since August 1995. Dr. Maxson is a director of the FHP
Foundation, a position he is obligated to resign if he becomes a stockholder of
FHP. He has been president of California State University, Long Beach since
1994. Dr. Maxson served as the President of the University of Nevada, Las Vegas,
from 1984 to 1994. He has also served on the corporate boards of Bank of America
Nevada and Houston Security Bank.
JOSEPH F. PREVRATIL has been a director of the Company since November 1996.
Mr. Prevratil serves as Chairman of the Finance Committee and as a member of the
Compensation Committee. He will be appointed a director of PacifiCare in
connection with the FHP Merger. He has been a director of FHP since 1991. Mr.
Prevratil is a director and Chief Executive Officer of the FHP Foundation. From
1982 to 1988, Mr. Prevratil served as President of Wrather Port Properties,
Inc., an entertainment and hotel complex that included the Queen Mary oceanliner
in Long Beach, California. In 1988 and 1989 he served as Executive Director of
the Port of Long Beach. From 1989 to 1993, Mr. Prevratil was President of his
own business, providing contracted consulting and management services to the
leisure-time industry and the Redevelopment Agency of the City of Long Beach. In
1993, Mr. Prevratil became President of the RMS Foundation, Inc., a nonprofit
corporation operating the Queen Mary oceanliner attraction. Mr. Prevratil has
been the President of J&P Riverside Hotel Corp., the general partner in
Riverside Hotel Partners, Ltd., a limited partnership that owned and operated
the Sheraton Riverside Hotel. In February 1996, Riverside Hotel Partners, Ltd.
filed a petition under Chapter 11 of the federal bankruptcy laws.
WESTCOTT W. PRICE III has been a director of the Company since November
1996, and has held the same position at TMMC since December 1995. Mr. Price
serves as a member of the Finance Committee. He has been a member of the Board
of Directors of FHP since 1984 and its Vice Chairman since 1986. He became
President of FHP in 1989 and Chief Executive Officer of FHP in 1990. Mr. Price
is a director of the FHP Foundation.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the terms of the Certificate of Incorporation of the Company,
the Board of Directors is divided into three classes, designated Class I, Class
II and Class III. Class I, consisting of Messrs. Anderson, Burdge and Heineman,
will hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1997, Class II, consisting of Mr. Honeycutt, Dr.
Jamplis and Mr. Massimino, will hold office initially for a term expiring at the
annual meeting of the stockholders to be held in 1998 and Class III, consisting
of Dr. Maxson, Mr. Prevratil and Mr. Price, will hold office initially for a
term expiring at the annual meeting of stockholders to be held in 1999. Each
director will hold office until the annual meeting for the year in which his
term expires and until his successor is duly elected and qualified. At each
annual meeting of the stockholders of the Company, the successors to the class
of directors whose terms expire at such meeting will be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election. See "Description of Capital Stock--Certain
Anti-Takeover Effects." The Board of Directors elects officers annually and such
officers serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Finance Committee, an Audit
Committee and a Compensation Committee.
FINANCE COMMITTEE. The Finance Committee has the responsibility to review
the Company's capital resources and financing needs.
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AUDIT COMMITTEE. The Audit Committee has the responsibility to review and
supervise the financial controls of the Company. The Audit Committee makes
recommendations to the Board of Directors of the Company with respect to the
Company's financial statements and the appointment of independent auditors,
reviews significant audit and accounting policies and practices, meets with the
Company's independent public accountants concerning, among other things, the
scope of audits and reports, and reviews the performance of overall accounting
and financial controls of the Company.
COMPENSATION COMMITTEE. The Compensation Committee has the responsibility
to review the performance of the officers of the Company and recommend to the
Board of Directors annual salary and bonus amounts for all officers of the
Company. The Compensation Committee also has the responsibility for oversight
and administration of the Company's 1996 Stock Incentive Plan and other
compensatory plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Burdge (Chairman), Dr. Jamplis and Mr. Prevratil have served as members
of the Compensation Committee since the Company's organizational meeting in
November 1996. Each of the members of the Compensation Committee is a
non-employee Director of the Company. No executive officer of the Company during
the last fiscal year served as a member of a compensation committee or director
of another for-profit entity in a situation in which an executive officer of
such other entity served as a member of the Compensation Committee or Director
of the Company.
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
DIRECTOR COMPENSATION. The Company's 1996 Stock Incentive Plan provides
for initial and subsequent annual grants of nonqualified stock options to
non-employee directors. See "Stock Incentive Plan-- Non-Employee Director
Options." Except for reimbursement of expenses, directors are not otherwise
compensated for attending meetings of the Board of Directors or its committees.
EXECUTIVE OFFICER COMPENSATION. The following table presents certain
information concerning compensation paid by the Company or FHP for services
rendered during the year ended December 31, 1995, for the Chief Executive
Officer and the next four most highly compensated executive officers of the
Company (collectively, the "Named Executive Officers"). The Company did not have
its own executive compensation or employee benefit plans prior to September
1996. Certain of the amounts shown below reflect the participation of the Named
Executive Officers in plans administered by FHP. The table does not reflect
options to purchase FHP Common Stock awarded to the Named Executive Officers by
FHP.
47
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
--------------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) COMPENSATION(4)
- --------------------------------------------------------------- --------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Jack D. Massimino.............................................. 1995 $ 411,925(6) $ -- $ 13,560
President and Chief Executive Officer
Gary E. Goldstein, M.D.(5)..................................... 1995 249,995 1,549 13,050
Former Senior Vice President
Gloria L. Austin............................................... 1995 205,502 20,000 12,263
Senior Vice President
Jennifer M. Gutzmore, M.D...................................... 1995 175,036 3,000 12,325
Vice President, Health Care Services
Walter R. Stone................................................ 1995 148,627 -- 12,074
Vice President, Finance and Treasurer
</TABLE>
- ------------------------
(1) The dollar value of perquisites and other personal benefits did not exceed
the lesser of $50,000 or 10% of the Named Executive Officer's salary and
bonus.
(2) Includes the base salary earned by the Named Executive Officer during the
year and any voluntary salary reduction resulting from contributions for the
year by the Named Executive Officer to (a) the FHP ESOP under Section 401(k)
of the Code and (b) the FHP Deferred Compensation Plan.
(3) Includes the cash value of any bonus earned by the Named Executive Officer
during FHP's fiscal year ended June 30, 1995 and the cash value of any
voluntary bonus reductions resulting in contributions to (a) the FHP ESOP
under Section 401(k) of the Code and (b) the FHP Deferred Compensation Plan.
Does not include the cash value of bonuses earned with respect to FHP's
fiscal year ended June 30, 1996 as follows: Mr. Massimino--$591,700; Ms.
Austin--$645,280; Dr. Gutzmore--$156,806; and Mr. Stone--$258,833.
(4) Includes the dollar value of taxable income from group term life insurance
coverage in excess of $50,000 purchased by FHP as follows: Mr.
Massimino--$1,560; Dr. Goldstein--$1,050; Ms. Austin-- $263; Dr.
Gutzmore--$325; and Mr. Stone--$183. Also includes FHP contributions under
the FHP Money Purchase Plan as follows: Mr. Massimino--$9,000; Dr.
Goldstein--$9,000; Ms. Austin-- $9,000; Dr. Gutzmore--$9,000; and Mr.
Stone--$8,918. Also includes FHP contributions under the FHP ESOP as
follows: Mr. Massimino--$3,000; Dr. Goldstein--$3,000; Ms. Austin--$3,000;
Dr. Gutzmore--$3,000; and Mr. Stone--$2,973. Also includes FHP contributions
under the 401(k) portion of the FHP ESOP Plan as follows: Dr.
Goldstein--$500; and Mr. Stone--$500.
(5) Dr. Goldstein has not been employed by TMMC since July 12, 1996.
(6) Mr. Massimino's annual salary was reduced from $450,000 to $350,000
effective July 1, 1995.
OPTION GRANTS
The Company did not grant any options with respect to its Common Stock
during the fiscal year ended December 31, 1995. The Company has granted options
with respect to its Common Stock on two occasions in its current fiscal year,
including grants to the Named Executive Officers. See "--Stock Incentive Plan."
As of December 12, 1996, the Named Executive Officers held options with respect
to shares of Common Stock as follows: Mr. Massimino--26,082 (all of which are
November 1996 Options); Ms. Austin--5,353 (all of which are November 1996
Options); Dr. Gutzmore--7,500; and Mr. Stone-- 5,353 (all of which are November
1996 Options). There were no option exercises as of December 6, 1996.
48
<PAGE>
CHANGE IN CONTROL EMPLOYMENT AGREEMENTS
The Company will enter into agreements (the "Change in Control Employment
Agreements") providing for benefits in the event of a "Change of Control" of the
Company with the following executives: Jack D. Massimino, Gloria L. Austin,
Becky J. Behlendorf, Jennifer M. Gutzmore, M.D., Regina B. Lightner and Walter
R. Stone. Pursuant to the Change of Control Employment Agreements, certain
officers agree to forego any payments or benefits to which they were entitled
under similar agreements with FHP. For the purposes of the Change of Control
Employment Agreements, a Change of Control occurs when: (i) another party, other
than a Company-sponsored employee benefit plan, acquires (other than directly
from the Company) beneficial ownership of 20% or more of the Company's stock or
voting securities; (ii) there is a change in a majority of the current Board of
Directors (the "Incumbent Board") (excluding any persons approved by a vote of
the Incumbent Board other than in connection with an actual or threatened proxy
contest); or (iii) there is a consummation of a complete liquidation or
dissolution of the Company or a merger, consolidation or sale of all or
substantially all of the Company's assets (collectively, a "Business
Combination") other than a Business Combination in which: (a) all or
substantially all of the stockholders of the Company receive 70% or more of the
stock of the Company resulting from the Business Combination; (b) no party,
other than a Company sponsored employee benefit plan, beneficially owns,
directly or indirectly, 20% or more of the Company's stock or voting securities
except to the extent any such ownership existed prior to the Business
Combination; and (c) at least a majority of the board of directors of the
resulting corporation were members of the Incumbent Board.
The Change of Control Employment Agreements provide that the executive's
employment will continue for three years following a Hostile Change of Control
and for two years following a Change of Control that is not Hostile, in each
case on equivalent terms (including position, duties, compensation and benefits)
to those existing immediately prior to the Change of Control. A Change in
Control is "Hostile" if it results from an unsolicited proposal that is approved
by a majority of the disinterested directors prior to disclosure of the Change
in Control or if such disclosure is made without the prior approval of a
majority of the disinterested directors. If during the relevant period the
executive's employment is terminated other than for "Cause," death or
disability, or if the executive terminates his employment for "Good Reason" (as
defined in the Employment Agreements), the executive is entitled to receive an
accrued salary and annual incentive payment through the date of termination and,
except in the event of death or disability, payments and benefits including the
continuation of bi-weekly salary payments and certain medical, dental and life
insurance coverage for the relevant period, payment of accrued vacation, holiday
and personal leave time, and a lump sum payment equal to additional
contributions that would have been allocated to the executive's accounts under
the Company's 1996 Employee Stock Ownership Plan and 1996 Money Purchase Pension
Plan if the executive had remained employed for the relevant period and deferred
the maximum pretax deferral allowed under the terms of these plans and the
amount of any benefits under the 1996 Employee Stock Ownership Plan that were
forfeited upon termination of employment but that would have vested if the
executive remained employed for the relevant period. All of the executive's
outstanding option rights under the Company's 1996 Stock Incentive Plan will
immediately become exercisable and all restrictions on Restricted Stock will be
eliminated on the date of termination of employment, unless prohibited by law.
The Change of Control Employment Agreements also contain provisions with
respect to the acceleration of options. Upon termination of employment other
than voluntary or for Cause, death or Disability, after a Change of Control and
prior to the end to the relevant period, all outstanding options held by the
executive vest, except to the extent such vesting would result in an "excess
parachute payment" nondeductible by the Company or would prevent accounting for
the Change of Control as a "pooling-of-interest." Options that do not vest by
reason of the exception become exercisable in accordance with their original
vesting schedule and remain exercisable until 90 days thereafter (or, if
earlier, until the original expiration date), provided that within 30 days of
the executive's date of termination the executive satisfies the following two
requirements: (i) the executive executes and delivers to the Company a
Settlement and
49
<PAGE>
Release Agreement waiving all the claims against the Company and its affiliates
(other than obligations under the Change of Control Employment Agreement and
vested employee benefits); and (ii) the executive executes and delivers to the
Company a Covenant Not to Compete for the period through the end of the
Employment Period, imposing certain restrictions upon the executive conducting
the same business in the same cities and counties as carried on by the Company
at the effective date of a Change of Control.
STOCK INCENTIVE PLAN
The Company's 1996 Stock Incentive Plan (the "Stock Incentive Plan") was
adopted by the Board of Directors and approved by FHP as of September 1996. The
purpose of the Stock Incentive Plan is to provide long-term incentives to those
key employees (including executive officers), significant agents and consultants
responsible for the continued success and growth of the Company. In addition,
the Stock Incentive Plan is intended to enable the Company to attract, motivate
and retain experienced and knowledgeable independent directors.
The Stock Incentive Plan is administered by a committee (the "Committee"),
comprised of the Board of Directors or a committee consisting of two or more of
its members, each of whom is an "outside" director within the meaning of Section
162(m) of the Internal Revenue Code (the "Code"). The Committee may grant
discretionary awards to any officer, non-employee director, key employee, or
significant consultant or advisor to the Company. In addition, the Stock
Incentive Plan provides for the automatic grant of nonqualified stock options to
non-employee directors.
SHARES THAT MAY BE ISSUED UNDER THE STOCK INCENTIVE PLAN. A maximum of
180,000 shares of Common Stock, or approximately 5.7% of the issued and
outstanding shares of Common Stock (on a fully diluted basis), has been reserved
for issuance under the Stock Incentive Plan and may be issued upon the exercise
of stock options ("Options") or stock appreciation rights ("SARs") or pursuant
to awards of restricted stock ("Restricted Stock Awards") or performance share
awards ("Performance Awards") and stock bonuses ("Stock Bonuses") or
non-employee director options ("Non-Employee Director Options") (Options, SARs,
Restricted Stock Awards, Performance Awards, Stock Bonuses and Non-Employee
Director Options are collectively referred to as "Awards"). The maximum number
of shares of Common Stock that may be delivered pursuant to incentive stock
options is 50,000 shares. The maximum number of shares of Common Stock that may
be delivered as Non-Employee Director Options is 60,000. The maximum number of
shares subject to Options and SARs that are granted during any calendar year to
any individual is limited to 50,000. The 180,000 shares available under the
Stock Incentive Plan will be registered under a Form S-8 registration statement
expected to be filed with the Securities and Exchange Commission (the
"Commission") within 12 months of the effective date of the registration
statement relating to the Rights and the Common Stock offered hereby (the
"Registration Statement"). As is customary in incentive plans of this nature,
the number and kind of shares available under the Stock Incentive Plan are
subject to adjustment in the event of any extraordinary dividend or any
extraordinary distribution in respect of the Common Stock, or any
reclassification, recapitalization, stock split (including a stock split in the
form of a stock dividend), reverse stock split, reorganization, merger,
combination, consolidation, split-up, spin-off, combination, repurchase or
exchange of Common Stock or other securities of the Company, or there shall
occur any other like corporate transaction or event in respect of the Common
Stock or a sale of substantially all the assets of the Company. Shares relating
to Awards which expire or for any reason are cancelled, terminated, forfeited,
fail to vest, or are reacquired, will again become available for grant purposes
in the Stock Incentive Plan to the extent permitted by law.
Awards are not transferable by an Award holder other than as expressly
provided for under the Stock Incentive Plan or by law, and are exercisable,
during his or her lifetime, only by the Award holder. The Committee determines
the terms of Awards, including the number of shares subject to the Award,
exercise price, term and exercisability. Unless the Committee otherwise
expressly provides, no Award is exercisable or will vest prior to twelve months
after its grant date. In the case of Options or other rights to acquire
50
<PAGE>
Common Stock, an Award will expire not later than ten years after its grant date
(five years in the case of Incentive Stock Options granted to Option holders who
own more than 10% of the voting power of the Company's outstanding voting
stock).
STOCK OPTIONS. An Option is the right to purchase shares of Common Stock at
a future date at a specified price (the "Option Price"). The Option Price is
generally the closing price for a share of Common Stock on a national securities
exchange or quotation system on the date of the grant. An Option may either be
an incentive stock option, as defined in the Code, or a non-qualified stock
option. An incentive stock option may not be granted to a person who owns more
than 10% of the total combined voting power of all classes of stock of the
Company unless the Option Price is at least 110% of the fair market value of
shares of Common Stock subject to the Option. The aggregate fair market value of
shares of Common Stock (determined at the time the Option is granted) for which
incentive stock options may be first exercisable by an Option holder during any
calendar year under the Stock Incentive Plan or any other plan of the Company
may not exceed $100,000. A non-qualified stock option is not subject to any of
these limitations.
STOCK APPRECIATION RIGHTS. In its discretion, the Committee may grant a
SAR either concurrently with the grant of an another Award (the SAR may extend
to all or a portion of the shares covered by such other Awards), or
independently from another Award. Upon exercise of a SAR, the holder receives,
for each share with respect to which the SAR is exercised, an amount equal to
the excess of the fair market value of a share of Common Stock on the date of
exercise of the SAR over the exercise price per share of Common Stock under the
related Award.
RESTRICTED STOCK AWARDS. A Restricted Stock Award is an award for a fixed
number of shares of Common Stock subject to restrictions. The Committee will
specify the price, if any, the participant must pay for the shares and the
restrictions imposed on the shares, which will not terminate earlier than twelve
months after the award date, except to the extent the Committee may otherwise
provide. Restricted Stock awarded to a participant may not be voluntarily or
involuntarily sold, assigned, transferred, pledged or otherwise disposed of or
encumbered during the restricted period.
PERFORMANCE SHARE AWARDS AND STOCK BONUSES. A Performance Award is an award
of a right to receive shares of Common Stock or other compensation (including
cash), the issuance or payment of which is contingent upon the attainment of
performance objectives, among other things. The Committee may, in its discretion
grant Performance Awards based upon factors the Committee deems relevant in
light of the specific type and terms of the award. The Committee may provide for
full or partial credit for the completion of such performance objectives in the
event of death, or total disability, a change in control or certain other
circumstances. A Stock Bonus is an award of shares of Common Stock for no
consideration other than past services and without restriction other than
transfer restrictions set by the Committee.
Without limiting the generality of the foregoing, the Stock Incentive Plan
permits the Committee to grant certain other types of awards ("Performance-Based
Awards") that are intended to qualify as "performance based compensation" under
Section 162(m) of the Code. Under Section 162(m), the Company may not deduct
certain compensation of over $1,000,000 paid in any year to the Chief Executive
Officer or one of the four other most highly compensated executive officers of
the Company ("Executive Officers") unless, among other things, this compensation
qualifies as performance-based compensation under Section 162(m), and the
material terms of the plan for such compensation are approved by stockholders.
Options and SAR's that are granted under that Plan at a fair market value
exercise price are intended to qualify as performance-based compensation. In
addition, other share-based awards (such as restricted stock or performance
awards) that may be granted under the Stock Incentive Plan may qualify as
performance-based compensation under Section 162(m). The Stock Incentive Plan
also provides for the grant of Performance-Based Awards that are not denominated
nor payable in and do not have a value
51
<PAGE>
derived from the value of a price related to shares of Common Stock and are
payable only in cash ("Cash-Based Awards") that are intended to satisfy the
requirements for performance-based compensation under Section 162 (m).
The maximum amount payable to any participant under all Cash-Based Awards
that are intended to be Performance-Based Awards during any calendar year under
the Plan will be $1,000,000. The maximum number of shares of the Company's
Common Stock that may be subject to all Performance-Based Awards, including
stock options and stock appreciation rights, that are granted to any participant
during any calendar year will not exceed 100,000 shares, either individually or
in the aggregate.
ACCELERATION OF AWARDS; POSSIBLE EARLY TERMINATION OF AWARDS. Unless prior
to a Change in Control Event (as described below) the Committee determines that
upon its occurrence there will be no acceleration, then upon the occurrence of a
Change in Control Event, each Option and SAR will become immediately
exercisable, Restricted Stock will vest free of restrictions, and Performance
Shares will become payable. In general, a Change in Control Event includes: (i)
approval by the stockholders of the Company of the dissolution or liquidation of
the Company; (ii) any acquisition by a person or group (subject to certain
exceptions) of 20% or more of either the outstanding Common Stock or the
combined voting power of the Company's outstanding securities; (iii) a change in
the majority of the Company's directors; or (iv) consummation of a
reorganization, merger, consolidation, sale or other disposition of all or
substantially all of the assets of the Company under certain circumstances;
provided that no award will be accelerated as to any person subject to Section
16 of the Securities Act to a date less than six months after its applicable
date of grant. Options or other Awards not exercised prior to the dissolution of
the Company or a merger or other corporate event where the Company is not the
surviving corporation and where no provision is made for the assumption,
conversion, substitution or exchange of the Options or Awards, will terminate
upon the occurrence of such event.
TERMINATION OF OR CHANGES TO THE STOCK INCENTIVE PLAN. The Board of
Directors may terminate or amend the Stock Incentive Plan. Any amendment, to the
extent then required by the Code or as required by any other applicable law,
must be approved by the stockholders of the Company. Unless previously
terminated by the Board of Directors, the Stock Incentive Plan will terminate
ten years after the effective date.
NON-EMPLOYEE DIRECTOR OPTIONS. The Stock Incentive Plan provides for
automatic initial and subsequent annual grants of non-qualified stock options to
non-employee directors. Under the initial grant, made as of September 17, 1996,
the Chairman of the Board of Directors received options to purchase 6,000 shares
of Common Stock, the chairmen of the Audit, Compensation and Finance Committees
each received options to purchase 5,000 shares of Common Stock, and each other
non-employee director received options to purchase 3,000 shares of Common Stock.
Each person who subsequently becomes a non-employee director will receive an
initial grant of options to purchase 3,000 shares of Common Stock. Under the
subsequent automatic grant, each non-employee director then in office will be
granted options to purchase 1,000 shares on each anniversary of the director's
initial option grant. The September 17, 1996 grants to non-employee directors
will vest at the rate of 25% on the later of 90 days after the Award date or 60
days after the date of commencement of trading of the Common Stock on a national
securities exchange or quotation system (the "Initial Award Date") and 25% per
year on the first three anniversaries of the Initial Award Date. Each other
Non-Employee Director Option will vest at the rate of 25% per year commencing on
the first anniversary of the Award date and each of the next three anniversaries
thereof. Upon the occurrence of a Change in Control Event, each Non-Employee
Director Option will become immediately exercisable in full, provided that no
Non-Employee Director Option will be accelerated to a date prior to six months
after its grant date. To the extent any Non-Employee Director Option is not
exercised prior to (i) dissolution of the Company or (ii) a merger or other
corporate event that the Company does not survive, and no provision is made for
the assumption, conversion, substitution or exchange of the Non-Employee
Director Option, the Non-Employee Director Option will terminate upon the
occurrence of the Change in Control Event.
52
<PAGE>
GRANTS TO DATE. As of December 12, 1996, the Company had granted options
to purchase a total of 109,986 shares of Common Stock under the Stock Incentive
Plan. Employees received grants with respect to 76,986 shares, and non-employee
directors received grants with respect to 33,000 shares. Options with respect to
70,350 shares, including all of the non-employee director options, were granted
as of September 17, 1996, with an exercise price of $29.17 per share, and
options with respect to 39,636 shares were granted as of November 21, 1996, with
an exercise price of $10 per share. Options with respect to 37,350 shares
granted to employees as of September 17, 1996 will vest at the rate of 20% per
year on each of the first five anniversaries of the date of the grant. The
November 1996 Options provide for vesting of 40% of the total number of shares
awarded as of December 31, 1996 and 15% each January 1 from 2000 to 2003.
EMPLOYEE STOCK OWNERSHIP PLAN
The Talbert Medical Management Holdings Corporation Employee Stock Ownership
Plan (the "ESOP") is intended to be a tax-qualified retirement plan that
satisfies the requirements of Sections 401(a), 401(k), 501(a) and 4975 of the
Code. The Company's ESOP will have substantially the same terms as FHP's ESOP.
The account balances of Company employees (together with employees of the
Talbert Medical Groups) will be transferred from FHP's ESOP to the Company's
ESOP. The ESOP will provide for a discretionary employer stock bonus
contribution that can be made each year and allocated to the employer
contribution accounts of participants. The employer contribution account of each
participant will be subject to a five-year "cliff" vesting schedule.
Participants formerly employed by FHP will receive credit for their service at
FHP.
In addition, the ESOP will permit employees to elect to reduce their
salaries and make 401(k) contributions to the ESOP. The 401(k) account of each
participant will be 100% vested. The ESOP will also provide for matching
contributions in the same manner as the FHP ESOP. Accordingly, if a participant
has completed less than five years of service, the employer matching
contribution rate will equal 50% of the participant's 401(k) deferrals up to six
percent of the participant's compensation. If the participant has completed at
least five years of service, the employer matching contributions rate will equal
100% of the participant's 401(k) deferrals up to six percent of the
participant's compensation.
The ESOP will permit participants to direct the investment of their 401(k)
and employer matching accounts on a monthly basis. One of the available
investment funds under the ESOP will be a Company Common Stock fund. The ESOP
administrator may establish such rules and procedures as it deems necessary in
its sole discretion to ensure that the participants' investments in the Company
Common Stock fund will satisfy the requirements of all applicable law. Such
rules and procedures may include a prohibition on certain participants' ability
to invest in the Company Common Stock fund.
DEFERRED COMPENSATION PLAN
The Talbert Medical Management Holdings Corporation Deferred Compensation
Plan (the "Deferred Compensation Plan") will be virtually identical to FHP's
Deferred Compensation Plan. Accordingly, the Deferred Compensation Plan will be
a nonqualified deferred compensation plan and will permit the Company's
non-employee directors and a select group of management or highly compensated
employees to elect to defer compensation under the Deferred Compensation Plan.
The Deferred Compensation Plan will permit a minimum deferral of 3% with respect
to salaries (or, with respect to bonuses, 1%) and a maximum deferral of 50% with
respect to salaries (or, with respect to bonuses, 100%). The Deferred
Compensation Plan will also permit discretionary employer contributions. Amounts
deferred under the Deferred Compensation Plan will be credited to bookkeeping
accounts established and maintained for each participant.
The compensation deferral account of each participant will be 100% vested.
The employer contribution account of each participant will be subject to a
five-year "cliff" vesting schedule, but will become 100% vested in the event of
a Change-of-Control (as defined under the Deferred Compensation Plan).
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The Company's Deferred Compensation Plan will provide for the same
distribution options as under FHP's Deferred Compensation Plan including: (i)
short-term payout option; (ii) retirement benefit; (iii) termination
distribution (iv) survivor benefit; and (v) withdrawal election.
MONEY PURCHASE PENSION PLAN
The Talbert Medical Management Holdings Corporation Money Purchase Pension
Plan (the "Money Purchase Pension Plan") is intended to be a tax-qualified
retirement plan that satisfies the requirements of Sections 401(a) and 501(a) of
the Code. The Money Purchase Pension Plan will be virtually identical to FHP's
Money Purchase Pension Plan. Accordingly, the Money Purchase Pension Plan will
be frozen both as to contributions as well as to participation. The account
balances of Company employees and the employees of the Talbert Medical Groups
will be transferred from FHP's Money Purchase Pension Plan to the Money Purchase
Pension Plan. The accounts of each participant under the Money Purchase Pension
Plan will be 100% vested. In general, accounts will be distributable upon a
participant's termination from employment.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation contains a provision eliminating
or limiting director liability for monetary damages arising from a breach of
fiduciary duty as a director, except for liability of a director (i) for any
breach of such director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) under the Delaware statutory
provision making directors personally liable, under a negligence standard, for
unlawful dividends or unlawful stock purchases or redemptions; or (iv) for any
transaction from which the director derived an improper personal benefit. As a
result of this provision, the ability of the Company or a stockholder thereof to
successfully prosecute an action against a director for a breach of his or her
duty of care is limited. However, the provision does not affect the availability
of equitable remedies such as an injunction or rescission based upon a
director's breach of his duty of care.
In addition, the Certificate of Incorporation and the Company's Bylaws
provide for mandatory indemnification rights, subject to limited exceptions, to
any person who by reason of the fact that he or she is a director or officer of
the Company, is involved in a legal proceeding of any nature if he or she acted
in good faith and in a manner he or she reasonably believed to be in and not
opposed to the best interests of the Company. If such legal proceeding is
brought by or in the right of the Company, no indemnification will be made if
the person is adjudged to be liable for negligence or misconduct in the
performance of his duty to the Company, unless a court finds such person to be
entitled to indemnity despite adjudication of liability. Such indemnification
rights include reimbursement for expenses incurred by such director or officer
in advance of the final disposition of such proceeding in accordance with the
applicable provisions of Delaware General Corporation Law.
The Company will enter into separate indemnification agreements with its
directors and executive officers. Each indemnification agreement provides for,
among other things: (i) indemnification against any and all expenses, judgments,
fines, penalties, and amounts paid in settlement of any claim that an indemnitee
was, is, or is threatened to be made a party to or witness or other participant
to unless it is determined, as provided in the indemnification agreement, that
indemnification is not permitted under law; and (ii) prompt advancement of
expenses to any indemnitee.
The Company also maintains directors' and officers' liability insurance. The
Company believes that the provisions of its Certificate of Incorporation,
Bylaws, indemnification agreements and insurance are necessary to attract and
retain qualified persons as directors and officers. At present, there is no
pending litigation or proceeding involving any director, officer, employee or
agent of the Company where indemnification would be required or permitted. The
Company is not aware of any threatened litigation or proceeding that might
result in a claim for such indemnification.
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CERTAIN TRANSACTIONS
In connection with the reorganization of the staff model operations of FHP
and the creation of TMMC and THSC, in March 1996 twelve individuals, then all
FHP or TMMC executives (the "Management Investors"), purchased shares of TMMC's
common stock (the "TMMC Management Shares") and shares of THSC's Common Stock
(the "THSC Management Shares") for an aggregate consideration of approximately
$8,000 pursuant to a Stock Purchase Agreement among FHP, TMMC, THSC and the
Management Investors (the "Management Stock Purchase Agreement").
In connection with the Acquisition, pursuant to a Management Stock Exchange
Agreement with the Company, the Management Investors will exchange their TMMC
and THSC Management Shares for an equivalent number of shares of the Company's
Common Stock, on equivalent terms and conditions as are provided in the
Management Stock Purchase Agreement (the "Company Management Shares"). See
"Relationship with FHP and PacifiCare Following the Offering--Management Stock
Exchange Agreement."
The Company Management Shares will be issued as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Jack D. Massimino.......................................................... 150,000(2)
Westcott W. Price III...................................................... 20,250
Gloria L. Austin........................................................... 15,000
Kathryn M. Adair........................................................... 7,500
Richard D. Jacobs.......................................................... 7,500
Larry L. Georgopolous...................................................... 6,000
Walter R. Stone............................................................ 6,000
Margaret Van Meter (1)..................................................... 6,000
Barbara C. McNutt.......................................................... 4,500
Gary E. Goldstein, M.D..................................................... 3,750
Kenneth S. Ord............................................................. 3,000
Michael J. Weinstock....................................................... 3,000
-------
Total: 232,500
-------
-------
</TABLE>
- ------------------------
(1) Ms. Van Meter has notified the Company that she intends to terminate her
employment in the first quarter of 1997. On July 1, 1996, 1,500 of her
Company Management Shares vested, and the remaining 4,500 will be
repurchased by FHP pursuant to its buy-back rights under the Management
Stock Purchase Agreement.
(2) Includes 15,000 shares held under an irrevocable trust for the benefit of
Mr. Massimino's children.
55
<PAGE>
RELATIONSHIP WITH FHP AND PACIFICARE FOLLOWING THE OFFERING
To govern certain of the ongoing relationships between the Company, FHP and
PacifiCare after the Offering and to provide mechanisms for an orderly
transition, the parties will enter into the various agreements described in this
section.
THE FOLLOWING SUMMARIES OF THE VARIOUS AGREEMENTS DO NOT PURPORT TO BE
COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THEIR TEXT, COPIES
OF WHICH ARE FILED AS EXHIBITS TO THE REGISTRATION STATEMENT AND ARE
INCORPORATED HEREIN BY REFERENCE.
PROVIDER AGREEMENTS
Pursuant to the terms of the FHP Merger, TMMC, on behalf of the Talbert
Medical Groups, has entered into the New FHP Provider Agreements with various
HMO subsidiaries of FHP to provide medical and dental services to FHP plan
members. The New FHP Provider Agreements will become effective upon the
completion of the FHP Merger. Under the New FHP Provider Agreements TMMC, as
manager of the Talbert Medical Groups, unconditionally guarantees the
performance of each Talbert Medical Group. The New FHP Provider Agreements have
ten-year terms, except for Utah, which has a 15-year term. Capitation rates
established in the New FHP Provider Agreements are subject to renegotiation one
year after the Effective Time. If the parties are unable to agree upon new
rates, the existing rates will remain in effect.
The Talbert Medical Groups will be responsible for providing or arranging
all covered medical services to members of various FHP HMO subsidiaries in
accordance with professional standards. FHP will provide administration of the
health plan, marketing, enrollment, benefit design and interpretation, medical
management (including quality and utilization management) and claims processing.
The Talbert Medical Groups will receive compensation in two components: monthly
capitation payments (which are a percentage of premiums) and incentive
compensation, disbursed semi-annually, related to controlling hospital or
pharmacy costs, where applicable.
The New FHP Provider Agreements provide that the consent of FHP and
PacifiCare is required for any proposed sale or change in control of TMMC or a
Talbert Medical Group during the first two years of their term, which consent
will not be unreasonably withheld. The Talbert Medical Groups have agreed not to
seek or obtain a Medicare-risk contract with HCFA. The New FHP Provider
Agreements anticipate that FHP systems, compensation mechanisms and
administrative procedures will initially be followed, but will eventually
convert to PacifiCare systems, compensation mechanisms and administrative
procedures.
Unlike previous provider agreements with FHP, the New FHP Provider
Agreements do not contain any subsidies from FHP, and therefore will result in
lower revenues and higher costs per enrollee to the Company. See "Risk
Factors--Contracted Rate Decrease."
The Company also has recently entered into a provider agreement with
PacifiCare's California HMO subsidiary to provide medical and dental services to
its members. The terms of this agreement are substantially similar to those of
the New FHP Provider Agreements, but have already taken effect.
ACQUISITION AGREEMENT
The Company and FHP have entered into a Stock Purchase Agreement pursuant to
which the Company will acquire FHP's interest in TMMC and THSC (the "Acquisition
Agreement"). Under the Acquisition Agreement, the Company will purchase all of
the shares of the common stock held by FHP in exchange for the Rights and the
Talbert Note. The Talbert Note will be payable in an amount equal to the
proceeds of the Offering if fully subscribed. If the Offering is not fully
subscribed, the Company will sell to FHP any of its shares of Common Stock
unsubscribed in the Offering in exchange for the cancellation of any remaining
indebtedness under the Talbert Note. As a condition precedent to the Company's
obligations under the Acquisition Agreement, FHP will make the Capital
Contribution to TMMC.
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<PAGE>
MANAGEMENT STOCK EXCHANGE AGREEMENT
The Company and the Management Investors have entered into a Management
Stock Exchange Agreement, in the form of an amendment to the Management Stock
Purchase Agreement, pursuant to which the Management Investors will exchange
their TMMC and THSC Management Shares for Company Management Shares effective as
of the Closing Date of the FHP Merger. Transfer of Company Management Shares is
restricted; restrictions lapsed as to 25% of each Management Investor's shares
on July 1, 1996, and will lapse as to an additional 25% on July 1 of 1997, 1998
and 1999. FHP has the right to repurchase Company Management Shares: (i) in the
event of termination of employment and prior to the lapse of restrictions for
$.03 per share (other than the shares owned by Messrs. Ord, Price and
Weinstock); (ii) at any time before October 1, 1999 for $100 per share; or (iii)
in certain amounts if the Company fails to meet specified financial goals. These
prices are subject to adjustment by the Compensation Committee of the board of
directors of PacifiCare Holdings, plus one member of the Company's Board of
Directors. The Company Management Shares that are no longer restricted have the
registration rights discussed under "Description of Capital Stock--Registration
Rights."
STANDSTILL AGREEMENT
The Company and FHP have entered into a Standstill Agreement to define the
relationship between the Company and FHP with respect to the Common Stock and
voting securities of the Company held by FHP ("FHP Shares") following the
Acquisition. The Standstill Agreement provides that FHP (i) will vote the FHP
Shares in accordance with the votes of the non-FHP stockholders, (ii) will not
acquire additional shares of Common Stock, (iii) will be subject to certain
restrictions with respect to its ability to solicit proxies, make acquisition
proposals, become a member of a "group" (as defined in the federal securities
laws), or otherwise use its holdings of Common Stock to seek to exercise control
over the Company's management, and (iv) will be entitled to certain registration
rights. See "Description of Capital Stock-- Registration Rights." The Standstill
Agreement has a seven-year term. The Standstill Agreement will be null and void
if FHP reacquires shares of Common Stock unsubscribed for in the Offering in
excess of 20% of the total number of outstanding shares of Common Stock.
MASTER LEASE AGREEMENT
The Company and FHP have entered into the Master Lease Agreement to provide
for the lease, sublease or assignment by the Company of facilities and equipment
used by the Talbert Medical Groups that are either owned or leased by FHP. The
Master Lease Agreement will expire on December 31, 2000. The Master Lease
Agreement originally contained an option whereby FHP could require the Company
to purchase, and the Company could require FHP to sell, the real estate and
equipment subject to the Master Lease Agreement at its book value. The Master
Lease Agreement was amended in December 1996 to remove this option effective as
of January 1, 1996. Accordingly, the Company's consolidated financial statements
reflect the Master Lease Agreement as an operating lease. The Master Lease
Agreement, as amended, also provides that the parties will enter into individual
leases with respect to the real estate and equipment subject to the Master Lease
Agreement. The Company and FHP have agreed to certain additional amendments of
the Master Lease Agreement pursuant to a letter agreement. These amendments
include (i) the extension, at prevailing market rates, of the existing terms of
the individual leases to December 31, 2005, with the exception of leases with
respect to up to 90,000 square feet (of a total of approximately 472,000 square
feet) that the Company may elect not to renew; (ii) two five-year extension
options at prevailing market rates, exercisable solely at the Company's
discretion; (iii) a right of first offer for the Company to purchase the
furniture, fixtures and equipment subject to the Master Lease Agreement
("FF&E"). The parties have also agreed to enter into a separate lease agreement
with respect to FF&E that will expire in December 31, 2000.
ADMINISTRATIVE SERVICES AGREEMENT
The Company and FHP have entered an Administrative Services Agreement
pursuant to which FHP will provide information systems services to the Company
after the Expiration Date for up to one year. The Administrative Services
Agreement may be terminated earlier by: (i) 120 days written notice; (ii) 30
days written notice of a material breach, subject to cure; or (iii) mutual
agreement of the Company and FHP.
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<PAGE>
EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT
The Company and FHP have entered into an Employee Benefits and Compensation
Allocation Agreement (the "Benefits Agreement"), addressing certain employee
compensation and benefits matters. The Benefits Agreement provides for, among
other things: (i) effective as of the Expiration Date, the assumption by the
Company of all liabilities of FHP for benefits under certain nonqualified
deferred compensation plans with respect to employees who on or after the
Offering will be employees of the Company ("the Employees"); (ii) the transfer
of assets and liabilities from the FHP Money Purchase Pension Plan attributable
to the accounts of the Employees and the employees of the Talbert Medical Groups
(collectively with the Employees, the "Talbert Individuals") into a separate
tax-qualified pension plan and trust to be established by the Company; and (iii)
the transfer of assets and liabilities attributable to the accounts of the
Talbert Individuals under the FHP ESOP into a separate tax-qualified plan and
trust to be established by the Company.
The Benefits Agreement also provides that immediately prior to the Offering
the Company will establish a medical and dental plan that provides benefits to
the Employees similar to those provided by FHP. Coverage will be effective
immediately and the plan will not impose any pre-existing condition limitations
or exclusions with respect to the Employees. The Company will continue to
maintain the medical and dental plan (or comparable plans) for a period of at
least one year following the Offering.
The Benefits Agreement provides for certain adjustments to outstanding
employee stock options under FHP's Executive Incentive Plan (the "EIP").
Pursuant to Section 4.8 of the FHP Merger Agreement, options under the EIP that
are outstanding as of the date of merger of FHP with PacifiCare Holdings will
either be (i) cashed out in accordance with Section 4.8(a) of the FHP Merger
Agreement or (ii) exchanged for options (the "Exchange Options") to purchase
shares of Class B Common Stock, par value of $.01 per share, of PacifiCare
Holdings.
The Benefits Agreement provides that no severance benefits will be payable
to the Employees as a result of the Offering. The Benefits Agreement will become
effective only if, upon completion of the Offering, FHP owns less than 50% of
the outstanding shares of Common Stock.
TAX ALLOCATION AGREEMENT
The Company and FHP have entered into a Tax Allocation Agreement that
provides for FHP, among other things, to file all tax returns with respect to,
and to pay all taxes imposed upon or attributable to, FHP and its affiliates for
all taxable periods, including the taxes incurred in connection with the
Offering. The Company generally has agreed, among other things, to file all tax
returns with respect to the Company for all taxable periods beginning after the
expiration of the Rights and to pay all taxes imposed upon or attributable to
the Company for all taxable periods ending after the Acquisition. The Company
will indemnify FHP against any adverse adjustment, or receive from FHP the
benefit of any favorable adjustment, of an FHP return to the extent that the
adjustment (i) relates to a taxable period prior to the Acquisition, (ii) arises
out of the Company's activities, and (iii) when combined with all other such
adjustments that have occurred, exceeds $2 million, but does not exceed $4
million. The Company and FHP will share equally the liability for, or the
benefit of, such an adjustment to the extent any such adjustment, when combined
with all other such adjustments that have occurred, exceeds $4 million. The Tax
Allocation Agreement will become effective only if, upon completion of the
Offering, FHP owns less than 50% of the outstanding shares of Common Stock.
ALLOCATION OF LIABILITIES AND INDEMNIFICATION AGREEMENT
The Company and FHP have entered into an Allocation of Liabilities and
Indemnification Agreement ("the Assumption Agreement") to provide for
assumptions of liabilities and cross-indemnities designed to allocate between
them financial responsibility for certain liabilities. Under the Assumption
Agreement, the Company will assume, to the extent they arose from the nature of
the business of TMMC or THSC: (i) any liabilities that are known and reserved
against, from January 1, 1996; and (ii) any liabilities that are unknown and not
reserved against (other than malpractice liabilities), from January 1, 1994. All
other liabilities will be assumed by FHP. The Assumption Agreement will become
effective only if, upon completion of the Offering, FHP owns less than 50% of
the outstanding shares of Common Stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of October 31, 1996 (except as
otherwise indicated), and as adjusted to give effect to the Offering, in each
case by (a) FHP, (b) each stockholder who would have the opportunity to
beneficially own 5% or more of the outstanding shares of Common Stock based on
ownership of FHP Common or Preferred Stock, (c) each director and Named
Executive Officer of the Company, and (d) all directors and executive officers
of the Company as a group. The adjustments to give effect to the Offering assume
that each Rights holder fully exercises his or her Basic Subscription Privilege.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR BENEFICIAL OWNERSHIP AFTER
TO OFFERING(2) OFFERING(2)(3)
--------------------------- NUMBER OF -----------------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF BENEFICIAL OWNER(1) SHARES PERCENT OFFERED SHARES PERCENT
- ----------------------------------- ----------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
FHP International Corporation ..... 2,767,500 92.25% 2,767,500 -- --
3120 Lake Center Drive
Santa Ana, California 92704
Jack D. Massimino.................. 160,433(4)(5)(6) 5.3% -- 166,619(7)(8) 5.5%
Gloria L. Austin................... 17,141(4)(6) * -- 18,516(7)(8) *
Jennifer M. Gutzmore, M.D.......... -- * -- 188(7)(8) *
Walter R. Stone.................... 8,141(4)(6) * -- 10,464(7)(8) *
Gary E. Goldstein, M.D............. 3,750(4) * -- 6,573 *
Heine Securities Corporation ...... -- -- -- 285,172(9) 9.5%
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Neuberger & Berman L.P. ........... -- -- -- 196,918(10) 6.6%
605 Third Avenue
New York, New York 10158
The Capital Group Companies, Inc. . -- -- -- 192,692(11) 6.4%
333 South Hope Street
Los Angeles, California 90071
Jack R. Anderson................... -- -- -- 143,600(7)(12) 4.8%
Richard M. Burdge, Sr.............. -- -- -- 41,517(7)(13) 1.4%
Warner Heineman.................... -- -- -- 1,167(7)(14) *
Van B. Honeycutt................... -- -- -- -- --
Robert W. Jamplis, M.D............. -- -- -- 234(7)(15) *
Robert C. Maxson, Ed.D............. -- -- -- -- --
Joseph F. Prevratil................ -- -- -- 1,827(7)(16) *
Westcott W. Price III.............. 20,250(4) * -- 45,142(7)(17) 1.5%
All executive officers and
directors as
a group (15 persons)............. 205,965(4) 6.8% -- 429,087(7) 14.2%
</TABLE>
- --------------------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each of the stockholders named in
this table is: c/o Talbert Medical Management Holdings Corporation, 3540
Howard Way, Costa Mesa, California 92626.
(2) Unless otherwise indicated in the footnotes to this table and subject to the
community property laws where applicable, each of the stockholders named in
this table has sole voting authority and investment discretion with respect
to the shares shown as beneficially owned.
(3) Based on an estimated 42,101,000 shares of FHP Common Stock and 21,039,058
shares of FHP Preferred Stock outstanding as of the Effective Date.
(4) Transfer of these shares is restricted pursuant to the Management Stock
Purchase Agreement dated as of March 15, 1996 between the Management
Investors, the Company and FHP.
(5) Includes 15,000 shares held under an irrevocable trust for the benefit of
Mr. Massimino's children.
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<PAGE>
(6) Based on beneficial ownership of Common Stock that includes stock options
exercisable within 60 days after December 6, 1996.
(7) Based on beneficial ownership of FHP Common Stock that includes stock
options exercisable 60 days after October 31, 1996.
(8) Based on beneficial ownership of FHP Common Stock that includes shares held
by the trustee under the FHP ESOP. As of December 31, 1995, the approximate
number of shares of FHP Common Stock allocated to the ESOP accounts of the
individuals named above were as follows: Mr. Price--5,297 shares; Mr.
Massimino--3,291 shares; Ms. Austin--2,108 shares; Dr. Gutzmore--2,313; and
Mr. Stone--2,784.
(9) Based on beneficial ownership of 5,694,226 shares of FHP Common Stock and
486,592 shares of FHP Preferred Stock, as reported on Schedule 13F for the
period ended June 30, 1996.
(10) Based on beneficial ownership of a total of 4,001,346 shares of FHP Common
Stock and 250,000 shares of FHP Preferred Stock, as reported on Schedule 13F
for the period ended June 30, 1996. Schedule 13F states that (i) Neuberger &
Berman L.P. has shared investment discretion and sole voting authority with
respect to 568,046 shares of FHP Common Stock; (ii) Neuberger & Berman
Institutional Asset Management Division has shared investment discretion and
no voting authority with respect to 1,075,400 shares of FHP Common Stock;
and (iii) Neuberger & Berman Management Incorporated has shared investment
discretion and no voting authority with respect to 2,357,900 shares of FHP
Common Stock and 250,000 shares of FHP Preferred Stock.
(11) Based on beneficial ownership of a total of 3,238,300 shares of FHP Common
Stock and 1,084,300 shares of FHP Preferred Stock, as reported on Schedule
13F for the period ended June 30, 1996. Schedule 13F states that (i) Capital
Guardian Trust Company has shared investment discretion with respect to
1,862,900 shares of FHP Common Stock and 299,300 shares of FHP Preferred
Stock, sole voting authority with respect to 1,653,900 shares of FHP Common
Stock and 293,300 shares of FHP Preferred Stock and no voting authority with
respect to 209,000 shares of FHP Common Stock and 6,000 shares of FHP
Preferred Stock; (ii) Capital Research and Management Company has shared
investment discretion and no voting authority with respect to 1,375,400
shares of FHP Common Stock and 785,000 shares of FHP Preferred Stock; and
(iii) Capital Group Companies, Inc. exercises investment discretion over
both Capital Guardian Trust Company and Capital Research and Management
Company.
(12) Based on beneficial ownership of 829,518 shares of FHP Common Stock and
2,771,794 shares of FHP Preferred Stock as of October 31, 1996, including
(i) 137,202 shares of FHP Common Stock and 457,340 shares of FHP Preferred
Stock held by Mr. Anderson's wife, and (ii) 271,200 shares of Common Stock
and 904,000 shares of FHP Preferred Stock held by trusts of which Mr.
Anderson's relatives are beneficiaries. Mr. Anderson disclaims beneficial
ownership of these shares.
(13) Based on beneficial ownership of 287,630 shares of FHP Common Stock and
742,104 shares of FHP Preferred Stock as of October 31, 1996, including
25,030 shares of FHP Common Stock and 83,438 shares of FHP Preferred Stock
held by Mr. Burdge's wife. Also includes 48,000 shares of FHP Common Stock
held by a trust of which Mr. Burdge's relatives are beneficiaries. Mr.
Burdge disclaims beneficial ownership of these shares.
(14) Based on beneficial ownership of 24,900 shares of FHP Common Stock as of
October 31, 1996.
(15) Based on beneficial ownership of 5,000 shares of FHP Common Stock as of
October 31, 1996.
(16) Based on beneficial ownership of 37,000 shares of FHP Common Stock as of
October 31, 1996.
(17) Based on beneficial ownership of 531,297 shares of FHP Common Stock as of
October 31, 1996, including shares held under a revocable trust controlled
by Mr. Price.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation provides that the Company may
issue up to 15 million shares of common stock, par value $0.01 per share (the
"Common Stock"), and 1.2 million shares of preferred stock, par value $0.01 per
share (the "Preferred Stock"). Immediately preceding the Offering, there will be
232,500 shares of Common Stock and no shares of Preferred Stock issued and
outstanding, held by 13 stockholders of record.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of stockholders and do not have
preemptive rights. The holders of Common Stock do not have cumulative voting
rights. Subject to any preferential rights of any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors of the Company from funds legally available therefor. In the event of
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities.
PREFERRED STOCK
The Company's Board of Directors has the authority, without any vote or
action by stockholders, to issue Preferred Stock in one or more series and to
fix the designations, preferences, rights, qualifications, limitations and
restrictions thereof, including dividend rights, dividend rates, conversion
rights and terms, voting rights, redemption rights, prices and terms (including
any sinking fund provisions), liquidation preferences and the number of shares
constituting any series. In connection with the Stockholders Rights Agreement,
the Board of Directors has authorized a series of Preferred Stock designated as
"Junior Participating Preferred Stock" that may be issued upon the exercise of
rights distributed to all holders of Common Stock. See "Description of Capital
Stock--Certain Anti-Takeover Effects." Although the Company has no present plans
to issue any shares of Preferred Stock following the consummation of the
Offering, the issuance of shares of Preferred Stock, or the issuance of rights
to purchase such shares, may have the effect of delaying, deferring or
preventing a change in control of the Company or an unsolicited acquisition
proposal.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Rights, the Company's Certificate of
Incorporation, Bylaws and other agreements to which the Company is a party
summarized in the following paragraphs may be deemed to have anti-takeover
effects and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might favor, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
EXERCISE CAP. The Rights may not be exercised to the extent that the holder
would become the beneficial owner of more than 8% of the shares of Common Stock
outstanding, subject to certain exceptions. See "The Offering--Exercise Cap."
This exercise cap may hinder efforts to accumulate Rights to purchase Common
Stock prior to the Expiration Date.
CLASSIFIED BOARD OF DIRECTORS. The Company's Certificate of Incorporation
and Bylaws provide for the Board of Directors to be divided into three classes
of directors, as nearly equal in number as possible, serving staggered terms so
that directors' initial terms will expire at the 1997, 1998 or 1999 annual
meeting of stockholders. Starting with the 1997 annual meeting of stockholders,
one class of directors will be elected each year for a three-year term. A
director may be removed by the stockholders of the Company only for cause. See
"Management--Classified Board of Directors."
61
<PAGE>
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interests of
stockholders.
With a classified Board of Directors, at least two annual meetings of the
Company's stockholders, instead of one, would generally be required to effect a
change in the majority of the Board of Directors. As a result, a provision
relating to a classified Board of Directors may discourage proxy contests for
the election of directors or purchases of a substantial block of the Common
Stock because this provision could operate to prevent obtaining control of the
Board of Directors in a relatively short period of time. The classification
provision could also have the effect of discouraging a third party from making a
tender offer to otherwise attempt to obtain control of the Company.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER
NOMINATIONS OF DIRECTORS. The Company's Bylaws establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors or a committee thereof, of candidates for election as
directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before an annual meeting of stockholders of the Company
(the "Business Procedure"). The Nomination Procedure requires that a stockholder
give prior written notice, in proper form, of a planned nomination for the Board
of Directors to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Bylaws. If the Chairman of the
Board of Directors determines that a person was not nominated in accordance with
the Nomination Procedure, the person will not be eligible for election as a
director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Bylaws.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws: (i) may have the effect of precluding a nomination for the
election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed; or (ii) may discourage
a deter a third party from conducting a solicitation of proxies to elect its own
slate of directors or otherwise attempting to obtain control of the Company,
even if the conduct of such solicitation or such attempt might be beneficial to
the Company and its stockholders.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT. The Company's
Certificate of Incorporation prohibits stockholder action by written consent in
lieu of a meeting, and provides that stockholder action can be taken only at an
annual or special meeting of stockholders. Special meetings of stockholders may
be called only by the Board of Directors, but if FHP acquires in excess of 20%
of the outstanding Common Stock from unsubscribed shares in the Offering, a
special meeting of stockholders may be called at the written request of
stockholders entitled to cast in excess of 20% of the votes entitled to be cast
at the special meeting. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting, unless a
special meeting is called by the Board of Directors.
SUPERMAJORITY VOTE FOR BUSINESS COMBINATIONS. The Company's Certificate of
Incorporation provides that the affirmative vote of at least 66 2/3% of the
outstanding shares of the Company then entitled to vote is required for certain
business combinations, including a merger, or disposition of substantially all
the assets, of the Company. This requirement is not applicable if the Board of
Directors approves the transaction by a resolution adopted by 66 2/3% of its
members. These provisions will not take effect if FHP acquires in excess of 20%
of the outstanding Common Stock from unsubscribed shares in the Offering.
62
<PAGE>
AMENDMENT OF CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND
BYLAWS. The Company's Certificate of Incorporation and the Bylaws provide that
the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of the Company then entitled to vote on the matter is required to amend
the Bylaws and certain provisions of the Certificate of Incorporation, including
those provisions relating to the number of directors, the filling of vacancies
on the Board of Directors, the prohibition on stockholder action without a
meeting, indemnification of directors, officers and others, the limitation on
liability of directors and the supermajority voting requirements in the
Certificate of Incorporation and Bylaws. The Certificate of Incorporation
further provides that the Bylaws may be amended by the Board of Directors,
except that if FHP does not acquire in excess of 20% of the outstanding Common
Stock solely through the transfer of shares unsubscribed in the Offering, the
authorized number of directors may not be amended without the affirmative vote
of the holders of at least 75% of the outstanding shares of the Company then
entitled to vote on the matter. These voting requirements will have the effect
of making more difficult any amendment by stockholders, even if a majority of
the Company's stockholders believes that the amendment would be in its best
interests.
DELAWARE TAKEOVER STATUTE. The Company is subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that the stockholder became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (a)
by persons who are directors and also officers and (b) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or after to such date, the business combination is approved
by the Board of Directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
RIGHTS AGREEMENT. As of the Expiration Date, pursuant to a Stockholder
Rights Agreement between the Company and American Stock Transfer & Trust
Company, as Rights Agent, the Company has declared a dividend distribution to
all holders of Common Stock of a right to purchase a unit initially consisting
of one one-hundredth of a share of Junior Participating Preferred Stock upon the
terms and conditions set forth in that agreement. The Stockholder Rights
Agreement is designed to give the Board of Directors the time and opportunity to
protect stockholder interests and encourage equal treatment of all stockholders
in a takeover situation. In the event of a takeover attempt, the holders of the
rights may exercise them to purchase Common Stock at a 50% discount, or, in the
event of a "squeeze-out" transaction where the Company would not be the
surviving entity, the acquiring company's common stock at a 50% discount. The
issuance of these rights may have the effect of delaying, deferring or
preventing a change in control of the Company or an unsolicited acquisition
proposal.
The Stockholder Rights Agreement provides for a trigger percentage of 8% for
the 90-day period following the Expiration Date, and 15% thereafter. Certain
persons who acquire Common Stock in excess of the trigger percentage will not
trigger the rights, including, with certain limitations, (i) persons who acquire
such Common Stock solely as a result of the exercise of Rights distributed to
them in the Offering, (ii) FHP, if it acquires such Common Stock solely through
the transfer of shares unsubscribed in the
63
<PAGE>
Offering, and (iii) transferees of FHP, if FHP acquires in excess of 20% of the
outstanding Common Stock solely through the transfer of shares unsubscribed in
the Offering.
REGISTRATION RIGHTS
The Management Investors have certain piggyback registration rights.
Accordingly, if the Company proposes to register any of its Common Stock,
whether or not for sale for its own account, with certain exceptions, the
Company is required to notify the Management Investors and use its best efforts
to include the shares of Common Stock requested to be included by them, provided
that the Company may determine for any reason not to register such securities
and shall be relieved of its obligation to use best efforts to effect
registration of such securities. These registration rights are subject to
rejection of such shares under certain circumstances by the underwriter of an
underwritten offering and to a lock-up period to be determined by the Company
and the underwriters, except as part of such underwritten offering.
Under the Standstill Agreement, FHP has certain shelf registration rights
whereby at any time following one year after the Expiration Date, FHP may
require the Company to file and maintain a shelf registration statement to
effect the registration of Common Stock, if any, owned by FHP. FHP will also
have registration rights to participate in certain underwritten public offerings
by the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
LEGAL MATTERS
Certain matters with respect to the validity of the issuance of Common Stock
offered hereby are being passed upon for the Company by O'Melveny & Myers LLP,
Los Angeles, California.
EXPERTS
The financial statements as of December 31, 1995 and 1994 and for each of
the three years in the period ended December 31, 1995 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement," which term encompasses all amendments,
exhibits and schedules thereto), under the Securities Act, with respect to the
Rights and the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference hereby is made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference hereby is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement filed by the Company with the Commission, as well as such
reports and other information filed by the Company with the Commission, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material, when filed, may also be obtained from the Public
64
<PAGE>
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports and other
information with the Commission in accordance with the Commission's rules. Such
reports and other information concerning the Company may be inspected and copied
at the public reference facilities and regional offices of the Commission
referred to above.
The Company intends to furnish its stockholders annual reports containing
audited consolidated financial statements and an opinion thereon expressed by
independent auditors, and quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.
FHP and PacifiCare have filed a joint proxy statement/prospectus on Schedule
14A (the "FHP Merger Proxy Statement," which term encompasses all amendments,
exhibits, and schedules thereto), under Section 14(a) of the Exchange Act, with
respect to the FHP Merger and certain other matters. PacifiCare is, and prior to
the FHP Merger FHP will be, subject to the information requirements of the
Exchange Act, and, in accordance therewith, will file reports and information
with the Commission in accordance with the Commission's rules which may be
obtained as described above.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
-------------
<S> <C>
Independent Auditors' Report........................................................................... F-2
Consolidated Balance Sheets, as of December 31, 1994 and 1995 (audited), and September 30, 1996
(unaudited).......................................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 (audited),
and the nine months ended September 30, 1995 and 1996 (unaudited).................................... F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 1993, 1994 and 1995
(audited), and the nine months ended September 30, 1996 (unaudited).................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 (audited),
and the nine months ended September 30, 1995 and 1996 (unaudited).................................... F-6
Notes to Consolidated Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Talbert Medical Management Holdings Corporation
We have audited the accompanying consolidated balance sheets of Talbert
Medical Management Holdings Corporation and its subsidiaries ("the Company") as
of December 31, 1994 and 1995, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Talbert Medical Management
Holdings Corporation and its subsidiaries as of December 31, 1994 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As more fully described in Note 1, the Company is part of FHP International
Corporation ("FHP") and had no separate legal status or existence through
December 31, 1995. The Company had various transactions with FHP, including
various expense allocations and reimbursements, that are material in amount. The
financial statements of the Company have been prepared from separate records
maintained by the Company as well as from the combined records of FHP, and may
not necessarily be indicative of the conditions that would have existed if the
Company had operated as an independent entity.
Costa Mesa, California
December 11, 1996 (January , 1997 as to the effects
of the acquisition described in Note 1)
The accompanying consolidated financial statements have been prepared as if
the acquisition of Talbert Medical Management Corporation and Talbert Health
Services Corporation by Talbert Medical Management Holdings Corporation,
anticipated to occur in January 1997, had been completed on the basis
substantially identical to that described herein. The above opinion is in the
form which will be signed by Deloitte & Touche LLP upon the consummation of the
acquisition, which is described in Note 1 to the consolidated financial
statements, and assuming that, from December 11, 1996 to the date of such
acquisition no other events will have occurred that would affect the
accompanying consolidated financial statements and notes thereto.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
December 12, 1996
F-2
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ---------- SEPTEMBER 30,
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents (Notes 1 and 2).................................. $ -- $ -- $ 14,291
Accounts receivable, net of allowance for doubtful accounts of $5,386,
$5,478 and $8,040 at December 31, 1994 and 1995, and September 30, 1996
(unaudited), respectively (Notes 1 and 2)................................ 3,629 4,976 10,108
Inventories (Notes 1 and 2)................................................ 7,826 7,414 6,979
Deferred income taxes (Notes 1, 2 and 6)................................... 5,788 6,434 5,568
Prepaid expenses and other current assets (Note 2)......................... 5,215 3,602 6,507
---------- ---------- -------------
Total current assets................................................... 22,458 22,426 43,453
Property and equipment, net (Note 3)....................................... -- -- 5,186
Deferred rent.............................................................. -- -- 2,552
Other assets (Note 2)...................................................... 629 752 540
---------- ---------- -------------
Total assets........................................................... $ 23,087 $ 23,178 $ 51,731
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C> <C> <C>
Accounts payable (Note 2)................................... $ 6,669 $ 8,693 $ 6,123
Medical claims payable (Notes 1, 2 and 4)................... 11,776 12,831 14,497
Accrued salaries and employee benefits (Notes 2 and 7)...... 21,957 19,055 16,708
Other current liabilities (Note 2).......................... 798 485 1,447
Advances from FHP........................................... -- -- 15,457
--------- --------- -----------
Total current liabilities............................... 41,200 41,064 54,232
Deferred income taxes (Note 6).............................. -- -- 1,110
Other liabilities........................................... -- -- 59
--------- --------- -----------
Total liabilities....................................... 41,200 41,064 55,401
--------- --------- -----------
Commitments and contingencies (Note 8)
Stockholders' deficit (Notes 2, 7, 9, 10, and 12):
Preferred Stock, $0.01 par value; 1,200,000 shares
authorized; no shares outstanding at September 30,
1996....................................................
Common Stock, $0.01 par value; 15,000,000 shares
authorized; issued and outstanding 3,000,000 shares at
September 30, 1996...................................... -- -- 30
Paid in capital........................................... -- -- 70
Retained deficit (Note 9)................................. (18,113) (17,886) (3,770)
--------- --------- -----------
Total stockholders' deficit............................. (18,113) (17,886) (3,670)
--------- --------- -----------
Total liabilities and stockholders' deficit............. $ 23,087 $ 23,178 $ 51,731
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ---------- NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (Notes 1 and 2)........................... $ 470,883 $ 503,338 $ 495,699 $ 379,365 $ 351,235
Expenses (Notes 1, 2 and 7):
Affiliated medical services..................... 170,690 173,230 173,417 132,051 103,504
Purchased medical services...................... 110,582 124,083 121,570 94,133 85,851
Dental services................................. 20,129 28,955 31,379 24,544 20,443
Optometry, pharmacy, and other primary health
care services................................. 86,985 96,275 102,412 77,395 80,181
Clinic operations............................... 80,853 87,253 85,585 68,235 49,207
---------- ---------- ---------- ----------- -----------
Total cost of health care..................... 469,239 509,796 514,363 396,358 339,186
Marketing, general and administrative........... 24,002 26,675 29,698 22,188 19,622
---------- ---------- ---------- ----------- -----------
Operating loss.............................. (22,358) (33,133) (48,362) (39,181) (7,573)
Interest income................................... -- -- -- -- 1,199
---------- ---------- ---------- ----------- -----------
Loss before income tax benefit.................... (22,358) (33,133) (48,362) (39,181) (6,374)
Income tax benefit (Notes 1 and 6)................ (8,924) (13,553) (19,754) (16,005) (2,604)
---------- ---------- ---------- ----------- -----------
Net loss.................................... $ (13,434) $ (19,580) $ (28,608) $ (23,176) $ (3,770)
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
Loss per common and common equivalent share (Note
2).............................................. $ (4.48) $ (6.53) $ (9.54) $ (7.73) $ (1.26)
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF COMMON SHARES)
<TABLE>
<CAPTION>
NUMBER OF RETAINED TOTAL
COMMON COMMON PAID IN EARNINGS STOCKHOLDERS'
SHARES STOCK CAPITAL (DEFICIT) DEFICIT
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 (NOTE 2)................ -- $ -- $ -- $ (17,276) $ (17,276)
Net change in stockholders' deficit arising from
intercompany transactions (Note 2)............... -- -- -- 13,235 13,235
Net loss........................................... -- -- -- (13,434) (13,434)
------------ ----- ---------- ---------- ------------
BALANCE AT DECEMBER 31, 1993....................... -- -- -- (17,475) (17,475)
Net change in stockholders' deficit arising from
intercompany transactions (Note 2)............... -- -- -- 18,942 18,942
Net loss........................................... -- -- -- (19,580) (19,580)
------------ ----- ---------- ---------- ------------
BALANCE AT DECEMBER 31, 1994....................... -- -- -- (18,113) (18,113)
Net change in stockholders' deficit arising from
intercompany transactions (Note 2)............... -- -- -- 28,835 28,835
Net loss........................................... -- -- -- (28,608) (28,608)
------------ ----- ---------- ---------- ------------
BALANCE AT DECEMBER 31, 1995....................... -- -- -- (17,886) (17,886)
Issuance of Common Stock (Note 10)................. 10,000,000 100 -- -- 100
Retroactive restatement of the effect of one-
for-3.33 reverse stock split (Note 10)........... (7,000,000) (70) 70 -- --
Capital contribution by FHP (Note 9)............... -- -- 5,055 -- 5,055
Assumption of liabilities by FHP (Note 9).......... -- -- 12,831 -- 12,831
Recapitalization of the Company by FHP (Note 9).... -- -- (17,886) 17,886 --
Net loss........................................... -- -- -- (3,770) (3,770)
------------ ----- ---------- ---------- ------------
BALANCE AT SEPTEMBER 30, 1996 (UNAUDITED).......... 3,000,000 $ 30 $ 70 $ (3,770) $ (3,670)
------------ ----- ---------- ---------- ------------
------------ ----- ---------- ---------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................... $ (13,434) $ (19,580) $ (28,608) $ (23,176) $ (3,770)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... -- -- -- -- 627
Increase in allowance for
doubtful accounts.............. 3,024 368 92 800 2,562
Deferred income taxes............ (1,342) (632) (646) 984 1,976
Effect on cash of changes in
operating assets and
liabilities
Accounts receivable............ (4,800) (1,212) (1,439) (1,143) (7,694)
Inventories.................... (692) (1,983) 412 1,983 435
Prepaid expenses and other
current assets............... (1,162) (685) 1,613 637 (2,905)
Deferred rent.................. (2,552)
Other assets................... 49 (17) (123) 47 212
Accounts payable............... (942) 2,014 2,024 2,831 (2,570)
Medical claims payable......... 1,313 256 1,055 (135) 14,497
Accrued salaries and employee
benefits..................... 4,647 2,156 (2,902) (6,252) (2,347)
Other liabilities.............. 104 373 (313) (346) 1,021
--------- --------- --------- ----------- -----------
Net cash used in operating
activities......................... (13,235) (18,942) (28,835) (23,770) (508)
--------- --------- --------- ----------- -----------
INVESTING ACTIVITIES--Purchase of
property and equipment............. -- -- -- -- (5,813)
--------- --------- --------- ----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock........... -- -- -- -- 100
Advances from FHP.................. 13,235 18,942 28,835 23,770 15,457
Capital contribution by FHP........ -- -- -- -- 5,055
--------- --------- --------- ----------- -----------
Net cash provided by financing
activities......................... 13,235 18,942 28,835 23,770 20,612
--------- --------- --------- ----------- -----------
Net increase in cash and cash
equivalents........................ -- -- -- -- 14,291
Cash and cash equivalents, at
beginning of period................ -- -- -- -- --
--------- --------- --------- ----------- -----------
Cash and cash equivalents, at end of
period............................. $ -- $ -- $ -- $ -- $ 14,291
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental cash flow information:
Non-cash transactions:
Recapitalization of the Company by
FHP -- Assumption of medical
claims payable by FHP (Note 9)... $ 12,831
-----------
-----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Talbert Medical Management Holdings Corporation ("TMMHC", and with its
subsidiaries, the "Company") through its subsidiaries Talbert Medical Management
Corporation ("TMMC") and Talbert Health Services Corporation ("THSC"), organizes
and manages physician and dentist practice groups that contract with HMOs and
other payors to provide health care services to their members. Under long-term
management services agreements with its affiliated practice groups (the "Talbert
Medical Groups"), the Company provides management systems and services,
nonphysician health care personnel, facilities and equipment to the Talbert
Medical Groups in return for a reimbursement of certain clinic operations costs,
plus a management fee based on the Talbert Medical Groups' revenues net of
certain reimbursed clinic operations costs, except for the California Medical
Group, where TMMC receives a management fee based on gross revenues. Pharmacy,
radiology, optometry, laboratory, home health, hospice, rehabilitation and
physical therapy services are also available through contracts with THSC.
TMMC, THSC and the Talbert Medical Groups were organized in 1995 in
connection with the restructuring of FHP International Corporation ("FHP"),
which included the transformation of FHP's staff model operations into a
contracted care model operation. The Talbert Medical Groups were organized as
professional corporations in the various states (except in New Mexico) in which
FHP's staff model operations were located to employ the physicians, dentists and
other health care professionals formerly employed by FHP. TMMC was formed to
provide management services to the Talbert Medical Groups, and THSC was
organized to provide certain ancillary clinical services. TMMC and THSC were
incorporated on September 15, 1995 and December 6, 1995, respectively. TMMC,
THSC and the Talbert Medical Groups effectively commenced their operations on
January 1, 1996. TMMHC was organized in November 1996 to serve as a holding
company for TMMC and THSC following their separation from FHP in connection with
the merger of FHP and PacifiCare Health Systems, Inc., et. al. ("PacifiCare") as
discussed below.
FHP's staff model operations had no separate legal status prior to the
organization of TMMC, THSC and the Talbert Medical Groups. FHP has, however,
offered health care services as a staff model HMO through other subsidiaries
since 1961. In the normal course of business, the staff model operations had
various transactions with FHP and its direct subsidiaries that are material in
amount. The accompanying consolidated financial statements of the staff model
operations have been prepared in part from separate records maintained by
subsidiaries of FHP. These statements also reflect key assumptions regarding the
allocation of certain revenue and expense items and certain balance sheet
accounts, many of which could be material, where separate records were not
utilized (Note 2). The accompanying consolidated historical financial statements
of the staff model operations may not necessarily be indicative of the
conditions that would have existed if the staff model operations had operated as
an independent entity.
MERGER OF FHP AND PACIFICARE HEALTH SYSTEMS, INC.
On August 4, 1996, FHP entered into an Agreement and Plan of Reorganization,
as amended and restated, (the "Merger Agreement"), by and among FHP and
PacifiCare. Pursuant to the Merger Agreement, PacifiCare will acquire all of the
outstanding stock of FHP. The transaction is expected to close in January 1997
(the "Effective Time").
In connection with the proposed merger between FHP and PacifiCare, FHP will
sell its 92.25% of the common stock of TMMC and THSC to the Company in exchange
for transferable rights to acquire 92.25%
F-7
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the common shares of the Company for $21.50 per share, plus a note for
$59,501,250 (the "Talbert Note"). The rights are expected to be distributed to
the stockholders of FHP. Based on current expectations concerning the number of
shares of FHP common stock that will be outstanding at the Effective Time, FHP
stockholders are expected to receive one right for every 21.34381 shares of FHP
common stock and one right for every 26.46474 shares of FHP preferred stock.
Rights holders may purchase one share of the Company's Common Stock with each
right and also may subscribe for additional shares of the Company's Common Stock
under certain circumstances (the "Offering"). The maximum number of shares to be
issued is 2,767,500. If fully subscribed, the Company expects to receive
$59,501,250 from the Offering, which will be used to retire the Talbert Note.
The Company will sell to FHP any shares of common stock unsubscribed in the
offering in exchange for cancellation of any remaining indebtedness under the
Talbert Note. The holders of the remaining 7.75% of common stock of TMMC and
THSC will exchange their shares in TMMC and THSC for 7.75% of the Common Stock
of the Company.
If the Offering is not fully subscribed, the unsubscribed portion of the
Common Stock will be reacquired by FHP (and, therefore indirectly by the holding
company that will own 100% of FHP and PacifiCare as a result of the FHP Merger
("PacifiCare Holdings")). The Company and FHP have entered into a standstill
agreement with respect to any Common Stock obtained by FHP following the
Acquisition (the "Standstill Agreement"). The Standstill Agreement provides,
among other restrictions, that if FHP reacquires 20% or less of the Company's
outstanding Common Stock in exchange for cancellation of indebtedness under the
Talbert Note, FHP (i) will vote its shares of Common Stock in accordance with
the votes of the non-FHP stockholders, (ii) will be subject to certain
restrictions with respect to its ability to solicit proxies, make acquisition
proposals, become a member of a "group" (as defined in federal securities laws),
or otherwise use its holdings of Common Stock to seek to exercise control over
the Company's management, and (iii) will be entitled to certain shelf
registration rights and the right to participate in future registrations by the
Company. These provisions of the Standstill Agreement, among others, will not
apply if FHP reacquires more than 20% of the Common Stock of the Company after
the consummation of the Offering.
The Talbert Medical Groups will continue to provide care to enrolled members
of FHP under their existing provider agreements until the Effective Time. In
November 1996, the Company renegotiated its provider contract with FHP pursuant
to the terms of the FHP Merger Agreement. This resulted in a decrease in
capitated rates which, if such rates had been in effect during the year ended
December 31, 1995 and the nine months ended September 30, 1996, would, on an
unaudited pro forma basis, have resulted in reducing the Company's revenue by
$36,258,000 and $26,284,000, respectively, and increasing total cost of health
care by $6,897,000 and $5,293,000, respectively.
Just prior to the Offering , FHP is expected to contribute approximately
$68,000,000 to TMMC which is expected to result in a stockholders' equity
balance of approximately $59,000,000 (the "Capital Contribution"). In connection
with the Capital Contribution, the Company will recognize as stock compensation
expense approximately $5,270,000 relating to the Common Stock of the Company
owned by management and others who will not be making a capital contribution.
This expense will be recognized ratably over the vesting period of the
restricted common shares held by management and others. Approximately 25% of
such restrictions lapsed in July 1996 and the remainder are assumed to lapse
ratably each July through 1999. Approximately $1,318,000 of the stock
compensation expense is expected to be recognized on the date of the Capital
Contribution in connection with previously issued restricted shares on which
restrictions have already lapsed.
F-8
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As a result of the foregoing transactions, TMMC and THSC will become
wholly-owned subsidiaries of the Company in a transaction accounted for similar
to a pooling of interests.
BASIS OF PRESENTATION
The accompanying consolidated financial statements for the Company include
the accounts of TMMC, THSC and the Talbert Medical Groups. TMMC has direct or
indirect unilateral and perpetual control over the assets and non-medical
operations of the Talbert Medical Groups by means other than owning the majority
of voting stock. TMMC and the Talbert Medical Groups have entered into 20-40
year practice management agreements with provisions for extensions under certain
circumstances. Because of control by means other than equity ownership,
consolidation of the Talbert Medical Groups is necessary to present fairly the
financial position and results of operations of TMMC. Control by TMMC is
perpetual rather than temporary because of: (i) the length of the original terms
of the management and other agreements; (ii) the successive extension period
provided by the agreements; (iii) the continuing investment of capital by TMMC;
(iv) the employment of the majority of nonphysician personnel by TMMC; (v) the
nature of the services provided to the Talbert Medical Groups by TMMC and (vi)
the provisions of a Share Control Agreement entered into by each Talbert Medical
Group shareholder and TMMC. The terms of the Share Control Agreement require the
shareholder: (i) to elect to the board of directors of the Talbert Medical
Groups only persons approved by TMMC; (ii) to obtain written consent from TMMC
to approve or authorize any merger, consolidation or other reorganization, sale
of assets, or sale of common stock of the Talbert Medical Groups; and (iii) to
give a right to purchase any or all shares of the Talbert Medical Groups to a
person designated by TMMC.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
The Company has elected a fiscal year ending December 31.
REVENUE RECOGNITION AND HEALTH CARE COSTS
The Talbert Medical Groups have contracts with various managed care
organizations to provide physician services based on negotiated fee schedules.
Under various contracts with HMOs, capitation payments are received to cover all
physician services needed by the HMO members. During the years ended December
31, 1993, 1994 and 1995, and the nine months ended September 30, 1995 and 1996,
the Company received nearly all of its capitated revenue from FHP's
subsidiaries. Capitation payments are recognized as revenue on the accrual
basis, and represent approximately 90%, 90%, 88%, 89% (unaudited) and 81%
(unaudited) of the Company's net revenue for the years ended December 31, 1993,
1994 and 1995, and for the nine months ended September 30, 1995 and 1996,
respectively. The Company's remaining revenues are largely derived from
co-payments and fee-for-service from such capitated enrollees.
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to future audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
are adjusted in future periods as final settlements are determined.
Health care costs are recorded in the period when services are provided to
HMO members, including estimates for contracted medical specialists costs that
have been incurred as of the balance sheet date but not yet paid. The estimates
for medical claims payable are based on historical studies of claims paid. The
F-9
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
methods of making such estimates and for establishing the resulting reserves are
continually reviewed and updated, and any adjustments resulting therefrom are
reflected in current operations. While the ultimate amount of claims and the
related expenses paid are dependent on future developments, management is of the
opinion that the liability for medical claims payable is adequate to cover such
medical claims and expenses. The Company's medical malpractice liability
coverage currently provides professional liability insurance in the amount of
$2,000,000 per claim, and $12,000,000 in the aggregate per policy year.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying value of cash
and cash equivalents approximates fair value based on their short-term maturity.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of premiums receivable from FHP.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated balance sheet includes the following financial
instruments: cash and cash equivalents, accounts receivable and accounts
payable. The Company considers the carrying amounts of current assets and
liabilities in the consolidated financial statements to approximate the fair
value for these financial instruments because of the relatively short period of
time between origination of the instruments and their expected realization.
RECEIVABLES FROM FHP
Included in accounts receivable at September 30, 1996 is approximately
$7,200,000 (unaudited) due from FHP for health care services provided and
estimated accrued incentives.
ADVERTISING COSTS
Advertising costs, which have not been significant, are expensed when
incurred.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method. The principal components of
inventories are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Pharmacy................................................... $ 5,042 $ 5,400 $ 4,472
Optometry.................................................. 2,089 1,368 1,619
Other...................................................... 695 646 888
--------- --------- ------
$ 7,826 $ 7,414 $ 6,979
--------- --------- ------
--------- --------- ------
</TABLE>
F-10
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, income taxes are recognized for (a) the amount of
taxes payable or refundable for the current year and (b) deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. The effects of
income taxes are measured based on enacted tax law and rates. Deferred tax
assets and liabilities are established for temporary differences between the
financial reporting basis and tax basis of the Company's assets and liabilities
at tax rates expected to be in effect when such assets or liabilities are
realized or settled.
The results of the operations of the Company, TMMC, THSC and the Talbert
Medical Groups are included in the consolidated federal and state income tax
returns of FHP. A tax allocation has been made to the Company based primarily on
an estimated separate return basis, including the recording of benefits for tax
losses utilized in FHP's consolidated returns. Upon separation from FHP, the
Company will likely not be able to recognize tax benefits from losses because it
is not certain when the Company will generate sufficient taxable income to
realize such benefits.
The Company and FHP have entered into a Tax Allocation Agreement that
provides for FHP, among other things, to file all tax returns with respect to,
and to pay all taxes imposed upon or attributable to, FHP and its affiliates for
all taxable periods, including the taxes incurred in connection with the
Offering. The Company generally has agreed, among other things, to file all tax
returns with respect to the Company for all taxable periods beginning after the
expiration of the Rights and to pay all taxes imposed upon or attributable to
the Company for all taxable periods ending after the Acquisition. The Company
will indemnify FHP against any adverse adjustment, or receive from FHP the
benefit of any favorable adjustment, of an FHP return to the extent that the
adjustment (i) relates to a taxable period prior to the Acquisition, (ii) arises
out of the Company's activities, and (iii) when combined with all other such
adjustments that, in the aggregate, exceed $2 million, but does not exceed $4
million. The Company and FHP will share equally the liability for, or the
benefit of, such adjustments to the extent they exceed $4 million. The Tax
Allocation Agreement will become effective only if, upon completion of the
Offering, FHP owns less than 50% of the outstanding shares of Common Stock.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization,
are provided principally by the straight-line method over the estimated useful
lives of the respective classes of assets (three to ten years). Routine
maintenance and repairs are charged to expense as incurred, while costs of
betterments and renewals are capitalized.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." As permitted by SFAS 121, the Company elected to adopt the statement as of
December 31, 1995. In accordance with SFAS 121, long-lived assets to be held
will be reviewed for events or changes in circumstances that would indicate that
the carrying value may not be recoverable. The adoption of SFAS 121 had no
effect on the consolidated financial statements for fiscal year 1995.
F-11
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" provides an alternative to APB Opinion
No. 25 ("APB 25"). SFAS 123 encourages, but does not require, recognition
against earnings of compensation expense for grants of stock, stock options and
other equity instruments by employers (collectively, "options"), based on fair
value at the date of grant. SFAS 123 provides a methodology for the
determination of fair value; however, SFAS 123 also allows companies to continue
to measure compensation cost using the intrinsic value method of accounting
provided by APB 25. SFAS 123 requires companies that choose not to adopt the new
fair value accounting rules to disclose pro forma net income and earnings per
share under the new method as if it had been adopted. The Company intends to
continue with the intrinsic value method prescribed in APB 25 and make pro froma
disclosures of net income and earnings per share as if the fair value method of
accounting (as defined in SFAS 123) had been applied for 1996.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Principal
areas requiring the use of estimates include: the allocation of financial
statement amounts between the Company and FHP (Note 2), determination of
allowances for doubtful accounts receivable, and determination of medical claims
payable.
MANAGEMENT PLANS
The Company has experienced operating losses, negative cash flows and a
working capital deficiency. Management plans to stabilize the Company's
financial condition through revenue enhancement plans and cost reduction
efforts. Management's revenue enhancement plans focus on attracting new Medicare
and commercial enrollees by entering into provider agreements with payors other
than FHP. In addition, management intends to continue its efforts to reduce
operating and overhead costs. Management believes that these plans will provide
sufficient additional cash flow to maintain the Company's operations over a
reasonable period of time.
NOTE 2--ASSUMPTIONS RELATED TO THE HISTORICAL FINANCIAL STATEMENTS OF THE
COMPANY
The accompanying consolidated financial statements as of and for the periods
prior to January 1, 1996 reflect the assets, liabilities, revenues and expenses
that were directly related to the continuing operations of the Company as they
were operated by FHP. FHP's historical cost basis of the assets and liabilities
has been carried over to the Company. In cases involving assets, liabilities,
revenues, and expenses not specifically identifiable to any particular business
of FHP, certain allocations were made to reflect the future and ongoing
operations of the Company. These allocations were based on a variety of factors
which management believes provide a reliable basis for the accompanying
consolidated financial statements and include the following:
1. No cash balances are recorded as part of these historical financial
statements as it was the practice of FHP not to maintain separate cash
balances for the businesses.
F-12
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ASSUMPTIONS RELATED TO THE HISTORICAL FINANCIAL STATEMENTS OF THE
COMPANY (CONTINUED)
2. The Company estimated its proportionate share of expenses incurred by
FHP on a company-wide basis and used such estimates as a basis to
allocate certain liabilities, principally accounts payable and accrued
salaries and benefits.
3. Capitated enrollee statistics were utilized as a basis to allocate
certain historical revenue and expense items.
4. The net change in stockholders' deficit arising from intercompany
transactions, as reflected in the consolidated statements of
stockholder's deficit, includes (i) the aggregate intercompany
allocations of costs and expenses incurred by the Company and paid by FHP
and (ii) cash generated by the Company and collected by FHP, during the
periods presented. The net change in stockholders' deficit arising from
intercompany transactions also includes all liabilities of the Company
that are not separate legal obligations of the Company, such as income
taxes payable and employee benefit plan obligations that are legal
obligations of FHP, but have been charged to the Company. The amounts
advanced to FHP by the Company were offset primarily against retained
earnings on January 1, 1996 in conjunction with the recapitalization of
the Company. (Note 9)
5. Effective January 1, 1996 the Company bears no risk for the cost of
services related to the hospitalization of members, which risk is
retained by FHP for all prior periods. The historical consolidated
financial statements assume the existence of agreements whereby such
hospital risk is retained by FHP and, accordingly, such costs have been
omitted from the accompanying financial statements.
6. Management information services and certain administrative and overhead
activities are provided to the Company by FHP under a management services
arrangement. The historical financial statements include estimates of
such costs assuming that such arrangement had been in place during the
periods presented.
7. The historical retained earnings of the FHP staff model at December 31,
1990 was utilized in the preparation of the Company's historical balance
sheet at that date. Such balance has been adjusted annually to reflect
the net change in stockholders' deficit arising from intercompany
transactions and the net loss of the Company since that date.
8. The historical financial statements assume that the Real Estate and
Equipment Master Transfer Agreement entered into as of January 1, 1996
between TMMC and FHP had been in effect during all periods presented.
(Note 5)
9. Loss per common and common equivalent share was computed assuming that
the Company's capital structure subsequent to the Offering was in place
for the years ended December 31, 1993, 1994 and 1995, and the nine months
ended September 30, 1995 and 1996. As such, the loss per share
calculation assumes 3,000,000 common shares outstanding for each of the
periods presented.
F-13
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
Furniture, fixtures and equipment.................................................................. $ 2,670
Computer equipment................................................................................. 1,931
Leasehold improvements............................................................................. 1,212
------
5,813
Less accumulated depreciation and amortization..................................................... (627)
------
Property and equipment, net.................................................................... $ 5,186
------
------
</TABLE>
NOTE 4--MEDICAL CLAIMS PAYABLE
Activity in the liability for medical claims payable is summarized below
(amounts in thousands):
<TABLE>
<CAPTION>
BALANCE CLAIMS INCURRED CLAIMS PAID BALANCE
BEGINNING DURING THE DURING THE END OF
OF PERIOD PERIOD PERIOD PERIOD
----------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1993................ $ 10,207 44,911 (43,598) $ 11,520
Year ended December 31, 1994................ $ 11,520 55,205 (54,949) $ 11,776
Year ended December 31, 1995................ $ 11,776 51,803 (50,748) $ 12,831(1)
Nine months ended September 30, 1996
(unaudited)............................... $ -- (1) 34,259 (19,762) $ 14,497
</TABLE>
- ------------------------
(1) The unpaid balance of $12,831 at December 31, 1995 was assumed by FHP as
part of the recapitalization of the Company on January 1, 1996 (Note 9).
NOTE 5--LEASES
TMMC and FHP have entered into a Real Estate and Equipment Master Transfer
Agreement (the "Master Lease Agreement") to provide for the lease or sublease by
TMMC of facilities and equipment used by the Talbert Medical Groups that are
either owned or leased by FHP. The leases are accounted for as operating leases.
The Master Lease Agreement will expire on December 31, 2000. The Company and FHP
have agreed to certain amendments of the Master Lease Agreement pursuant to a
letter agreement. These amendments include (i) the extension, at prevailing
market rates, of the existing terms of the individual leases to December 31,
2005, with the exception of leases with respect to up to 90,000 square feet (of
a total of approximately 472,000 square feet) that the Company may elect not to
renew; (ii) two five-year extension options at prevailing market rates,
exercisable solely at the Company's discretion; (iii) a right of first offer for
the Company to purchase the furniture, fixtures and equipment subject to the
Master Lease Agreement ("FF&E"). The parties have also agreed to enter into a
separate lease agreement with respect to FF&E that will expire on December 31,
2000. The Company has also entered into leases with
F-14
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LEASES (CONTINUED)
third parties and has assumed the obligations of FHP under certain other leases
with third parties. Future minimum annual rental commitments under lease
obligations are as follows (amounts in thousands):
<TABLE>
<CAPTION>
MASTER LEASE OTHER LEASES TOTAL
------------ ------------ ----------
<S> <C> <C> <C>
Years ending December 31:
1996............................................... $ 21,454 $ 6,916 $ 28,370
1997............................................... 19,603 7,097 26,700
1998............................................... 17,577 6,809 24,386
1999............................................... 16,272 6,121 22,393
2000............................................... 15,352 4,926 20,278
Remainder.......................................... 28,125 15,269 43,394
------------ ------------ ----------
Total operating lease commitments.................... $ 118,383 $ 47,138 $ 165,521
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
NOTE 6--INCOME TAX BENEFIT
The components of the income tax benefit are summarized as follows (amounts
in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................................... $ (5,875) $ (10,160) $ (14,899) $ (13,246) $ (3,571)
State............................................. (1,707) (2,761) (4,209) (3,743) (1,009)
---------- ---------- ---------- ---------- ------------
Total current benefit............................... (7,582) (12,921) (19,108) (16,989) (4,580)
---------- ---------- ---------- ---------- ------------
Deferred:
Federal and state................................. (1,342) (632) (646) 984 1,976
---------- ---------- ---------- ---------- ------------
Total income tax benefit............................ $ (8,924) $ (13,553) $ (19,754) $ (16,005) $ (2,604)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
</TABLE>
The income tax benefit differs from the amount of tax determined by applying
the federal statutory rate to loss before income taxes. The components of this
difference are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------------------------- ----------------------------
1993 1994 1995 1995 (UNAUDITED)
------------------------ ------------------------ ------------------------ ----------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------------- --------- ------------- --------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax benefit from net
losses at federal
statutory tax rate... $ (7,602) 34% $ (11,597) 35% $ (16,926) 35% $ (13,713) 35%
State tax benefit, net
of federal tax....... (1,322) 6% (1,956) 6% (2,828) 6% (2,292) 6%
-- -- -- --
--------- --------- --------- -----------
Total income tax
benefit.............. $ (8,924) 40% $ (13,553) 41% $ (19,754) 41% $ (16,005) 41%
-- -- -- --
-- -- -- --
--------- --------- --------- -----------
--------- --------- --------- -----------
<CAPTION>
1996 (UNAUDITED)
------------------------------
AMOUNT PERCENT
----------- -----------------
<S> <C> <C>
Tax benefit from net
losses at federal
statutory tax rate... $ (2,231) 35%
State tax benefit, net
of federal tax....... (373) 6%
--
-----------
Total income tax
benefit.............. $ (2,604) 41%
--
--
-----------
-----------
</TABLE>
F-15
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAX BENEFIT (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- SEPTEMBER 30,
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets-reserves and accruals not currently deductible... $ 5,788 $ 6,434 $ 5,568
Valuation allowance.................................................. -- -- --
--------- --------- ------
Total deferred tax assets............................................ 5,788 6,434 5,568
Deferred tax liabilities-difference between book and tax deduction
allowable under operating leases................................... (1,110)
--------- --------- ------
Net deferred tax assets.......................................... $ 5,788 $ 6,434 $ 4,458
--------- --------- ------
--------- --------- ------
</TABLE>
Management believes that it is more likely than not that sufficient future
taxable income will be generated to recover its deferred tax assets.
Accordingly, no valuation allowance is deemed necessary.
NOTE 7--EMPLOYEE BENEFITS
FHP has certain benefit plans in which the Company's employees are currently
participating. FHP has two tax-qualified retirement plans: a Money Purchase
Pension Plan ("MPPP") and an Employee Stock Ownership Plan with Code section
401(k) and employer matching contribution features ("ESOP"). Following the
separation from FHP, the Company intends to establish a money purchase pension
plan that will be virtually identical to FHP's MPPP. The Company's Money
Purchase Pension Plan (the "Money Purchase Pension Plan") is intended to be a
tax-qualified retirement plan that satisfies the requirements of Sections 401(a)
and 501(a) of the Internal Revenue Code. The Money Purchase Pension Plan will be
frozen both as to contributions as well as to participation. The account
balances under the FHP MPPP attributable to employees of the Company will be
transferred to the Money Purchase Pension Plan. The accounts of each participant
under the Plan will be 100% vested. In general, accounts will be distributable
upon a participant's termination from employment. With respect to the ESOP, the
Company will establish its own plan and trust which are substantially the same
as FHP's ESOP and its related trust. Following the separation from FHP, the
account balances under FHP's ESOP which are attributable to employees of the
Company will be transferred to the new plan and trust to be established by the
Company.
Under the provisions of the FHP plans, FHP contributed into trusts for the
benefit of employees an amount equal to 12% of eligible annual compensation, as
defined, of all plan participants. Effective January 1, 1995, the contribution
rate was reduced to 8% of eligible annual compensation, as defined. Effective
January 1, 1996 the contribution rate was further reduced to 2% of eligible
annual compensation. Participants do not vest until they have completed five
years of service with the Company. Nonvested contributions, which are forfeited
upon an employee's termination, are treated as a reduction in the amount of
FHP's contribution. The combined contribution expenses for the Company's
employees for the MPPP and ESOP were $16,411,000, $15,611,000, and $10,246,000,
for the years ended December 31, 1993, 1994 and 1995 and $7,871,000, and
$3,951,000 for the nine months ended September 30, 1995 and 1996, respectively
(unaudited).
F-16
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFITS (CONTINUED)
Following the separation from FHP, the Company intends to establish a
Deferred Compensation Plan (the "Deferred Compensation Plan") that will be
virtually identical to FHP's deferred compensation plan. Accordingly, the
Deferred Compensation Plan will be a nonqualified deferred compensation plan and
will permit the Company's non-employee directors and a select group of
management or highly compensated employees to elect to defer compensation under
the Deferred Compensation Plan. The Deferred Compensation Plan will permit a
minimum deferral of 3% with respect to salaries (or, with respect to bonuses,
1%) and a maximum deferral of 50% with respect to salaries (or, with respect to
bonuses, 100%). The Deferred Compensation Plan will also permit discretionary
employer contributions. Amounts deferred under the Deferred Compensation Plan
will be credited to bookkeeping accounts established and maintained for each
participant.
The compensation deferral account of each participant will be 100% vested.
The employer contribution account of each participant will be subject to a
five-year "cliff" vesting schedule, but will become 100% vested in the event of
a change-of-control (as defined under the Deferred Compensation Plan).
The Company's Deferred Compensation Plan will provide for the same
distribution options as under FHP's Deferred Compensation Plan including: (i)
short-term payout option, (ii) retirement benefit, (iii) termination
distribution, (iv) survivor benefit and (v) withdrawal election.
The 1996 Stock Incentive Plan (the "Plan") was adopted by the Board of
Directors and approved by FHP in November 1996. The Plan replaces the
substantially similar plan established by TMMC. Under the Plan, the Company is
authorized to grant up to 180,000 shares of common stock options, stock
appreciation rights, restricted stock awards, performance share awards, stock
bonuses, or non-employee director options to any officer, non-employee director
or key employee of the Company. The Board of Directors granted 70,350 options to
employees and non-employee directors under the TMMC plan as of September 17,
1996 with an exercise price of $29.17 per share. These options have been
converted into Plan options. The Plan options granted to management vest at the
rate of 20% per year beginning on the first anniversary the grant date. The
non-employee director stock options vest at the rate of 25% on the later of
ninety days after the award date or sixty days after the Effective Time, and 25%
on each anniversary of the grant date for the first three anniversaries of the
grant date. Additional grants were made in November 1996 (Note 12). The
following is a summary of the activity in the Plan for the nine months ended
September 30, 1996:
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Shares subject to options outstanding -- January 1, 1996............................. 0
Granted ($29.17 per share)........................................................... 70,350
Exercised............................................................................ 0
Cancelled............................................................................ 0
---------
Shares subject to options outstanding -- September 30, 1996 (unaudited).............. 70,350
---------
---------
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
LITIGATION
During the ordinary course of business, the Company and its subsidiaries
have become a party to pending and threatened legal actions and proceedings.
Management of the Company is of the opinion, taking into account its insurance
coverage, that the outcome of the currently known legal actions and
F-17
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
proceedings will not, singly or in the aggregate, have a material effect on the
consolidated financial position of the Company and its subsidiaries.
REGULATED OPERATIONS
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. The Company believes that its operations as
described herein are in substantial compliance with applicable law. The ability
of the Company to operate profitably will depend in part upon the Talbert
Medical Groups and their affiliated physicians obtaining and maintaining all
necessary licenses, certificates of need and other approvals and operating in
compliance with applicable health care regulations.
NOTE 9--RECAPITALIZATION
FHP initially capitalized and incorporated TMMC and THSC on September 15,
1995 and December 6, 1995, respectively, with a combined cash contribution of
$91,000. On January 1, 1996, TMMC and THSC assumed the operations and certain
assets and liabilities that had previously been recorded on the books of FHP's
staff model. As part of this assumption, FHP retained certain medical claims
payable ($12,831,000) and contributed cash of $5,055,000 to the Company. As a
result, the Company's retained deficit of $17,886,000 was eliminated.
NOTE 10--STOCKHOLDERS' DEFICIT
The Company's Certificate of Incorporation provides for the issuance of
1,200,000 shares of preferred stock, par value $0.01 per share, and 15,000,000
shares of common stock, par value $0.01 per share. Dividends may be declared and
paid to the holders in cash, property or other securities out of any net profits
or net assets available therefor.
On September 17, 1996 the Board of Directors approved a one-for-3.33 reverse
split of TMMC's Common Stock. All share and per share information in the
accompanying consolidated financial statements have been retroactively restated
to reflect this reverse stock split.
FHP currently owns approximately 92.25% of TMMC and THSC. Management and
other investors (the "Management Investors") own the remaining percentage of
outstanding shares ("Management Shares"). Transfer of the Management Shares is
restricted. The Management Investors will not have the ability to sell or
transfer Management Shares until such restrictions lapse. Twenty-five percent of
the shares issued to each Management Investor vested on July 1, 1996 and the
remainder will vest each July 1 until July 1, 1999 beginning July 1, 1997. With
certain exceptions, if a Management Investor terminates his or her employment
relationship with his or her respective employer before certain shares vest, the
restricted shares will be repurchased from the management for their original
purchase price. In addition, pursuant to certain performance purchase options,
if certain financial goals are not met at the vesting dates, up to 20% of the
otherwise then-vesting shares become subject to repurchase at the original
purchase price.
RIGHTS AGREEMENT. As of the expiration of the Rights Offering (the
"Expiration Date"), pursuant to a Stockholder Rights Agreement between the
Company and American Stock Transfer & Trust Company, as Rights Agent, the
Company has declared a dividend distribution to all holders of Common Stock of a
right to purchase a unit initially consisting of one one-hundredth of a share of
Junior Participating Preferred Stock upon the terms and conditions set forth in
that agreement. The Stockholder Rights Agreement is
F-18
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' DEFICIT (CONTINUED)
designed to give the Board of Directors the time and opportunity to protect
stockholder interests and encourage equal treatment of all stockholders in a
takeover situation. In the event of a takeover attempt, the holders of the
rights may exercise them to purchase Common Stock at a 50% discount, or, in the
event of a "squeeze-out" transaction where the Company would not be the
surviving entity, the acquiring company's common stock at a 50% discount. The
issuance of these rights may have the effect of delaying, deferring or
preventing a change in control of the Company or an unsolicited acquisition
proposal.
The Stockholder Rights Agreement provides for a trigger percentage of 8% for
the 90-day period following the Expiration Date, and 15% thereafter. Certain
persons who acquire Common Stock in excess of the trigger percentage will not
trigger the rights, including, with certain limitations, (i) persons who acquire
such Common Stock solely as a result of the exercise of Rights distributed to
them in the Offering, (ii) FHP, if it acquires such Common Stock solely through
the transfer of shares unsubscribed in the Offering, and (iii) transferees of
FHP, if FHP acquires in excess of 20% of the outstanding Common Stock solely
through the transfer of shares unsubscribed in the Offering.
NOTE 11--UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Revenue.................................................... $ 122,977 $ 122,581 $ 127,898 $ 129,882
Operating loss............................................. (3,988) (7,915) (11,930) (9,300)
Loss before income tax benefit............................. (3,988) (7,915) (11,930) (9,300)
Net loss................................................... (2,357) (4,677) (7,050) (5,496)
Loss per common and common equivalant share................ (0.79) (1.56) (2.35) (1.83)
Year ended December 31, 1995:
Revenue.................................................... $ 133,719 $ 132,167 $ 113,479 $ 116,334
Operating loss............................................. (10,558) (12,730) (15,894) (9,180)
Loss before income tax benefit............................. (10,558) (12,730) (15,894) (9,180)
Net loss................................................... (6,244) (7,530) (9,402) (5,432)
Loss per common and common equivalant share................ (2.08) (2.51) (3.14) (1.81)
Nine Months Ended September 30, 1996:
Revenue.................................................... $ 115,209 $ 121,283 $ 114,743
Operating loss............................................. (4,570) (1,172) (1,831)
Loss before income tax benefit............................. (4,339) (752) (1,283)
Net loss................................................... (2,566) (445) (759)
Loss per common and common equivalant share................ (0.86) (0.15) (0.25)
</TABLE>
F-19
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS
MERGER OF FHP AND PACIFICARE HEALTH SYSTEMS, INC.--SEE NOTE 1
STOCK OPTION GRANTS
On November 21, 1996, the Company issued options to acquire 39,636 shares of
common stock to certain officers with an exercise price of $10.00 per share. The
options vest 40% on December 31, 1996 and 15% each on January 1 from 2000
through 2003. Based on an assumed fair market value of $29.17 per share on the
date of grant, the Company will recognize approximately $760,000 of stock
compensation expense (before income tax benefit) as the related options vest.
Accordingly, 40% of the $760,000 compensation expense, or $304,000, will be
recognized in December 1996.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN TO THOSE TO WHICH IT RELATES OR AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 12
The Company............................................................... 18
The Offering.............................................................. 19
Financial Statements...................................................... 23
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 23
Capitalization............................................................ 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 28
Business.................................................................. 34
Management................................................................ 44
Certain Transactions...................................................... 55
Relationship with FHP and PacifiCare Following the Offering............... 56
Principal Stockholders.................................................... 59
Description of Capital Stock.............................................. 61
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 64
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,767,500 SHARES
[logo]
TALBERT MEDICAL
MANAGEMENT
HOLDINGS
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
, 1997
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
ITEM AMOUNT
- --------------------------------------------------------------------------------------------- ---------
<S> <C>
Securities and Exchange Commission registration fee.......................................... $ 20,518
Blue Sky fees and expenses...................................................................
Printing and engraving expenses..............................................................
Legal fees and expenses......................................................................
Accounting fees and expenses.................................................................
Miscellaneous................................................................................
---------
Total.................................................................................... $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
See "Management--Limitations on Liability of Officers and Directors,"
contained in the Prospectus.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 15, 1996, TMMC and THSC entered into an agreement to issue 270,000
shares and 45 shares, respectively, of their common stock to the Management
Investors as an inducement for the Management Investors to remain in the service
of the companies and as an incentive for increased efforts during their service.
The securities were issued with a restrictive legend thereon, and are subject to
other restrictions, including buy-back rights of FHP, contained in the
Management Stock Purchase Agreement, a copy of which is filed as an exhibit to
the Registration Statement and is incorporated herein by reference. See "Certain
Transactions."
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Reorganization dated as of November 11, 1996 among PacifiCare
Health Systems, Inc., N-T Holdings, Inc., Neptune Merger Corp., Tree Acquisition Corp. and FHP
International Corporation.
3.1 Certificate of Incorporation of Talbert Medical Management Holdings Corporation, as amended to date.
3.2 Bylaws of Talbert Medical Management Holdings Corporation, as amended to date.
4.1 Form of Rights Agreement dated as of , 1996 between Talbert Medical Management Holdings
Corporation and American Stock Transfer & Trust Company.
4.2 Management Stock Purchase Agreement dated as of March 15, 1996, as amended, between Talbert Medical
Management Holdings Corporation, Talbert Medical Management Corporation, Talbert Health Services
Corporation, FHP International Corporation and the investors who are signatories thereto.
*5.1 Opinion of O'Melveny & Myers LLP.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Form of Provider Agreement dated as of , 1996 between certain HMO subsidiaries of FHP
International Corporation and the Talbert Medical Groups.
10.2 Form of Provider Agreement dated as of , 1996 between the California HMO subsidiary of
PacifiCare Health Systems, Inc. and the Talbert Medical Groups.
10.3 Form of Stock Purchase Agreement dated as of , 1996 between Talbert Medical Management
Holdings Corporation and FHP International Corporation.
10.4 Form of Standstill Agreement dated as of , 1996 between Talbert Medical Management
Holdings Corporation and FHP International Corporation.
10.5 Form of Amended and Restated Real Estate and Equipment Master Transfer Agreement dated as of
, 1996 among Talbert Medical Management Corporation, Inc., FHP, Inc., FHP of Utah, Inc.
and FHP of New Mexico, Inc.
10.6 Form of Letter Agreement among Talbert Medical Management Corporation and FHP, Inc., FHP of Utah, Inc.
and FHP of New Mexico, Inc.
10.7 Form of Administrative Services Agreement dated as of , 1996 between Talbert Medical
Management Corporation and FHP International Corporation.
10.8 Form of Employee Benefits and Compensation Allocation Agreement dated as of , 1996 between
Talbert Medical Management Holdings Corporation and FHP International Corporation.
10.9 Form of Tax Allocation Agreement dated as of , 1996 among Talbert Medical Management
Holdings Corporation, Talbert Medical Management Corporation, Talbert Health Services Corporation and
FHP International Corporation.
10.10 Form of Allocation of Liabilities and Indemnification Agreement dated as of , 1996 among
Talbert Medical Management Holdings Corporation, Talbert Medical Management Corporation, Talbert
Health Services Corporation and FHP International Corporation.
10.11 Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan.
10.12 Form of Stock Option Agreement between Talbert Medical Management Holdings Corporation and certain
members of management.
10.13 Form of Stock Option Agreement between Talbert Medical Management Holdings Corporation and certain
non-employee directors.
*10.14 Talbert Medical Management Holdings Corporation Employee Stock Ownership Plan.
10.15 Form of Talbert Medical Management Holdings Corporation Deferred Compensation Plan.
*10.16 Talbert Medical Management Holdings Corporation Money Purchase Pension Plan.
*10.17 Form of Indemnification Agreement between Talbert Medical Management Holdings Corporation and its
officers and directors.
*10.18 Form of Employment Agreement between Talbert Medical Management Holdings Corporation and certain
officers who are signatories thereto.
10.19 Form of Chief of Staff Agreement between the Talbert Medical Groups and certain individuals who are
signatories thereto.
10.20 Form of Share Control Agreement (non-California) between Talbert Medical Management Corporation and
certain individuals who are signatories thereto.
10.21 Form of Share Control Agreement (California) between Talbert Medical Management Corporation and certain
individuals who are signatories thereto.
10.22 Form of Management Services Agreement (non-California) between Talbert Medical Management Corporation
and the Talbert Medical Groups.
10.23 Form of Management Service Agreement (California) between Talbert Medical Management Corporation and the
Talbert Medical Groups.
10.24 Form of Physician Employment Agreement (non-Utah) between the Talbert Medical Groups and certain
individuals who are signatories thereto.
10.25 Form of Physician Employment Agreement (Utah) between the Talbert Medical Groups and certain individuals
who are signatories thereto.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
11.1 Statement re computation of per share earnings
21.1 Subsidiaries of Talbert Medical Management Holdings Corporation
*23.1 Consent of Deloitte & Touche LLP
23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
24.1 Power of attorney (see page II-5)
</TABLE>
- ------------------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
Reports of Independent Public Accountants on Schedules.
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the information required is included in the financial statements and notes
hereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of
II-3
<PAGE>
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
(4) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the standby underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Costa Mesa, State of California, on this 11th day of
December, 1996.
TALBERT MEDICAL MANAGEMENT HOLDINGS
CORPORATION
By: /s/ JACK D. MASSIMINO
-----------------------------------
Jack D. Massimino
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Jack D. Massimino and Walter R. Stone and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution, for him and in his name, place and stead in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
comply with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on December 11, 1996 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ JACK D. MASSIMINO
------------------------------------------- President and Chief Executive Officer (Principal
Jack D. Massimino Executive Officer)
/s/ WALTER R. STONE
------------------------------------------- Vice President, Finance and Treasurer (Principal
Walter R. Stone Financial and Accounting Officer)
/s/ JACK R. ANDERSON
------------------------------------------- Director
Jack R. Anderson
------------------------------------------- Director
Richard M. Burdge, Sr.
/s/ WARNER HEINEMAN
------------------------------------------- Director
Warner Heineman
------------------------------------------- Director
Van B. Honeycutt
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ ROBERT W. JAMPLIS, M.D.
------------------------------------------- Director
Robert W. Jamplis, M.D.
/s/ ROBERT C. MAXSON
------------------------------------------- Director
Robert C. Maxson
/s/ JOSEPH F. PREVRATIL
------------------------------------------- Director
Joseph F. Prevratil
/s/ WESTCOTT W. PRICE III
------------------------------------------- Director
Westcott W. Price III
-------------------------------------------
Jack D. Massimino
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
AMENDED AND RESTATED AGREEMENT
AND PLAN OF REORGANIZATION
AMONG
PACIFICARE HEALTH SYSTEMS, INC.
N-T HOLDINGS, INC.
NEPTUNE MERGER CORP.
TREE ACQUISITION CORP.
AND
FHP INTERNATIONAL CORPORATION
---------------------
AS OF NOVEMBER 11, 1996
---------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE 1 DESCRIPTION OF TRANSACTION............................................................. 1
1.1 Mergers................................................................................ 1
1.2 Effect of the Mergers.................................................................. 2
1.3 Closing; Effective Time................................................................ 2
1.4 Certificates of Incorporation and Bylaws; Directors and Officers....................... 2
1.5 Conversion of Shares................................................................... 3
1.6 Closing of the Transfer Books of the Company and PacifiCare............................ 6
1.7 Exchange of Certificates............................................................... 6
1.8 Appraisal Rights....................................................................... 8
1.9 Stock Subject to Conditions............................................................ 8
1.10 Tax Consequences....................................................................... 8
1.11 Accounting Consequences................................................................ 9
1.12 Further Action......................................................................... 9
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................... 9
2.1 Organization; Subsidiaries; Capitalization............................................. 9
2.2 SEC Filings; Financial Statements...................................................... 10
2.3 Absence of Certain Changes or Events................................................... 11
2.4 Tax Matters............................................................................ 11
2.5 Contracts.............................................................................. 12
2.6 Employees.............................................................................. 13
2.7 Litigation and Claims; Compliance with Law............................................. 15
2.8 Properties............................................................................. 15
2.9 Disclosure............................................................................. 15
2.10 Transactions with Affiliates........................................................... 16
2.11 Vote Required.......................................................................... 16
2.12 Takeover Provisions Inapplicable....................................................... 16
2.13 Company Action......................................................................... 16
2.14 Fairness Opinion....................................................................... 16
2.15 Financial Advisor...................................................................... 16
2.16 Enforceability......................................................................... 16
2.17 Governmental Consents; No Conflicts.................................................... 17
2.18 Reserves............................................................................... 17
2.19 Audits or Investigations by Governmental Entities...................................... 18
2.20 Environmental Provisions............................................................... 18
2.21 Intellectual Property.................................................................. 19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING............................... 19
3.1 Organization; Subsidiaries; Capitalization............................................. 19
3.2 SEC Filings; Financial Statements...................................................... 21
3.3 Absence of Certain Changes or Events................................................... 21
3.4 Tax Matters............................................................................ 21
3.5 Contracts.............................................................................. 22
3.6 Employees.............................................................................. 23
3.7 Litigation and Claims; Compliance with Law............................................. 24
3.8 Properties............................................................................. 24
3.9 Disclosure............................................................................. 24
3.10 Transactions with Affiliates........................................................... 25
3.11 Vote Required.......................................................................... 25
3.12 Takeover Provisions Inapplicable....................................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
3.13 PacifiCare Action...................................................................... 25
3.14 Actions by Holding, Neptune Sub and Company Sub........................................ 25
3.15 Fairness Opinion....................................................................... 25
3.16 Financial Advisor...................................................................... 25
3.17 Enforceability......................................................................... 26
3.18 Governmental Consents; No Conflicts.................................................... 26
3.19 Common and Preferred Stock To Be Issued................................................ 26
3.20 Reserves............................................................................... 26
3.21 Audits or Investigations by Governmental Entities...................................... 27
3.22 Environmental Provisions............................................................... 27
3.23 Intellectual Property.................................................................. 28
3.24 Formation of Holding................................................................... 28
ARTICLE 4 CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME;
ADDITIONAL AGREEMENTS................................................................. 28
4.1 Information and Access................................................................. 28
4.2 Conduct of Business of the Company..................................................... 29
4.3 Conduct of Business of PacifiCare...................................................... 31
4.4 Negotiation With Others................................................................ 32
4.5 Registration Statement; Prospectus/Proxy Statement..................................... 32
4.6 Stockholders' Meetings................................................................. 33
4.7 Regulatory Approvals................................................................... 34
4.8 Employee Benefits Plans................................................................ 34
4.9 Indemnification........................................................................ 37
4.10 Additional Agreements.................................................................. 38
4.11 Disclosure............................................................................. 39
4.12 Affiliate Agreements................................................................... 39
4.13 Tax Qualification and Opinion Back-Up Certificates..................................... 39
4.14 Financing.............................................................................. 39
4.15 Talbert................................................................................ 39
4.16 7% Senior Notes Due 2003............................................................... 40
4.17 Notices of Certain Events.............................................................. 40
4.18 Certain Corporate Matters with Respect to PacifiCare................................... 40
4.19 Compliance with Regulations............................................................ 40
4.20 Assumption by Successor................................................................ 41
4.21 No Activity by Holding................................................................. 41
ARTICLE 5 CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING.......................... 41
5.1 Representations and Warranties Accurate................................................ 41
5.2 Compliance With Covenants.............................................................. 41
5.3 No Material Adverse Effect............................................................. 41
5.4 Certificate............................................................................ 41
5.5 Effectiveness of Registration Statement................................................ 41
5.6 Stockholder Approval................................................................... 41
5.7 Affiliates Agreements.................................................................. 41
5.8 Legal Opinion.......................................................................... 42
5.9 Tax Opinion............................................................................ 42
5.10 Absence of Restraint................................................................... 42
5.11 No Governmental Litigation............................................................. 42
5.12 No Other Litigation.................................................................... 42
5.13 HSR Act................................................................................ 42
5.14 Quotation on Nasdaq National Market or New York Stock Exchange......................... 42
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
5.15 Other Required Consents and Approvals.................................................. 42
5.16 TakeCare Board Representation.......................................................... 42
5.17 Restated Rights Plan................................................................... 43
5.18 Talbert................................................................................ 43
ARTICLE 6 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS...................................... 43
6.1 Representations and Warranties Accurate................................................ 43
6.2 Compliance With Covenants.............................................................. 43
6.3 No Material Adverse Effect............................................................. 43
6.4 Certificate............................................................................ 43
6.5 Effectiveness of Registration Statement................................................ 43
6.6 Stockholder Approval................................................................... 43
6.7 Legal Opinion.......................................................................... 43
6.8 Tax Opinion............................................................................ 43
6.9 Absence of Restraint................................................................... 44
6.10 No Governmental Litigation............................................................. 44
6.11 HSR Act................................................................................ 44
6.12 Quotation on Nasdaq National Market or New York Stock Exchange......................... 44
ARTICLE 7 TERMINATION OF AGREEMENT............................................................... 44
7.1 Termination............................................................................ 44
7.2 Effect of Termination.................................................................. 45
7.3 Fees and Expenses...................................................................... 45
ARTICLE 8 MISCELLANEOUS.......................................................................... 46
8.1 Amendment.............................................................................. 46
8.2 Waiver................................................................................. 47
8.3 No Survival of Representations and Warranties.......................................... 47
8.4 Entire Agreement; Counterparts; Applicable Law......................................... 47
8.5 Attorneys' Fees........................................................................ 47
8.6 Assignability.......................................................................... 47
8.7 Notices................................................................................ 47
8.8 Cooperation............................................................................ 50
8.9 Certain Terms.......................................................................... 50
8.10 Titles................................................................................. 50
8.11 Articles, Sections and Exhibits........................................................ 50
8.12 Jurisdiction........................................................................... 50
8.13 Counterparts; Effectiveness............................................................ 50
8.14 Schedules.............................................................................. 50
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit 1.4 Holding Restated Certificate of Incorporation
Exhibit 4.12 Affiliate Agreements*
</TABLE>
- ------------------------
* Not included as part of this Appendix A.
iii
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"Agreement") is made and entered into as of November 11, 1996, by and among: N-T
HOLDINGS, INC., a Delaware corporation ("Holding"), PACIFICARE HEALTH SYSTEMS,
INC., a Delaware corporation ("PacifiCare"); NEPTUNE MERGER CORP., a Delaware
corporation and a wholly-owned subsidiary of Holding ("Neptune Sub"); FHP
INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), and TREE
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of
Holding ("Company Sub") who hereby amend and entirely restate the Agreement and
Plan of Reorganization among the same parties dated as of August 4, 1996 (the
"Original Agreement") as amended and restated on September 17, 1996 (the "First
Amended Reorganization Agreement").
RECITALS
A. The parties intend concurrently to effect a merger of Neptune Sub into
PacifiCare (the "PacifiCare Merger") and a merger of Company Sub into Company
(the "Company Merger"), each such merger to be carried out in accordance with
this Agreement and the laws of the State of Delaware (the "Mergers"), such that
PacifiCare and Company become wholly-owned subsidiaries of Holding and the
shareholders of PacifiCare and Company become shareholders of Holding. After the
Closing, Holding will act as a holding company for PacifiCare and the Company.
B. This Agreement has been approved by the respective Boards of Directors
of Holding, PacifiCare, Neptune Sub, Company and Company Sub.
C. For United States federal income tax purposes, it is intended that the
transactions contemplated by this Agreement qualify as transfers subject to
Section 351(a) of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder (the "Code") and that the shareholders of
the Company be treated as if they transferred their stock in Company to Holding
in exchange for the Company merger consideration and that the shareholders of
PacifiCare be treated as if they transferred their stock in PacifiCare to
Holding in exchange for the PacifiCare merger consideration.
D. On August 4, 1996 PacifiCare had issued and outstanding approximately
12,370,758 shares of Class A Common Stock, $0.01 par value ("PacifiCare Class A
Common Stock") and 18,812,799 shares of Class B Common Stock, $0.01 par value
("PacifiCare Class B Common Stock"). On August 4, 1996 the Company had issued
and outstanding approximately 40,806,165 shares of Common Stock, $0.05 par value
("Company Common Stock") and approximately 21,030,345 shares of Series A
Cumulative Convertible Preferred Stock, $0.05 par value ("Company Series A
Preferred Stock").
E. Contemporaneously with the execution and delivery of the Original
Agreement, certain stockholders of PacifiCare and of the Company executed Voting
and Non-Disposition Agreements.
AGREEMENT
Holding, PacifiCare, Neptune Sub, the Company, and Company Sub hereby agree
as follows:
ARTICLE 1
DESCRIPTION OF TRANSACTION
1.1 MERGERS. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined in Section 1.3), Company Sub
shall be merged into the Company and the separate existence of the Company Sub
shall cease. The Company will be the surviving corporation in the Company Merger
(the "Company Surviving Corporation") and its separate corporate existence, with
all its purposes, objects, rights, privileges, powers and franchises shall
continue unaffected by
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such merger. Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, Neptune Sub shall be merged into PacifiCare
and the separate existence of Neptune Sub shall cease. PacifiCare shall be the
surviving corporation in PacifiCare Merger ("PacifiCare Surviving Corporation")
and its separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises shall continue unaffected by such merger.
Company Sub and Neptune Sub have been formed solely for the purpose of effecting
the Company Merger and the PacifiCare Merger, respectively, and there will be no
other activity in Company Sub and Neptune Sub.
1.2 EFFECT OF THE MERGERS. The Mergers shall have the effects set forth in
this Agreement and in Section 259 of the Delaware General Corporation Law (the
"DGCL").
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of PacifiCare on the second business day following the date as of which each of
the conditions set forth in Articles 5 and 6 has been fulfilled or waived or on
such other date or at such other place as may be jointly designated by
PacifiCare and the Company (the "Closing Date"). As soon as practicable after
the Closing, properly executed certificates of merger for each Merger conforming
to the requirements of the DGCL and changing the name of Holding to "PacifiCare
Health Systems, Inc." and the name of PacifiCare to "PacifiCare Operations,
Inc." or some other name chosen by PacifiCare, shall be filed with the Delaware
Secretary of State. The Mergers shall become effective at the time said
certificates of merger are filed with the Delaware Secretary of State or at such
later time as may be specified in said certificates of merger (the "Effective
Time").
1.4 CERTIFICATES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS.
(a) The Certificates of Incorporation of PacifiCare and Company shall be
the Certificates of Incorporation of PacifiCare Surviving Corporation and the
Company Surviving Corporation, respectively, as of the Effective Time.
(b) The Bylaws of PacifiCare and the Company, as in effect immediately
prior to the Effective Time, shall become the Bylaws of PacifiCare Surviving
Corporation and the Company Surviving Corporation, respectively, at the
Effective Time.
(c) The directors of the Company shall resign or be removed concurrently
with the Effective Time.
(d) PacifiCare shall cause Holding to take all necessary corporate action
to amend the Certificate of Incorporation and Bylaws of Holding prior to the
Effective Time to be in substantially the form of the Amended and Restated
Certificate of Incorporation attached hereto as Exhibit 1.4 (the "Holding
Restated Certificate of Incorporation") and the Bylaws of PacifiCare in effect
on the date hereof; PROVIDED, HOWEVER, that if the Series A Required Vote (as
defined in Section 2.11) is not received for the Series A Amendment (as defined
in Section 2.11), PacifiCare shall cause Holding to take all necessary corporate
action to file a Certificate of Designation creating a Series A-1 Preferred
Stock with rights, preferences, privileges and restrictions identical in all
substantial respects to those of the Company Series A Preferred Stock; and,
PROVIDED FURTHER, that the indemnification provisions of the Bylaws of Holding
may be amended to provide additional indemnification rights to the Directors
and/or Officers of Holding. PacifiCare shall cause the Board of Directors of
Holding after the Effective Time to consist of at least ten persons, of which
two individuals shall be designated by the Board of Directors of the Company and
be reasonably satisfactory to the Board of Directors of PacifiCare. The
designation of such new directors by the Board of Directors of the Company, and
the approval of such new directors by the Board of Directors of PacifiCare shall
each occur prior to the Effective Time. Such new directors shall be appointed to
different classes, and they shall commence to serve within 60 days of the
Effective Time and remain as directors until their successors have been duly
elected or until their earlier death, removal or resignation, provided that they
shall be renominated as required to be able to serve a minimum of three years.
If, prior to the end of such period, either of such directors becomes
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unable to serve as director, or is no longer qualified to serve as a director,
the remaining director (or his successor) shall select a replacement nominee
(which nominee shall be satisfactory to the Board of Directors of Holding) to be
appointed to serve the remaining term.
1.5 CONVERSION OF SHARES.
(a) At the Effective Time, by virtue of the Company Merger (and without any
action on the part of any stockholder of the Company):
(i) any shares of Company Common Stock or Company Series A Preferred
Stock then held by the Company or any subsidiary of the Company (or held in
the Company's treasury) shall be canceled;
(ii) any shares of Company Common Stock or Company Series A Preferred
Stock then held by PacifiCare, Neptune Sub or any other subsidiary of
PacifiCare shall be canceled;
(iii) except as provided in clauses (i) and (ii) above or as provided in
Section 1.8 with respect to shares as to which appraisal rights have been
exercised and subject to Section 1.5(c) below, each share of Company Common
Stock outstanding immediately prior to the Effective Time shall be converted
into the right to receive:
(A) an amount of Cash equal to $17.50 (the "Common Cash
Consideration"), plus
(B) the Final Class A/Common Share Ratio (as defined in Section
1.5(a)(vi)(D) below) of a share of Holding's Class A Common Stock, $.01
par value, as provided in the Holding Restated Certificate of
Incorporation ("Holding Class A Common Stock"), plus
(C) the Final Class B/Common Share Ratio (as defined in Section
1.5(a)(vi)(E) below) of a share of Holding's Class B Common Stock, $.01
par value, as provided in the Holding Restated Certificate of
Incorporation ("Holding Class B Common Stock");
(D) Talbert Rights as specified in Section 1.5(a)(v) below.
(iv) except as provided in clauses (i) and (ii) above and subject to
Section 1.5(c), each share of Company Series A Preferred Stock outstanding
immediately prior to the Effective Time shall be converted into Talbert
Rights as specified in Section 1.5(a)(v) below and the other consideration
specified in this clause (iv).
If the Series A Required Vote is received for the Series A Amendment, each
share of Series A Preferred Stock shall, in addition to the consideration
described in the first sentence of this Section 1.5(a)(iv), be converted
into (A) an amount of cash equal to $14.113 (the "Series A Cash
Consideration"); and (B) and one-half ( 1/2) share of Holding Series A (as
defined in Section 1.7(a)).
If the Series A Required Vote is not received for the Series A Amendment,
then, in accordance with the Company's Certificate of Incorporation, the
Company shall, on the date of the Effective Time (or as soon thereafter as
practicable and in any event within 5 days thereof), give notice (the
"Conversion Notice") in accordance with the Company's Certificate of
Designation with respect to the Company Series A Preferred Stock (the
"Certificate of Designation") to all holders of Company Series A Preferred
Stock (other than holders making an Irrevocable Election with respect to all
of their Company Series A Preferred Stock as described in the next
paragraph) that a "Change of Control" (as defined in the Certificate of
Designation) has occurred on the date of the Effective Time and that such
holders may exercise certain "Special Conversion Rights," as defined in the
Certificate of Designation, by delivery of written notice of exercise of
such rights, together with certificates representing the Company Series A
Preferred Stock with respect to which such rights are being exercised, duly
endorsed for transfer, until the expiration of 55 days from the date of the
Conversion Notice. Such Conversion Notice shall also include such other
information as may be required by the Certificate of Designation. In
accordance with the Certificate of Designation, each holder of Company
Series A Preferred Stock receiving the Conversion Notice shall be entitled,
upon exercise of such Special Conversion Rights, to convert each share of
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<PAGE>
Company Series A Preferred Stock as to which an Irrevocable Election has not
validly been made into either (A) the consideration to be received by a
holder of a single share of Company Common Stock pursuant to Section
1.5(a)(iii) times a fraction, the numerator of which is $25.00 and the
denominator of which is equal to the closing price of the Company Common
Stock on the last business day prior to the date the Company gives the
Conversion Notice to the holders of the Company Series A Preferred Stock or
(B) $25.00 cash plus any accrued but unpaid dividends on such share;
PROVIDED, HOWEVER, that if any holder elects the option specified in clause
(A) above, Holding (directly or through the Company Surviving Corporation)
may, at its option, elect to pay such holder $25.00 cash plus any accrued
but unpaid dividends on such share instead of the consideration set forth in
said clause (A). The Conversion Notice shall also provide that the holders
of Company Series A Preferred Stock may elect to waive their Special
Conversion Rights and elect to receive the same consideration in the Company
Merger that such holder would have received if such holder had converted
such holder's shares of Company Series A Preferred Stock into Company Common
Stock pursuant to such holder's regular conversion rights immediately prior
to the Effective Time ("As-If-Converted Company Merger Consideration"). If
any holder of Company Series A Preferred Stock entitled to receive a
Conversion Notice fails to exercise such holder's Special Conversion Rights
or to waive such rights and elect to receive As-If-Converted Company Merger
Consideration within the time period specified in this Section 1.5(a)(iv)
and the Certificate of Designation, such holder shall thereafter with
respect to all shares of Company Series A Preferred Stock as to which a
valid Irrevocable Election has not been made have only the right to
surrender such shares in accordance with the provisions of Section 1.7 and
to receive for each share the As-If-Converted Company Merger Consideration.
Each holder of Company Series A Preferred Stock shall be given the right,
exercisable prior to the date of the Company Stockholder Meeting, to make an
irrevocable election (the "Irrevocable Election") to waive such holder's
Special Conversion Rights and such holder's right to receive As-If-Converted
Company Merger Consideration in accordance with the foregoing paragraph and
the Certificate of Designation and to instead receive, in lieu thereof, for
each share of Company Series A Preferred Stock as to which the Irrevocable
Election is made (A) the Series A Cash Consideration and (B) one-half ( 1/2)
share of Holding Series A (as defined in Section 1.7(a)). The Irrevocable
Election shall be effected by returning a Form of Irrevocable Election,
properly executed, together with stock certificates representing the Company
Series A Preferred held by the holder as to which the Irrevocable Election
is made (or a properly completed guarantee of delivery) to the Company's
transfer agent prior to the date of the Company Meeting. By making an
Irrevocable Election, the holder will irrevocably waive such holder's right
with respect to all shares as to which the Irrevocable Election is made to
(A) exercise Special Conversion Rights (as provided in the Certificate of
Designation); (B) exercise such holder's right to receive As-If-Converted
Company Merger Consideration; (C) exercise such holder's right to convert
such Company Series A Preferred Stock to Company Common Stock or; (D) gift,
sell, hypothecate or in any other manner transfer such Company Series A
Preferred Stock to any person who does not expressly accept such stock
subject to such Irrevocable Election and agree to be bound thereby; PROVIDED
that the restrictions imposed by such Irrevocable Election shall lapse if
this Agreement shall terminate in accordance with its terms prior to the
Effective Time.
If the Series A Required Vote is not received for the Series A Amendment,
then each share of Series A Preferred Stock as to which a valid Irrevocable
Election has been made shall, in addition to the consideration described in
the first sentence of this Section 1.5(a)(iv), be converted into the Series
A Cash Consideration and one-half ( 1/2) share of Holding Series A.
(v) Subject to Section 1.8 and subject to completion of the transactions
contemplated by Section 4.15, at the Effective Time, by virtue of the
Company Merger (and without any action on the part of any stockholder of the
Company) each share of Company Common Stock and Company Series A Preferred
Stock outstanding immediately prior to the Effective Time shall be converted
in part into rights to purchase directly or indirectly through one or more
other corporations
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<PAGE>
formed to facilitate such purchase, all of the Company's interest in Talbert
Medical Management Corporation and Talbert Health Services Corporation
(collectively, "Talbert") pro rata based on the number of then outstanding
shares of Company Common Stock and the number of shares of Company Common
Stock into which outstanding shares of Company Series A Preferred Stock are
convertible immediately prior to the Effective Time.
(vi) for purposes of this Agreement:
(A) the "Average Pre-Vote Closing Share Price" for the PacifiCare
Class B Common Stock shall be the average closing price as quoted in the
Wall Street Journal of PacifiCare's Class B Common Stock ("PacifiCare
Class B Common Stock") during the twenty trading days ending on the
trading date immediately prior to the date of the stockholder meeting at
which the Company's stockholders vote on whether to approve the Company
Merger,
(B) the "Initial Exchange Ratio" shall be .258,
(C) the "Closing Price/Signing Price Ratio" shall be the Average
Pre-Vote Closing Share Price for PacifiCare Class B Common Stock divided
by $68.00,
(D) the "Final Class A/Common Share Ratio" shall be 2,350,000
divided by the Common Outstanding Number (as defined in Section
1.5(a)(vi)(G)), calculated to the nearest .001,
(E) the "Final Class B/Common Share Ratio" shall be the Final
Exchange Ratio minus the Final Class A/Common Share Ratio,
(F) the "Final Exchange Ratio" shall be the product of the Initial
Exchange Ratio times the following multiplier, calculated to the nearest
.001:
<TABLE>
<CAPTION>
CLOSING PRICE/SIGNING PRICE
MULTIPLIER RATIO
- ------------------------------------------------- ------------------------------
<S> <C>
0.8875 above 1.30
One minus ( 1/2 times (the Closing
Price/Signing Price Ratio less 1.075)) 1.075- 1.30
1 .925- 1.075
One plus ( 1/2 times (0.925 less the Closing
Price/Signing Price Ratio)) .70- .925
1.1125 less than .70
</TABLE>
(G) The "Common Outstanding Number" shall be the number of shares of
Company Common Stock issued and outstanding immediately before the
Effective Time plus the number of shares of Company Common Stock subject
to Company Options (as defined below), if any, which at the Effective
Time have the right to receive, upon exercise, the consideration set
forth in Section 1.5(a)(iii) after the Effective Time; PROVIDED, HOWEVER,
that if the Series A Required Vote is not received for the Series A
Amendment, then the "Common Outstanding Number" shall also include the
number of shares of Company Common Stock into which the Company Series A
Preferred Stock outstanding immediately prior to the Effective Time could
be converted, excluding those shares as to which a valid Irrevocable
Election has been made.
(vii) each share of the Common Stock, par value $.01 per share, of
Company Sub outstanding shall be converted into an equal number of shares of
Company Common Stock.
(b) At the Effective Time, by virtue of the PacifiCare Merger (and without
any action on the part of any stockholder of PacifiCare):
(i) any shares of PacifiCare Class A Common Stock or PacifiCare Class B
Common Stock (PacifiCare Class A Common Stock and PacifiCare Class B Common
Stock being sometimes
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<PAGE>
collectively referred to herein as "PacifiCare Common Stock") then held by
PacifiCare or any subsidiary of PacifiCare (or held in PacifiCare's
treasury) shall be canceled and no payment shall be made with respect
thereto;
(ii) any shares of PacifiCare Common Stock then held by the Company,
Company Sub or any other subsidiary of the Company shall be canceled;
(iii) except as provided in clauses (i) and (ii) above and subject to
Section 1.5(c) below, each share of PacifiCare Class A Common Stock then
outstanding shall be converted into the right to receive one share of
Holding Class A Common Stock and each share of PacifiCare Class B Common
Stock then outstanding shall be converted into the right to receive one
share of Holding Class B Common Stock (Holding Class A Common Stock and
Holding Class B Common Stock being sometimes collectively referred to herein
as "Holding Common Stock");
(iv) each share of Common Stock, par value $.001 per share, of Neptune
Sub then outstanding shall be converted into one share of PacifiCare Class A
Common Stock; and
(v) each share of the capital stock of Holding existing immediately
prior to the Effective Time shall be canceled.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock or Company Series A Preferred Stock
or PacifiCare Class A Common Stock or PacifiCare Class B Common Stock are
changed into a different number or class of shares by reason of any stock
dividend, subdivision, reclassification, recapitalization, split-up, combination
or similar transaction, the exchange ratio applicable thereto shall be
appropriately adjusted.
1.6 CLOSING OF THE TRANSFER BOOKS OF THE COMPANY AND PACIFICARE. At the
Effective Time, holders of certificates representing shares of Company Common
Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock and
PacifiCare Class B Common Stock shall cease to have any rights as stockholders
of the Company or PacifiCare, respectively, and the stock transfer books of the
Company and PacifiCare shall be closed with respect to all shares of Company
Common Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of Company Common Stock,
Company Series A Preferred Stock, PacifiCare Class A Common Stock or PacifiCare
Class B Common Stock shall thereafter be made on such stock transfer books. If,
after the Effective Time, a valid certificate previously representing any of
such shares of Company Common Stock, Company Series A Preferred Stock,
PacifiCare Class A Common Stock or PacifiCare Class B Common Stock (an "Old
Stock Certificate") is presented to the Exchange Agent (as defined in Section
1.7) or to the Company or PacifiCare, as applicable, such Old Stock Certificate
shall be canceled and exchanged as provided in Section 1.7.
1.7 EXCHANGE OF CERTIFICATES.
(a) If the Series A Required Vote is received for the Series A Amendment or
if any holder makes an Irrevocable Election, the Holding Restated Certificate of
Incorporation shall establish the terms of Holding's preferred stock, including
the Series A Preferred Stock (the "Holding Series A"). Such Holding Restated
Certificate of Incorporation shall be substantially in the form of Exhibit 1.4
hereto and shall be filed with the Secretary of State of the State of Delaware
prior to the Effective Time. The Holding Series A shall be convertible into
Holding Class B Common Stock upon the terms and conditions, and shall have the
rights, preferences and privileges, set forth in Exhibit 1.4.
(b) Prior to the Closing Date, PacifiCare shall select a reputable bank or
trust company to act as exchange agent in the Merger (the "Exchange Agent").
Promptly after the Effective Time, (i) Holding shall deposit with the Exchange
Agent certificates representing the shares of Holding Class A Common Stock,
Holding Class B Common Stock and Holding Series A, if any, issuable pursuant to
Section 1.5 and (ii) Holding shall deposit cash sufficient to make the payments
called for in Section 1.5 and payments in lieu of fractional shares in
accordance with Section 1.7(e). The shares of Holding Class A
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<PAGE>
Common Stock, Holding Class B Common Stock and Holding Series A, if any, and
cash amounts so deposited with the Exchange Agent, together with any dividends
or distributions received by the Exchange Agent with respect to such shares, are
referred to collectively as the "Exchange Fund."
(c) As soon as practicable after the Effective Time, the Exchange Agent
will mail to the holders of Old Stock Certificates (i) a letter of transmittal
in customary form and containing such provisions as Holding or PacifiCare may
reasonably specify and (ii) instructions for use in effecting the surrender of
Old Stock Certificates in exchange for the consideration set forth in Section
1.5. If the Series A Required Vote is not received for the Series A Amendment,
the Exchange Agent may (i) delay mailing the letter of transmittal for holders
of Company Series A Preferred Stock who have not made a valid Irrevocable
Election until after expiration of the period during which Special Conversion
Rights may be exercised or (ii) include the letter of transmittal with the
Conversion Notice. Upon surrender of an Old Stock Certificate to the Exchange
Agent for exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by the Exchange Agent, the holder
of such Old Stock Certificate shall be entitled to receive in exchange therefor
(i) in the case of holders of Company Common Stock, (A) a check in the amount
calculated pursuant to this Article 1 (subject to required tax withholding) and
(B) certificates representing the number of whole shares of Holding Class A
Common Stock and Holding Class B Common Stock that such holder has the right to
receive pursuant to the provisions of this Article 1; (ii) in the case of
holders of Company Series A Preferred Stock if the Series A Required Vote is
received for the Series A Amendment and as to holders who have made a valid
Irrevocable Election with respect to the shares represented by such Old Stock
Certificate. (A) a check in the amount calculated pursuant to this Article 1
(subject to required tax withholding), and (B) a certificate representing the
whole number of shares of Holding Series A that such holder has the right to
receive pursuant to the provisions of this Article 1; (iii) in the case of
holders of Company Series A Preferred Stock if the Series A Required Vote for
the Series A Amendment is not received and a valid Irrevocable Election has not
been made with respect to such Company Series A Preferred Stock, (A) if Special
Conversion Rights are exercised, the consideration which such holder is entitled
to receive upon exercise thereof (subject to required tax withholding) or (B)
the As-If-Converted Company Merger Consideration (subject to required tax
withholding); and (iv) in the case of holders of PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock, certificates representing the number of
whole shares of Holding Series A and Holding Series B Common Stock that such
holder has the right to receive pursuant to the provisions of Section 1.5. In
each case, the Old Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.7 or by Section 1.5(a)(iv), each
Old Stock Certificate shall be deemed, from and after the Effective Time to
represent only the right to receive upon such surrender the consideration
contemplated by Section 1.5.
(d) No dividends or other distributions declared or made with respect to
Holding Class A Common Stock, Holding Class B Common Stock or, if applicable,
Holding Series A, with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Old Stock Certificate with respect to the shares
of Holding Class A Common Stock, Holding Class B Common Stock and Holding Series
A represented thereby, and no cash payment shall be paid to any such holder,
until such holder surrenders such Old Stock Certificate in accordance with this
Section 1.7 (at which time such holder shall be entitled to receive all such
dividends and distributions and such cash payment).
(e) No certificates or scrip for fractional shares of Holding Class A
Common Stock, Holding Class B Common Stock or, if applicable, Holding Series A
shall be issued, but in lieu thereof, each holder of shares of Company Common
Stock or Company Series A Preferred Stock who would otherwise be entitled to
receive a certificate or scrip for a fraction of a share of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A shall receive
from Holding a cash amount equal to the market value of one share of Holding
Class A Common Stock, Holding Class B Common Stock or Holding Series A, as the
case may be, (based on the closing sales price of one share of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A as quoted on the
Nasdaq National Market or the New York Stock Exchange ("NYSE"), as the case may
be, on the first
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<PAGE>
trading day after the Mergers become effective) multiplied by the fraction of a
share of Holding Class A Common Stock, Holding Class B Common Stock or Holding
Series A to which such holder would otherwise be entitled.
(f) Any portion of the Exchange Fund that remains undistributed to former
stockholders of the Company or PacifiCare as of the date 365 days after the date
on which the Mergers become effective shall be delivered to Holding upon demand,
and any former stockholders of the Company or PacifiCare who have not
theretofore surrendered their Old Stock Certificates in accordance with this
Section 1.7 shall thereafter look only to Holding for payment of their claims
for cash, Holding Class A Common Stock, Holding Class B Common Stock, Holding
Series A and any dividends or distributions with respect thereto.
(g) Neither PacifiCare nor the Company shall be liable to any holder or
former holder of shares of Company Common Stock, PacifiCare Common Stock or
Company Series A Preferred Stock with respect to any shares (or dividends or
distributions with respect thereto) or cash amounts from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
1.8 APPRAISAL RIGHTS. Notwithstanding Section 1.5 above, shares of stock
of the Company or PacifiCare outstanding immediately prior to the Effective Time
and held by a holder who has not voted in favor of the Company Merger or the
PacifiCare Merger, as applicable, and who has exercised appraisal rights in
respect of such shares of the Company or PacifiCare in accordance with the DGCL,
shall not be converted into a right to receive shares or cash or other
consideration otherwise available to such holder (including without limitation
the Talbert Rights) unless such holder fails to perfect or withdraws or
otherwise loses his appraisal rights prior to the Effective Time. Shares of
Company's and PacifiCare's stock in respect of which appraisal rights have been
exercised shall be treated in accordance with Section 262 of the DGCL. If after
the Effective Time such holder fails to perfect or withdraws or otherwise loses
his right to demand payment of the fair value of his shares under the DGCL, such
shares shall be treated as if they had been converted as of the Effective Time
into a right to receive the shares and consideration such holder would have
received if such holder had not exercised his appraisal rights; provided,
however, that, such shares shall not be entitled to a distribution of any
Talbert Rights as provided in Section 4.15, but shall be entitled to receive in
cash the amount equal to the average closing price at which such rights trade on
their first five trading days. The Company shall give PacifiCare prompt notice
of any demands received by the Company for the exercise of appraisal rights with
respect to shares of the Company's Common Stock or the Company's Series A
Preferred Stock and PacifiCare shall have the right to participate in all
negotiation and proceedings with respect to such demands. The Company shall not,
except with the prior written consent of PacifiCare, make any payment with
respect to, or settle or offer to settle, any such demands.
1.9 STOCK SUBJECT TO CONDITIONS. If any shares of Company Common Stock or
PacifiCare Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with the Company or PacifiCare, then (unless such condition
terminates by virtue of the applicable Merger pursuant to the express terms of
such agreement) the shares of Holding Common Stock issued in exchange for such
shares of Company Common Stock or PacifiCare Common Stock, as the case may be,
will also be unvested or subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates evidencing such shares of
Holding Common Stock may accordingly be marked with appropriate legends.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Mergers are
intended to constitute contributions of property in exchange for stock within
the meaning of Section 351(a) of the Code. Neither the Company nor PacifiCare
shall take a position inconsistent with this Section 1.10 on any tax return.
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<PAGE>
1.11 ACCOUNTING CONSEQUENCES. For accounting purposes, the Company Merger
is intended to be treated as a "purchase."
1.12 FURTHER ACTION. If at any time after the Effective Time any further
action is determined by Holding to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Company Surviving Corporation or
PacifiCare Surviving Corporation with the full right, title and possession of
and to all assets, property, rights, privileges, immunities, powers and
franchises of Company Sub and the Company or of Neptune Sub and PacifiCare,
respectively, the officers and directors of the applicable Surviving Corporation
shall be fully authorized (in the name of Company Sub, in the name of the
Company, in the name of Neptune Sub, or in the name of PacifiCare and otherwise)
to take such action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered to PacifiCare on
the date of the Original Agreement and signed by the President of the Company
(the "Company Disclosure Schedule"), the Company represents and warrants to
PacifiCare and Holding, as of the date of the Original Agreement (except to the
extent set forth in Section 5.1(b)) as follows:
2.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) The Company is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. The Company has all necessary
power and authority under applicable corporate law and its organizational
documents to own or lease its properties and to carry on its business as
presently conducted. As of the date of the Original Agreement, the Company
Disclosure Schedule sets forth a list of all of the Company's subsidiaries. For
purposes of this Agreement, a company's "subsidiaries" shall include all
corporations, limited partnerships, joint ventures and other entities in which
such company, directly or indirectly, owns a majority interest.
(b) Each of the Company and its subsidiaries, to the extent conducting
business as a health maintenance organization ("HMO"), insurance company,
third-party administrator or otherwise requiring any form of governmental
licensure, qualification or authorization, is duly licensed, qualified or
authorized and in good standing under the applicable laws and regulations,
respectively, of each state or territory in which the conduct of such business
requires such licensure, qualification or authorization, except where failure
would not have a material adverse effect on the Company or its material
subsidiaries as set forth in Schedule 2.1(b) (the "Company's Material
Subsidiaries"). The conduct of the Company's and its subsidiaries' respective
business is in conformity with all applicable foreign, federal, state or
territorial, local and other governmental and regulatory requirements and the
forms, procedures and practices of the Company and its subsidiaries in the
conduct of their respective business are also in compliance with all such
requirements, to the extent applicable, except where nonconformity or
noncompliance would not constitute a Material Adverse Effect on the Company. For
purposes of this Agreement, "Material Adverse Effect," as it applies to the
Company, means a material adverse effect on the business, operations, financial
condition or assets of the Company and its subsidiaries, taken as a whole, other
than as a result of the performance by the Company of its obligations, or the
exercise by Holding, PacifiCare and Neptune Sub of their rights, under this
Agreement.
(c) As of the date of the Original Agreement, the authorized capital stock
of the Company consisted of: 100,000,000 shares of Company Common Stock, par
value $0.05 per share, of which, as of the date of the Original Agreement,
40,806,165 shares were issued and outstanding; and 40,000,000 shares of
preferred stock, par value $0.05 per share, of which, as of the date of the
Original Agreement, 21,030,345 shares of Company Series A Preferred Stock were
issued and outstanding. All the issued and outstanding shares of Company Common
Stock and Company Series A Preferred Stock are validly issued, fully paid and
nonassessable and free of preemptive rights. As of the date of the Original
Agreement, the Company had issued outstanding options to purchase a total of
3,917,259 shares of
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Company Common Stock (the "Company Options") pursuant to Company's stock option
plans and agreements. The Company has provided PacifiCare a schedule (the
"Option and Restricted Stock Schedule") which sets forth (i) with respect to the
Company Options, the name of each optionee, the number of shares of Company
Common Stock subject to each Company Option, the date of grant and exercise
price and the vesting schedule of each Company Option, (ii) each option plan and
agreement under which the Company Options have been granted, and the Company has
delivered to PacifiCare complete and accurate copies of all such plans, and
(iii) the name of each holder of restricted stock, the date of sale and issuance
of such restricted stock to each such holder, and the applicable restrictions on
such restricted stock. The Company has an Amended and Restated Rights Agreement
dated as of March 28,1994 between Company and American Stock Transfer & Trust
Co., as agent (the "Restated Rights Agreement") under which certain shareholder
rights have been granted. The execution of Voting and Non-Disposition Agreements
by certain stockholders of the Company has not and will not give rise to any
rights or benefits under the Restated Rights Plan. Except as set forth above or
on the Company Disclosure Schedule, as of the date of the Original Agreement,
(i) there were no shares of capital stock of the Company authorized, issued or
outstanding, (ii) there were no outstanding subscriptions, options, warrants,
stock appreciation right plans, calls, rights, convertible securities,
stockholder rights plans (or similar plans commonly referred to as "poison
pills") or other agreements or commitments of any character relating to issued
or unissued capital stock or other securities of the Company or any of its
subsidiaries, or obligating the Company or any other party to issue, transfer or
sell any shares of the capital stock or other securities of the Company or any
of its subsidiaries, and (iii) there were no other outstanding securities
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of the capital stock or other securities of the Company or any of its
subsidiaries or any successor corporation or controlling person of such
successor corporation. The Company is not under any obligation to register under
the Securities Act any of its presently outstanding securities or any securities
that may be subsequently issued.
(d) Each subsidiary of the Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by the Company or another subsidiary of the
Company, free and clear of any liens, claims or encumbrances.
(e) Complete and accurate copies of the Certificate of Incorporation and
Bylaws (or other or comparable charter documents), each as amended to date, of
the Company and each of its subsidiaries are filed as exhibits to the Company
SEC Reports or have been delivered to PacifiCare.
2.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has made available to PacifiCare a complete and accurate
copy of each report, schedule, registration statement and definitive proxy
statement filed by the Company with the Securities and Exchange Commission
("SEC") on or after July 1, 1995 (the "Company SEC Reports"), which are all the
forms, reports and documents required to be filed by the Company with the SEC
since July 1, 1995. The Company SEC Reports (i) complied in all material
respects with the requirements of the Securities Act or the Exchange Act (as
such terms are defined in Section 2.17), as the case may be, at and as of the
times they were filed (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) and (ii) did not at and
as of the time they were filed (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(b) Each of the sets of financial statements (including, in each case, any
related notes thereto) contained in the Company SEC Reports and the Company's
estimated balance sheet as of May 31, 1996 (the "May 31, 1996 Balance Sheet"),
as well as the Company's preliminary interim income statement for the fiscal
year ended June 30, 1996 (the "June 30 Statement") that have been delivered
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to PacifiCare (collectively, the "Past Financial Statements") were prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto) and fairly presents the consolidated financial position of
the Company and its subsidiaries as at the respective dates thereof and the
consolidated results of its operations and cash flows for the periods indicated,
except that the May 31, 1996 Balance Sheet and the June 30 Statement included in
the Past Financial Statements (i) were or are subject to normal year-end audit
adjustments which were not or are not expected to be material in amount and (ii)
do not contain footnotes.
(c) The Company and its subsidiaries have no Liabilities, except for (i)
any Liability which is accrued or fully reserved against in the May 31, 1996
Balance Sheet or disclosed in the notes included in the Past Financial
Statements, (ii) any Liability which was incurred after May 31, 1996 in the
ordinary course of business, (iii) other Liabilities which, individually or in
the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on the Company or (iv) any Liability under or disclosed
in this Agreement. As used herein, "Liabilities" shall mean any liability or
obligation of any kind or nature, secured or unsecured (whether absolute,
accrued, contingent or otherwise, and whether due or to become due).
2.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on the Company, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on the Company or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.2(b)(i), (ii), (v), (vi),
(vii), (ix), (xiv), and (xvi) if it were to occur or be effected between the
date of the Original Agreement and the Effective Time.
2.4 TAX MATTERS.
(a) The Company (or, if applicable, one of its subsidiaries) has filed,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, all material returns, declaration, reports, estimates,
information returns and statements, including information returns and reports
("Returns"), required to be filed under federal, state or territorial, local or
any foreign laws regarding Taxes (as defined below) by the Company and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.
(b) The Company (or, if applicable, one of its subsidiaries) has, within
the time (including any extensions of applicable due dates) and in the manner
prescribed by law, paid all Taxes (as defined below) that are due and payable
except Taxes (i) for which adequate reserves have been established under the
Past Financial Statements, (ii) which are being contested in good faith or (iii)
which involve permanent differences in the aggregate less than $5,000,000 or
involve timing differences in the aggregate less than $10,000,000.
(c) The Company and its subsidiaries have not filed (and will not file
prior to the Closing Date) any consent agreement under Section 341(f) of the
Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of
any subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by the Company or such subsidiaries.
(d) No outstanding debt obligation of the Company is "corporate acquisition
indebtedness" within the meaning of Section 279(b) of the Code.
(e) There are no claims or assessments in excess of $5,000,000, pending or
threatened, by any taxing authority against the Company or any of its
subsidiaries. The Company Disclosure Schedule lists all pending tax audits by
the IRS, all agreements with the IRS to delay the applicable statute of
limitations and all settlements of any tax audits or claims by the IRS since
July 1, 1993.
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(f) For purposes of this Article 2, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, fees, assessments or charges of any
kind whatsoever (together with any interest and any penalties, additions to tax
or additional amounts) imposed by any taxing authority (domestic or foreign)
upon or payable by the Company or any of its subsidiaries.
2.5 CONTRACTS.
(a) COMPANY MATERIAL CONTRACTS. For purposes of this Agreement, "Company
Material Contracts" shall mean (i) each contract, agreement or other arrangement
of or involving the Company or any of its subsidiaries with respect to
indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of the Company or any of its subsidiaries to compete or otherwise
conduct its business in any manner or place which materially affects the Company
or any material subsidiary; (iii) each mortgage, contract, license, lease,
indenture or other agreement of the Company or any of its subsidiaries (A) which
would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (other than any employee benefit plan)
or (B) which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to the
Company and its subsidiaries or their businesses or prospects taken as a whole;
and (iv) for each state in which the Company or its subsidiary conducts business
as an HMO, insurance company, third-party administrator or otherwise requiring
licensure as set forth in Section 2.1(b), (A) the material contracts (based on
gross revenues generated thereunder) with government agencies or employer or
other groups, (B) the material contracts (based on payments made thereunder)
with physician providers of health care services, (C) the material contracts
(based on payments made thereunder) with providers of hospital services, and (D)
the material contracts (based on payments made thereunder) with providers of
non-hospital, non-physician medical services, all as specified in the next
sentence. In California, material contracts are the twenty-five largest
government agency or employer or other group contracts, the twenty-five largest
physician provider contracts, the ten largest hospital contracts and the ten
largest non-physician, non-hospital contracts. In Colorado, material contracts
are the five largest hospital contracts and the ten largest physician provider
contracts. In Arizona, material contracts are the five largest hospital
contracts and five largest physician provider contracts. In Utah, material
contracts are the six largest hospital contracts and nine largest physician
provider contracts. In all other states or territories in which the Company or a
subsidiary conducts business, material contracts are the five largest government
agency or employer or other group contracts, the five largest physician provider
contracts and the five largest hospital contracts. The Company will use its best
efforts to provide a true and complete copy of each Company Material Contract to
PacifiCare within 30 days of the date of the Original Agreement.
All Company Material Contracts, are in full force and effect and are binding
upon Company or its subsidiary, as the case may be, and, to the Company's
knowledge, are binding on the other parties thereto, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws, both state and federal, affecting the enforcement of
creditors' rights or remedies in general from time to time in effect and the
exercise by courts of equity powers. To the Company's knowledge, no material
default by the Company or any of its subsidiaries has occurred under any of the
Company Material Contracts and (A) no material default by any of the other
contracting parties has occurred under any of the Company Material Contracts,
(B) no event has occurred which with the giving of notice or the lapse of time,
or both, would constitute a material default by the Company or any of its
subsidiaries or any of the other contracting parties and (C) there is no other
reason, including without limitation any pending or threatened termination, that
any Company Material Contract will terminate (other than expiration in
accordance with its terms).
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(b) The Company Disclosure Schedule sets forth a list of all claims other
than invoices in the ordinary course of business, or claims made under risk
programs in the ordinary course of business made or, to the Company's knowledge,
threatened against the Company or any of its subsidiaries under each Company
Material Contract presently or heretofore in effect (including claims for back
charges, rebates, price reductions, breaches of product or service warranties or
for product or service liability for products manufactured or sold), to the
extent such claims have had or would reasonably be expected to have (i) for
provider contracts, a cost to the Company or its Material Subsidiaries in excess
of $5,000,000 or (ii) for other Company Material Contracts, a material adverse
effect on the Company or any of its Material Subsidiaries.
(c) Except as listed on the Company Disclosure Schedule, there are no
contracts, agreements or understandings, oral or written, between the Company or
any of its subsidiaries and Talbert that would interfere or conflict with the
transactions contemplated by Section 4.15 hereof.
2.6 EMPLOYEES.
(a) The Company has made available to PacifiCare a list of the top 100 paid
employees of the Company and its subsidiaries and, to the Company's knowledge,
the information relating to each person on such list is correct. The Company
Disclosure Schedule identifies each "employee benefit plan," as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), currently or previously maintained, contributed to or entered into by
the Company or any ERISA Affiliate (as defined below) under which the Company or
any ERISA Affiliate thereof has any present or future obligation or liability
(collectively, the "Company Employee Plans"). For purposes of this Section 2.6,
"ERISA Affiliate" shall mean any entity which is a member of (A) a "controlled
group of corporations," as defined in Section 414(b) of the Code, (B) a group of
entities under "common control," as defined in Section 414(c) of the Code, or
(C) an "affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes Company. Copies of all Company Employee Plans (and, if applicable,
related trust agreements) and all amendments thereto and written interpretations
thereof (including summary plan descriptions) have been made available to
PacifiCare or its counsel, together with the most recent annual report (Form
5500, including, if applicable, Schedule B thereto) prepared in connection with
any such Company Employee Plan. All Company Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as defined in
Section 3(2) of ERISA (collectively, the "Company Pension Plans"), are
identified as such in the Company Disclosure Schedule. All material
contributions due from the Company with respect to any of the Company Employee
Plans have been made as required under ERISA or have been accrued on the
Company's financial statements as of March 31, 1996. Each Company Employee Plan
has been maintained substantially in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including, without limitation, ERISA and the Code, which are applicable to such
Company Employee Plans, except as would not have a Material Adverse Effect on
the Company.
(b) No Company Pension Plan constitutes, or has since the enactment of
ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA.
No Company Pension Plans are subject to Title IV of ERISA. No "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
has occurred with respect to any Company Employee Plan which is covered by Title
I of ERISA which would have a Material Adverse Effect on the Company, excluding
transactions effected pursuant to a statutory or administrative exemption.
Nothing done or omitted to be done by the Company and no transaction or holding
of any asset under or in connection with any Company Employee Plan has or will
make the Company or any officer or director of the Company subject to any
material liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502
of ERISA.
(c) With respect to each Company Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "Company 401(a) Plan"), either (A)
a favorable determination letter has been received from the Internal Revenue
Service ("IRS") as to such qualification under the Code as in effect immediately
after the Tax Reform Act of 1986, (B) an application for a favorable
determination
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letter is pending that was duly filed with the IRS prior to the expiration of
the time within which retroactive amendment relating back to the effective date
of such plan may be made under Section 401(b) of the Code and regulations or IRS
pronouncements thereunder, or (C) the time provided under Section 401(b) of the
Code and regulations or IRS pronouncements thereunder for making retroactive
amendments relating back to the effective date of such plan will not expire
before the date that is sixty (60) days after the date of the Original
Agreement, and there is no reason to believe that any favorable determination
letter will not be received.
(d) No Company Employee Plan provides or ever has provided death, medical
or health benefits (whether or not insured) with respect to current or former
employees after any such employee's retirement or other termination of service
(other than (A) benefit coverage mandated by applicable law, including, without
limitation, coverage provided pursuant to Section 4980B of the Code, (B) death
benefits or retirement benefits under any Company Pension Plan, (C) deferred
compensation benefits accrued as liabilities on the books of the Company, or (D)
benefits the full cost of which is borne by the current or former employee (or
the employee's beneficiary)).
(e) The Company Disclosure Schedule lists each material employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, severance
benefits, disability benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
for employees, consultants or directors which (A) is not a Company Employee
Plan, (B) is entered into, maintained or contributed to, as the case may be, by
the Company or any subsidiary and (C) covers any employee or former employee of
the Company. Such contracts, plans and arrangements as are described in this
Section 2.6(e) are herein referred to collectively as the "Company Benefit
Arrangements." Each Company Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Company Benefit Arrangement. The Company has delivered to PacifiCare or its
counsel a complete and correct copy or description of each contract, plan or
arrangement that constitutes a Company Benefit Arrangement.
(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by the Company relating to, or change in employee
participation or coverage under, any Company Employee Plan or Company Benefit
Arrangement that would increase materially the expense of maintaining such
Company Employee Plan or Company Benefit Arrangement above the level of the
expense incurred in respect thereof for the year ended June 30, 1996.
(g) The Company has provided, or will have provided prior to the Closing to
individuals entitled thereto all required notices and coverage pursuant to
Section 4980B of the Code and the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended ("COBRA"), with respect to any "qualifying event" (as
defined in Section 4980B(f)(3) of the Code) occurring prior to and including the
Closing, and no material tax payable on account of Section 4980B of the Code has
been incurred with respect to any current or former employees (or their
beneficiaries) of the Company.
(h) Neither the Company nor any of its subsidiaries is subject to any
collective bargaining agreement with respect to any of its employees, has any
material current labor problems or disputes, and, to its knowledge, has been
subject to any effort to organize any employees during the last 24 months. The
Company has good labor relations and has no knowledge of any facts indicating
that the consummation of the transactions contemplated hereby will have a
material adverse effect on labor relations.
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2.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except as set forth in the Company Disclosure Schedule, there is, to
the Company's knowledge, no examination, audit, review, investigation,
arbitration, suit, litigation or other proceeding (a "Proceeding") pending or
threatened by or before any court or Governmental Authority (as defined in
Section 2.17) to which the Company or any of its subsidiaries is a party or
otherwise involved or to which any of the business or assets of the Company or
any of its subsidiaries is subject which has or would reasonably be expected to
have (i) a potential liability in excess of $5,000,000 or (ii) a material
adverse effect on Company, or any Company Material Subsidiary, whether or not
covered by insurance.
(b) Neither the Company nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost in excess
of $5,000,000, or (ii) to affect materially the operations of the Company or any
Company Material Subsidiary.
(c) Except as set forth on the Company Disclosure Schedule or in Company
SEC Reports or other public filings with the SEC, neither the Company nor any of
its subsidiaries is or has at any time since July 1, 1993 (July 1, 1990 in the
case of any violation involving any Governmental Authority) been in violation
of, or delinquent in respect to, any decree, order or arbitration award or law,
statute or regulation of, or agreement with, or any license or permit from, any
Governmental Authority to which any of its properties, assets, personnel or
business activities are subject or to which any of them is subject, including
laws, rules and regulations relating to the environment, insurance companies,
HMOs, third-party administrators or other businesses required to be licensed
under Section 2.1(b), occupational health and safety, employee benefits, wages,
workplace safety, equal employment opportunity and race, religious, sex and age
discrimination which has had or would reasonably be expected have a Material
Adverse Effect on the Company.
2.8 PROPERTIES.
(a) The Company and its subsidiaries have insurance policies, commercially
adequate to protect against the risks so insured. The Company has made available
copies of all such policies to PacifiCare or its counsel. Neither the Company
nor any of its subsidiaries has done anything by way of action or inaction which
might invalidate any of such policies in whole or in part, except in the
ordinary course of business.
(b) The Company and its subsidiaries own and hold title to all real and
other property reflected in the Company SEC Reports as owned by the Company or
any of its subsidiaries, as the case may be.
2.9 DISCLOSURE.
(a) The copies of all documents furnished by the Company pursuant to the
terms of this Agreement are complete and accurate copies of the originals.
(b) During the past 12 months, the Company has timely filed all required
forms, reports and documents required to be filed with the SEC and the National
Association of Securities Dealers (the "NASD").
(c) None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the registration statement on Form
S-4 to be filed with the SEC by Holding in connection with the issuance of the
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
in the Mergers and the votes of the Company's and PacifiCare's stockholders (the
"S-4 Registration Statement") will, at the time the S-4 Registration Statement
is filed with the SEC or at the time the S-4 Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. None of the information supplied or
to be supplied by the Company for inclusion or incorporation by reference in the
Prospectus/Proxy Statement filed as a part of the S-4
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Registration Statement (the "Prospectus/Proxy Statement"), will, at the time
mailed to the stockholders of the Company, at the time of the Company
Stockholders' Meeting (as defined in Section 4.6) and as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
2.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between Company and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since July 1, 1995, and for
which disclosure is required under Item 404 of Regulation S-K promulgated by the
SEC is set forth in the Company SEC Reports or in the Company Disclosure
Schedule.
2.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding Company Common Stock is necessary to adopt and approve this
Agreement and the Company Merger (the "Company Required Vote"). The affirmative
vote of the holders of a majority of the outstanding Common Stock and of 66 2/3%
of the outstanding Company Series A Preferred Stock (the "Series A Required
Vote") is necessary to adopt and approve an amendment (the "Series A Amendment")
to the Company's Restated and Amended Certificate of Incorporation (the "Company
Restated Certificate of Incorporation") providing for the payments in the first
sentence of Section 1.5(a)(iv) in lieu of those currently required by the
Certificate of Designation.
2.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date of the Original
Agreement and at all times on or prior to the Effective Date, Section 203 of the
DGCL was, and shall be, inapplicable to the Company Merger.
2.13 COMPANY ACTION. The Board of Directors of the Company (at a meeting
duly called and held) has (a) unanimously determined that the Company Merger and
the Series A Amendment are advisable and fair and in the best interests of the
Company and its stockholders, (b) unanimously approved this Agreement, the
Series A Amendment and the Company Merger in accordance with the provisions of
Sections 242 and 251 of the DGCL, (c) unanimously recommended the adoption and
approval of this Agreement and the Company Merger by the holders of Company
Common Stock and directed that the Company Merger be submitted for consideration
by the Company's stockholders at the Company Stockholders' Meeting, (d) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the
Company Merger, (e) unanimously recommended the adoption and approval of the
Series A Amendment by the holders of Company Common Stock and of Company Series
A Preferred Stock and directed that the Series A Amendment be submitted for
consideration by the Company's stockholders at the Company Stockholders'
Meeting, and (f) taken all necessary steps to ensure that the Company Merger and
related transactions, including, without limitation, the execution of any of the
Voting and Non-Distribution Agreements, will not result in the distribution or
exercisability of any rights under the Restated Rights Agreement.
2.14 FAIRNESS OPINION. The Company has received the written opinion of
Merrill Lynch & Co., financial advisor to the Company, dated August 4, 1996, to
the effect that the consideration to be received by the holders of the Company's
Common Stock is fair to such holders from a financial point of view.
2.15 FINANCIAL ADVISOR. The Company represents and warrants that except
for Merrill Lynch & Co., no broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission payable by the Company or its
subsidiaries in connection with the Company Merger, except a fee not to exceed
$400,000 payable with respect to the proposed Talbert separation described in
Section 4.15 below.
2.16 ENFORCEABILITY. The Company has full corporate power and authority to
execute, deliver and perform each of the Transactional Agreements to which it is
or will become a party. The execution
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and delivery of said Transactional Agreements have been duly and validly
authorized by the Board of Directors of the Company, and no other corporate
proceedings on the part of the Company are necessary for the Company to
authorize any of the Transactional Agreements, and no such proceedings (other
than the approval of the Company's stockholders) are necessary to enable the
Company to perform or consummate any of the transactions contemplated by this
Agreement. Said Transactional Agreements (a) have been (or will be) duly
executed and delivered by duly authorized officers of the Company and (b)
constitute (or, when executed by the Company, will constitute) legal, valid and
binding obligations of the Company enforceable against it in accordance with
their terms (except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and the exercise by courts of equity powers). For
purposes of this Article 2, "Transactional Agreements" means this Agreement and
the related Agreement of Merger for the Company Merger.
2.17 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act of 1933, as amended (the "Securities Act"), state securities or blue sky
laws, the DGCL, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, and third-party administrators or other businesses operated by the Company
or its subsidiaries requiring licensure, qualification or authorization, there
is no requirement applicable to the Company or any of its subsidiaries to make
any filing with, or to obtain any permit, authorization, consent or approval of,
any federal, state or territorial, local or foreign governmental or regulatory
agency, department, commission or other authority (a "Governmental Authority"),
except for such filings, permits, authorizations, consents or approvals which,
if not made or obtained, would not have a Material Adverse Effect on the
Company. Neither the execution and delivery of this Agreement by the Company nor
the consummation by the Company of any of the transactions contemplated by this
Agreement will (a) conflict with, violate or result in any breach of any
provision of the Certificate of Incorporation or Bylaws (or comparable charter
documents) of the Company or Talbert, (b) result in a material default (or with
notice or lapse of time or both would result in a default) under, or materially
impair the rights of the Company or any of its subsidiaries or materially alter
the rights or obligations of any third party under, or require the Company or
any of its subsidiaries to make any material payment or become subject to any
material liability to any third party under, or give rise to any right of
termination, amendment, cancellation, acceleration, repurchase, put or call
under, any of the terms, conditions or provisions of any Company Material
Contract, (c) result in the creation of any material (individually or in the
aggregate) liens, charges or encumbrances on any of the material assets of the
Company or any of its subsidiaries or (d) conflict with or violate any law,
statute, rule, regulation, judgment, order, writ, injunction, decree or
arbitration award applicable to the Company or any of its subsidiaries or any of
their material assets, which conflict or violation has had or would reasonably
be expected to have a Material Adverse Effect on the Company.
2.18 RESERVES. The reserves established by the Company and its
subsidiaries in the Company SEC Reports, or in any financial statement or
balance sheet contained in any document filed with the SEC after the date of the
Original Agreement, for statutorily required reserves and for incurred but not
yet paid claims for, or relating to, medical treatment or similar claims (i) are
computed in accordance with presently accepted industry standards consistently
applied, (ii) meet the requirements of any law, rule or regulation applicable to
such reserves, (iii) are computed on the basis of assumptions consistent with
those used in computing the corresponding reserves in the prior fiscal year, and
(iv) include provision for all actuarial reserves and related items which ought
to be established in accordance with applicable laws or regulations and prudent
industry practices. As of the date of the Original Agreement, neither the
Company nor its senior management was aware of any fact or circumstance which
would necessitate, in the good faith application of prudent reserving practices
and policies, any material adverse change in statutorily required reserves or
reserves for such incurred but
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not yet paid claims above that reflected in the most recent balance sheet
included in the Company SEC Reports (other than increases consistent with past
experience resulting from increases in enrollment with respect to the Company's
subsidiaries' services).
2.19 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
the Original Agreement, other than as disclosed in the Company Disclosure
Schedule, no audit or investigation of the Company or any of its subsidiaries
which may be expected to have a Material Adverse Effect on the Company was
pending before, or to the Company's knowledge had been threatened by, any
governmental or regulatory authority of the United States (other than the
Internal Revenue Service), the several States or territories (other than state
taxing authorities) or any foreign jurisdiction. There are no pending or
anticipated proceedings which may be expected to have a Material Adverse Effect
on the Company by or on behalf or in the name of the state or federal government
or any governmental agency relating to the imposition of civil monetary
penalties, exclusion or debarment from governmental programs or other
administrative sanctions.
2.20 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 2.20, the following definitions apply.
"Environmental Claim" means any claim, action, cause of action, or written
notice by any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by the Company or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.
(b) The Company and its subsidiaries are in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof,
except where the costs of any failure to comply will not exceed, in the
aggregate, $5,000,000. The Company and its subsidiaries have not received any
written communication, whether from a Governmental Authority, citizens group,
employee or otherwise, that alleges that they are not in such full compliance in
all material respects, and, to the knowledge of the Company, there are no
circumstances that may prevent or interfere with such full compliance in all
material respects in the future. To the knowledge of the Company, no current or
prior owner of any property owned or leased by the Company and its subsidiaries
has received any written communication, whether from a Governmental Authority,
citizens group, employee or otherwise, that alleges that the Company and its
subsidiaries is not in such compliance in all material respects.
(c) There is no material Environmental Claim pending or, to the knowledge
of the Company, threatened against the Company or a subsidiary or against any
person or entity whose liability for any Environmental Claim the Company and its
subsidiaries have or may have retained or assumed either contractually or by
operation of law, which Environmental Claim would reasonably be expected to have
a Material Adverse Effect on the Company.
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(d) To the knowledge of the Company, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could reasonably form the basis for any
material Environmental Claim against the Company or its subsidiaries or, to the
knowledge of the Company, against any person or entity whose liability for any
Environmental Claim the Company or a subsidiary has or may have retained or
assumed either contractually or by operation of law, which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on the Company.
2.21 INTELLECTUAL PROPERTY.
(a) To the knowledge of the Company, all patents, registered trademarks and
registered copyrights of the Company are valid and enforceable. There are no
interference, opposition or cancellation proceedings or infringement suits
pending or, to the knowledge of the Company or its subsidiaries, threatened,
with respect to any of the patents, registered trademarks or copyrights. The
Company or its subsidiaries have not been advised, nor has either any reason to
believe that the Company or a subsidiary is infringing a patent, trademark or
copyright held by another person.
(b) The Company and its subsidiaries own or have in their possession
certain information of the sort typically considered as trade secrets in the
healthcare industry (the "Trade Secrets"). The Company and its subsidiaries have
taken commercially reasonable precautions to maintain Trade Secrets in
confidence and to prevent their disclosure to unauthorized persons. To the
knowledge of the Company, the Company and its subsidiaries have good title and
an absolute (though not necessarily exclusive) right to use all Trade Secrets
and the use of the Trade Secrets does not infringe the rights of any third
party.
(c) Except as set forth in the Company Disclosure Schedule, to the
knowledge of the Company and its subsidiaries, no person is infringing upon any
patent, trademark or any copyright or is misappropriating any Trade Secret owned
by the Company or a subsidiary. To the best of the Company or its subsidiaries'
knowledge, none of the processes or know-how used by the Company or its
subsidiaries infringes any patent, trademark or copyright of any third party. To
the best of the Company or its subsidiaries' knowledge, there is no intellectual
property, in any form, necessary for the operation of the Company and its
subsidiaries' business as currently conducted which the Company or a subsidiary
does not currently own or license on commercially reasonable terms.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING
Except as set forth in the disclosure schedule delivered to Company on the
date of the Original Agreement and signed by the Presidents of PacifiCare and
Holding, respectively (collectively, the "PacifiCare Disclosure Schedule"),
PacifiCare and Holding represent and warrant to the Company, as of the date of
the Original Agreement (except to the extent set forth in Section 6.1(b)) as
follows:
3.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) PacifiCare is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. Holding is a corporation duly
organized, existing and in good standing under the laws of the State of
Delaware. Neptune Sub and Company Sub are corporations duly organized, existing
and in good standing under the laws of the State of Delaware. Each of
PacifiCare, Holding, Neptune Sub and Company Sub has all necessary power and
authority under applicable corporate law and its organizational documents to own
or lease its properties and to carry on its business as presently conducted. As
of the date of the Original Agreement, the PacifiCare Disclosure Schedule set
forth a list of all of PacifiCare's subsidiaries. As of the date of the Original
Agreement, other than PacifiCare's subsidiaries, neither PacifiCare nor any of
its subsidiaries owned or held, directly or indirectly, any debt or equity
securities of, or had any other interest in, any corporation, partnership,
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joint venture or other entity, except publicly traded debt or equity which in
any event represented less than 1% of such outstanding securities, and neither
PacifiCare nor any of its subsidiaries had entered into any agreement to acquire
any such interest.
(b) Each of PacifiCare and its subsidiaries, to the extent conducting
business as an HMO, insurance company, third-party administrator or other entity
requiring any form of governmental licensure, qualification or authorization is
duly licensed, qualified or authorized and in good standing under the applicable
laws and regulations, respectively, of each state or territory in which the
conduct of such business requires such licensure, qualification or
authorization, except where failure would not have a material adverse effect on
PacifiCare or on any of its material subsidiaries as set forth in the PacifiCare
Disclosure Schedule ("PacifiCare Material Subsidiaries"). The conduct of
PacifiCare's and its subsidiaries' respective business is in conformity with all
applicable foreign, federal, state or territorial, local and other governmental
and regulatory requirements and the forms, procedures and practices of
PacifiCare and its subsidiaries in the conduct of their respective businesses
are also in compliance with all such requirements, to the extent applicable,
except where nonconformity or noncompliance would not constitute a Material
Adverse Effect on PacifiCare. For purposes of this Agreement, "Material Adverse
Effect," as it applies to PacifiCare, means a material adverse effect on the
business, operations, financial condition or assets of PacifiCare and its
subsidiaries, taken as a whole, other than as a result of the performance by
PacifiCare or Holding of their obligations, or the exercise by the Company of
its rights, under this Agreement.
(c) As of the date of the Original Agreement, the authorized capital stock
of PacifiCare consisted of: 100,000,000 shares of PacifiCare Class A Common
Stock and 100,000,000 shares of PacifiCare Class B Common Stock of which, as of
the date of the Original Agreement, 12,370,758 shares of PacifiCare Class A
Common Stock and 18,812,799 of PacifiCare Class B Common Stock were issued and
outstanding; and 20,000,000 shares of preferred stock, par value $1.00 per
share, of which, as of the date of the Original Agreement, no shares of were
issued and outstanding. All the issued and outstanding shares of PacifiCare
Class A Common Stock and PacifiCare Class B Common Stock are validly issued,
fully paid and nonassessable and free of preemptive rights. As of the date of
the Original Agreement, PacifiCare had issued outstanding options to purchase a
total of 317,734 shares of PacifiCare Class A Common Stock and 1,742,939 shares
of PacifiCare Class B Common Stock (the "PacifiCare Options") pursuant to
PacifiCare's stock option plans and agreements. Except as set forth above, as of
the date of the Original Agreement, (i) there were no shares of capital stock of
PacifiCare authorized, issued or outstanding, (ii) there were no outstanding
subscriptions, options, warrants, stock appreciation right plans, calls, rights,
convertible securities, stockholder rights plans (or similar plans commonly
referred to as "poison pills") or other agreements or commitments of any
character relating to issued or unissued capital stock or other securities of
PacifiCare or any of its subsidiaries, or obligating PacifiCare or any other
party to issue, transfer or sell any shares of the capital stock or other
securities of PacifiCare or any of its subsidiaries, and (iii) there were no
other outstanding securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of the capital stock or other securities
of PacifiCare or any of its subsidiaries or any successor corporation or
controlling person of such successor corporation. The authorized capital of
Holding, Neptune Sub and Company Sub each consists of 1,000 shares of Common
Stock, par value $.001 per share, of which; in the case of Holding, 200 shares
are issued and outstanding and are held beneficially and of record by
PacifiCare, while in the case of Neptune Sub and Company Sub, 100 shares of
which are issued and outstanding are held beneficially and of record by Holding.
(d) Each subsidiary of PacifiCare is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by PacifiCare or another subsidiary of
PacifiCare, free and clear of any liens, claims or encumbrances.
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(e) Complete and accurate copies of the Certificate of Incorporation and
Bylaws (or other or comparable charter documents), each as amended to date, of
PacifiCare and each of its subsidiaries are filed as exhibits to PacifiCare SEC
Reports or have been made available to the Company.
3.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) PacifiCare has made available to the Company a complete and accurate
copy of each report, schedule, registration statement and definitive proxy
statement filed by PacifiCare with the SEC on or after July 1, 1995 (the
"PacifiCare SEC Reports"), which are all the forms, reports and documents
required to be filed by PacifiCare with the SEC since July 1, 1995. The
PacifiCare SEC Reports (i) complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, at
and as of the times they were filed (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) and (ii)
did not at and as of the time they were filed (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Each of the sets of financial statements (including, in each case, any
related notes thereto) contained in the PacifiCare SEC Reports and the set of
PacifiCare's unaudited interim financial statements as of and for the nine-month
period ended June 30, 1996 including PacifiCare's unaudited consolidated balance
sheet as of June 30, 1996 (the "PacifiCare June 30, 1996 Balance Sheet") that
are attached to the PacifiCare Disclosure Schedule (collectively, the
"PacifiCare Past Financial Statements") were prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of PacifiCare and its subsidiaries as at the respective dates thereof
and the consolidated results of its operations and cash flows for the periods
indicated, except that (i) the quarterly unaudited interim financial statements
included in the PacifiCare Past Financial Statements were or are subject to
normal year-end audit adjustments and (ii) the unaudited interim financial
statements as of and for the nine-month period ended June 30, 1996 included in
the PacifiCare Past Financial Statements are subject to normal year-end audit
adjustments and do not contain footnotes.
(c) PacifiCare and its subsidiaries have no Liabilities, except for (i) any
Liability which is accrued or fully reserved against in the PacifiCare June 30,
1996 Balance Sheet or disclosed in the notes included in the PacifiCare Past
Financial Statements, (ii) any Liability which was incurred after June 30, 1996
in the ordinary course of business, (iii) other Liabilities which, individually
or in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on PacifiCare or (iv) any Liability under or disclosed
in this Agreement.
3.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on PacifiCare, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.3(a), 4.3(b), 4.3(c),
4.3(d), 4.3(e), 4.3(f), 4.3(g) or 4.3(h), if it were to occur or be effected
between the date of the Original Agreement and the Effective Time.
3.4 TAX MATTERS.
(a) PacifiCare (or, if applicable, one of its subsidiaries) has filed,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, all Returns, required to be filed under federal,
state, local or any foreign laws regarding Taxes by PacifiCare and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.
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(b) PacifiCare (or, if applicable, one of its subsidiaries) has, within the
time (including any extensions of applicable due dates) and in the manner
prescribed by law, paid all Taxes (as defined below) that are due and payable,
except Taxes (i) for which adequate reserves have been established under the
Past Financial Statements, (ii) which are being contested in good faith or (iii)
which involve permanent differences in the aggregate less than $5,000,000 or
involve timing differences in the aggregate less than $10,000,000.
(c) PacifiCare and its subsidiaries have not filed (and will not file prior
to the Closing Date) any consent agreement under Section 341(f) of the Code or
agreed to have Section 341(f)(2) of the Code apply to any disposition of the
subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by PacifiCare or any of its subsidiaries.
(d) No outstanding debt obligation of PacifiCare is "corporate acquisition
indebtedness" within the meaning of Section 279(b) of the Code.
(e) For purposes of this Article 3, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, fees, assessments or charges of any
kind whatsoever (together with any interest and any penalties, additions to tax
or additional amounts) imposed by any taxing authority (domestic or foreign)
upon or payable by PacifiCare or any of its subsidiaries.
3.5 CONTRACTS.
(a) PACIFICARE MATERIAL CONTRACTS. For purposes of this Agreement,
"PacifiCare Material Contracts" shall mean (i) each contract, agreement or other
arrangement of or involving PacifiCare or any of its subsidiaries with respect
to indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of PacifiCare or any of its subsidiaries to compete or otherwise conduct
its business in any manner or place which materially affects PacifiCare or any
PacifiCare Material Subsidiary; (iii) each mortgage, contract, license, lease,
indenture or other agreement of PacifiCare or any of its subsidiaries (A) which
would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (other than any employee benefit plan)
or (B) which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to
PacifiCare and its subsidiaries or their businesses or prospects taken as a
whole; and (iv) for each state in which PacifiCare or its subsidiaries conducts
business as an HMO, insurance company, third-party administrator or otherwise
requiring licensure as set forth in Section 3.1(b), (A) the contracts with
employer or other groups or government agencies, (B) the contracts with
physician providers of health care services, (C) the contracts with providers of
hospital services and (D) the contracts with providers of non-hospital,
non-physician medical services, which are material to PacifiCare and its
subsidiaries or their businesses or prospects taken as a whole.
All PacifiCare Material Contracts are in full force and effect and are
binding upon PacifiCare and, to PacifiCare's knowledge, are binding on the other
parties thereto, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and the exercise by courts of equity powers. To
PacifiCare's knowledge, no material default by PacifiCare or any of its
subsidiaries has occurred under any of the PacifiCare Material Contracts and (A)
no material default by any of the other contracting parties has occurred under
any of the PacifiCare Material Contracts and (B) no event has occurred which
with the giving of notice or the lapse of time, or both, would constitute a
material default by PacifiCare or any of its subsidiaries or any of the other
contracting parties.
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(b) The PacifiCare Disclosure Schedule sets forth a list of all claims,
other than invoices in the ordinary course of business, and claims made under
risk programs in the ordinary course of business made or, to PacifiCare's
knowledge, threatened against PacifiCare or any of its subsidiaries under each
PacifiCare Material Contract presently or heretofore in effect (including claims
for back charges, rebates, price reductions, breaches of product or service
warranties or for product or service liability for products manufactured or
sold), to the extent such claims have had or would reasonably be expected to
have a cost to PacifiCare or its subsidiaries in excess of $5,000,000 or have a
material adverse effect on PacifiCare or any PacifiCare Material Subsidiaries.
3.6 EMPLOYEES.
(a) "PacifiCare Employee Plan" means each "employee benefit plan," as
defined in Section 3(3) of ERISA, currently or previously maintained,
contributed to or entered into by PacifiCare or any ERISA Affiliate (as defined
below) under which PacifiCare or any ERISA Affiliate thereof has any present or
future obligation or liability. For purposes of this Section 3.6, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled group of
corporations," as defined in Section 414(b) of the Code, (B) a group of entities
under "common control," as defined in Section 414(c) of the Code, or (C) an
"affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes PacifiCare. All material contributions due from PacifiCare with respect
to any of the PacifiCare Employee Plans have been made as required under ERISA
or have been accrued on PacifiCare's financial statements as of June 30, 1996.
Each PacifiCare Employee Plan has been maintained substantially in compliance
with its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations, including, without limitation, ERISA and the
Code, which are applicable to such PacifiCare Employee Plans, except as would
not have a Material Adverse Effect on PacifiCare.
(b) No PacifiCare Pension Plan constitutes, or has since the enactment of
ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA.
No PacifiCare Pension Plans are subject to Title IV of ERISA. No "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
has occurred with respect to any PacifiCare Employee Plan which is covered by
Title I of ERISA which would have a Material Adverse Effect on PacifiCare,
excluding transactions effected pursuant to a statutory or administrative
exemption. Nothing done or omitted to be done by PacifiCare and no transaction
or holding of any asset under or in connection with any PacifiCare Employee Plan
has or will make PacifiCare or any officer or director of PacifiCare subject to
any material liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502
of ERISA.
(c) With respect to each PacifiCare Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "PacifiCare 401(a) Plan"), either
(A) a favorable determination letter has been received from the IRS as to such
qualification under the Code as in effect immediately after the Tax Reform Act
of 1986, (B) an application for a favorable determination letter is pending that
was duly filed with the IRS prior to the expiration of the time within which
retroactive amendment relating back to the effective date of such plan may be
made under Section 401(b) of the Code and regulations or IRS pronouncements
thereunder, or (C) the time provided under Section 401(b) of the Code and
regulations or IRS pronouncements thereunder for making retroactive amendments
relating back to the effective date of such plan will not expire before the date
that is sixty (60) days after the date hereof, and there is no reason to believe
that any favorable determination letter will not be received.
(d) PacifiCare has provided, or will have provided prior to the Closing (as
defined in Section 1.3), to individuals entitled thereto all required notices
and coverage pursuant to Section 4980B of the Code and COBRA, with respect to
any "qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring
prior to and including the Closing, and no material tax payable on account of
Section 4980B of the Code has been incurred with respect to any current or
former employees (or their beneficiaries) of PacifiCare.
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3.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except as set forth in the PacifiCare Disclosure Schedule, there is, to
PacifiCare's knowledge, no Proceeding pending or threatened by or before any
court or Governmental Authority in which PacifiCare or any of its subsidiaries
is a party or otherwise involved or to which any of the business or assets of
PacifiCare or any of its subsidiaries is subject, which has or would reasonably
be expected to have (i) a potential liability in excess of $5,000,000 or (ii) a
material adverse effect on PacifiCare or any PacifiCare Material Subsidiary.
(b) Neither PacifiCare nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost to
PacifiCare or its subsidiaries in excess of $5,000,000 or (ii) to affect
materially the operations of PacifiCare or any PacifiCare Material Subsidiary.
(c) Except as set forth on the PacifiCare Disclosure Schedule or in
PacifiCare SEC Reports or other public filings with the SEC, neither PacifiCare
nor any of its subsidiaries is or has at any time since October 1, 1993, been in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law, statute or regulation of, or agreement with, or any license or
permit from, any Governmental Authority to which any of its properties, assets,
personnel or business activities are subject or to which any of them is subject,
including laws, rules and regulations relating to the environment, insurance
companies, HMOs, third-party administrators or other businesses required to be
licensed under Section 3.1(b), occupational health and safety, employee
benefits, wages, workplace safety, equal employment opportunity and race,
religious, sex and age discrimination which has had or would reasonably be
expected (i) to have a potential cost to PacifiCare or its subsidiaries in
excess of $5,000,000 or (ii) to affect materially the operations of PacifiCare
or any PacifiCare Material Subsidiary.
3.8 PROPERTIES.
(a) PacifiCare and its subsidiaries have insurance policies adequate to
protect them against the risks so insured. Neither PacifiCare nor any of its
subsidiaries has done anything by way of action or inaction which might
invalidate any of such policies in whole or in part.
(b) PacifiCare and its subsidiaries own and hold title to all real and
other property reflected in the PacifiCare SEC Reports as owned by PacifiCare or
any of its subsidiaries, as the case may be.
3.9 DISCLOSURE.
(a) The copies of all documents furnished by PacifiCare pursuant to the
terms of this Agreement are complete and accurate copies of the originals.
(b) During the past 12 months, PacifiCare has timely filed all required
forms, reports and documents required to be filed with the SEC and the NASD.
(c) None of the information supplied or to be supplied by PacifiCare for
inclusion or incorporation by reference in the S-4 Registration Statement will,
at the time the S-4 Registration Statement is filed with the SEC or at the time
the S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. None of the information supplied or to be supplied by PacifiCare for
inclusion or incorporation by reference in the Prospectus/Proxy Statement, will,
at the time mailed to the stockholders of PacifiCare, at the time of the
PacifiCare Stockholders' Meeting (as defined in Section 4.6) and as of the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
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3.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between PacifiCare and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since October 1, 1995, and for
which disclosure is required by Item 404 of Regulation S-K promulgated by the
SEC, is set forth in the PacifiCare SEC Reports or the PacifiCare Disclosure
Schedule.
3.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding PacifiCare Class A Common Stock is the only vote of the holders
of any class or series of PacifiCare's capital stock necessary to adopt and
approve this Agreement and the PacifiCare Merger, while the affirmative vote of
the holders of a majority of the outstanding PacifiCare Class A Common Stock and
of the holders of a majority of the outstanding PacifiCare Class B Common Stock,
each voting as a separate class, is necessary to adopt and approve an amendment
to the Certificate of Incorporation of PacifiCare to exempt the PacifiCare
Merger from a requirement of PacifiCare's Certificate of Incorporation that, in
the event of a merger or consolidation of PacifiCare, the holders of PacifiCare
Class B Common Stock shall receive the same consideration per share as the per
share consideration for the PacifiCare Class A Common Stock in such merger or
consolidation (the "PacifiCare Amendment") (such votes together being referred
to herein as the "Required PacifiCare Vote").
3.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date of the Original
Agreement and at all times on or prior to the Effective Date, Section 203 of the
DGCL was, and shall be, inapplicable to the PacifiCare Merger.
3.13 PACIFICARE ACTION. The Board of Directors of PacifiCare (at a meeting
duly called and held) has (a) determined that the PacifiCare Merger is advisable
and fair and in the best interests of PacifiCare and its stockholders, (b)
approved this Agreement, the PacifiCare Amendment and the PacifiCare Merger in
accordance with the provisions of Sections 242 and 251 of the DGCL, (c)
recommended the adoption and approval of this Agreement and the PacifiCare
Merger by the holders of PacifiCare Class A Common Stock and directed that the
PacifiCare Merger be submitted for consideration by PacifiCare's stockholders at
the PacifiCare Stockholders' Meeting, (d) recommended the adoption and approval
of the PacifiCare Amendment by the holders of PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock and directed that the PacifiCare Amendment
be submitted for consideration by PacifiCare's stockholders at the PacifiCare
Stockholders' meeting, (e) taken all necessary steps to render Section 203 of
the DGCL inapplicable to the PacifiCare Merger and (f) as sole stockholder of
Holding, Neptune Sub and Company Sub, approved this Agreement and the Merger in
accordance with Section 251 of the DGCL.
3.14 ACTIONS BY HOLDING, NEPTUNE SUB AND COMPANY SUB. The Boards of
Directors of Holding, Neptune Sub and Company Sub (at meetings duly called and
held or by unanimous written consents) have respectively (a) determined that the
Mergers are advisable and fair and in the best interests of Holding, Neptune Sub
and Company Sub, (b) unanimously approved this Agreement and the Mergers in
accordance with the provisions of Section 251 of the DGCL, (c) taken all
necessary steps to render Section 203 of the DGCL inapplicable to the Mergers
and the other transaction contemplated herein. Holding, as the sole stockholder
of Neptune Sub and Company Sub, has also approved or will also approve this
Agreement and the Mergers.
3.15 FAIRNESS OPINION. PacifiCare and its Board of Directors has received
from Dillon, Read & Co., financial advisors to PacifiCare, an opinion dated
August 4, 1996, to the effect that the consideration to be paid to the
stockholders of PacifiCare in the PacifiCare Merger is fair, from a financial
point of view, to PacifiCare and its stockholders.
3.16 FINANCIAL ADVISOR. PacifiCare represents and warrants that except for
Dillon, Read & Co., no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the PacifiCare
Merger or any of the other transactions contemplated in this Agreement based
upon arrangements made by or on behalf of PacifiCare or any of its subsidiaries.
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3.17 ENFORCEABILITY. Each of PacifiCare and Holding has full corporate
power and authority to execute, deliver and perform each of the Transactional
Agreements to which it is or will become a party. The execution and delivery of
said Transactional Agreements have been duly and validly authorized by the
Boards of Directors of PacifiCare and Holding, and no other corporate
proceedings on the part of PacifiCare and Holding are necessary for PacifiCare
and Holding to authorize any of the Transactional Agreements, and no such
proceedings (other than the approval of PacifiCare's and Holding stockholders)
are necessary to enable PacifiCare and Holding to perform or consummate any of
the transactions contemplated by this Agreement. Said Transactional Agreements
(a) have been (or will be) duly executed and delivered by duly authorized
officers of PacifiCare and Holding and (b) constitute (or, when executed by
PacifiCare and Holding, will constitute) legal, valid and binding obligations of
PacifiCare and Holding enforceable against it in accordance with their terms
(except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general from time
to time in effect and the exercise by courts of equity powers). For purposes of
this Article 3, "Transactional Agreements" means this Agreement and the related
Agreement of Merger for the PacifiCare Merger.
3.18 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Exchange Act, the Securities Act, state securities or blue sky laws, the DGCL,
the HSR Act, the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, third-party administrators or other businesses operated by PacifiCare or
its subsidiaries requiring licensure, qualification or authorization, there is
no requirement applicable to PacifiCare or any of its subsidiaries to make any
filing with, or to obtain any permit, authorization, consent or approval of any
Governmental Authority as a condition to the lawful consummation of any of the
transactions contemplated by this Agreement, except for such filings, permits,
authorizations, consents or approvals which, if not made or obtained, would not
have a Material Adverse Effect on PacifiCare. Except as set forth in the
PacifiCare Disclosure Schedule, neither the execution and delivery of this
Agreement by PacifiCare nor the consummation by PacifiCare will (a) conflict
with, violate or result in any breach of any provision of the Certificate of
Incorporation or Bylaws (or comparable charter documents) of PacifiCare or any
of its subsidiaries, (b) result in a material default (or with notice or lapse
of time or both would result in a default) under, or materially impair the
rights of PacifiCare or any of its subsidiaries or materially alter the rights
or obligations of any third party under, or require PacifiCare or any of its
subsidiaries to make any material payment or become subject to any material
liability to any third party under, or give rise to any right of termination,
amendment, cancellation, acceleration, repurchase, put or call under, any of the
terms, conditions or provisions of any PacifiCare Material Contract, (c) result
in the creation of any material (individually or in the aggregate) liens,
charges or encumbrances on any of the material assets of PacifiCare or any of
its subsidiaries or (d) conflict with or violate any law, statute, rule,
regulation, judgment, order, writ, injunction, decree or arbitration award
applicable to PacifiCare or any of its subsidiaries or any of their material
assets, which violation has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare.
3.19 COMMON AND PREFERRED STOCK TO BE ISSUED. The Holding Class A Common
Stock, Holding Class B Common Stock and Holding Series A to be issued to the
Company's stockholders in the Company Merger, when issued by Holding pursuant to
the terms of this Agreement, will be duly authorized, validly issued, fully paid
and non-assessable, will be issued in compliance with applicable federal and
state securities laws and will be clear of all liens, encumbrances and adverse
claims and may be resold by Company Affiliates (as defined in Section 4.12) in
accordance with paragraph (d) of Rule 145 of the Securities Act.
3.20 RESERVES. The reserves established by PacifiCare and its subsidiaries
in the PacifiCare SEC Reports, or in any financial statement or balance sheet
contained in any document filed with the SEC after the date of the Original
Agreement, for statutorily required reserves and for incurred but not yet paid
claims for, or relating to, medical treatment or similar claims (i) are computed
in
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accordance with presently accepted industry standards consistently applied, (ii)
meet the requirements of any law, rule or regulation applicable to such
reserves, (iii) are computed on the basis of assumptions consistent with those
used in computing the corresponding reserve in the prior fiscal year, and (iv)
include provision for all actuarial reserves and related items which ought to be
established in accordance with applicable laws or regulations and prudent
industry practices. As of the date of the Original Agreement, neither PacifiCare
nor its senior management was aware of any fact or circumstance which would
necessitate, in the good faith application of prudent reserving practices and
policies, any material adverse change in statutorily required reserves or
reserves for such incurred but not yet paid claims above that reflected in the
most recent balance sheet included in the PacifiCare SEC Reports (other than
increases consistent with past experience resulting from increases in enrollment
with respect to PacifiCare's subsidiaries' services).
3.21 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
the Original Agreement, other than as disclosed in the PacifiCare Disclosure
Schedule, no audit or investigation of PacifiCare or any of its subsidiaries
which may be expected to have a Material Adverse Effect on PacifiCare was
pending before, or to PacifiCare's knowledge had been threatened by, any
governmental or regulatory authority of the United States (other than the IRS),
the several States or territories (other than state taxing authorities) or any
foreign jurisdiction. There are no pending or anticipated proceedings which may
be expected to have a Material Adverse Effect on PacifiCare by or on behalf or
in the name of the state or federal government or any governmental agency
relating to the imposition of civil monetary penalties, exclusion or debarment
from governmental programs or other administrative sanctions.
3.22 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 3.22, the following definitions apply.
"Environmental Claim" means any claim, action, cause of action, or written
notice by any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by PacifiCare or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.
(b) PacifiCare and each subsidiary is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof except
where the costs of any failure to comply will not exceed $5,000,000. PacifiCare
and its subsidiaries have not received any written communication, whether from a
Governmental Authority, citizens group, employee or otherwise, that alleges that
they are not in such full compliance in all material respects, and, to the
knowledge of PacifiCare, there are no circumstances that may prevent or
interfere with such full compliance in all material respects in the future. To
the knowledge of PacifiCare, no current or prior owner of any property owned or
leased by PacifiCare or any subsidiary has received any written communication,
whether from a Governmental Authority, citizens group, employee or otherwise,
that alleges that any of them is not in such compliance.
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(c) There is no material Environmental Claim pending or, to the knowledge
of PacifiCare, threatened against PacifiCare or any subsidiary or against any
person or entity whose liability for any Environmental Claim PacifiCare has or
may have retained or assumed either contractually or by operation of law.
(d) To the knowledge of PacifiCare, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could reasonably form the basis for any
Environmental Claim against PacifiCare, any subsidiary or, to the knowledge of
PacifiCare, against any person or entity whose liability for any material
Environmental Claim PacifiCare or any subsidiary has or may have retained or
assumed either contractually or by operation of law, which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on PacifiCare.
3.23 INTELLECTUAL PROPERTY.
(a) To the knowledge of PacifiCare, PacifiCare and its subsidiaries own or
have in their possession certain information of the sort typically considered as
trade secrets in the healthcare industry (the "Trade Secrets"). PacifiCare and
its subsidiaries have good title and an absolute (though not necessarily
exclusive) right to use all Trade Secrets, and, to the knowledge of PacifiCare,
the use of the Trade Secrets does not infringe the rights of any third party.
(b) To the knowledge of PacifiCare, none of the processes or know-how used
by PacifiCare infringes any patent, trademark or copyright of any third party.
To the best of PacifiCare's knowledge, there is no intellectual property, in any
form, necessary for the operation of PacifiCare's or its subsidiaries' business
as currently conducted which PacifiCare or its subsidiaries do not currently own
or license on commercially reasonable terms.
3.24 FORMATION OF HOLDING. PacifiCare has caused Holding, Neptune Sub and
Company Sub to be formed and organized in anticipation of execution of this
Agreement and solely for the purposes of carrying out the Mergers and the
transactions contemplated hereby, and solely for such purposes (i) Holding has
issued 200 shares of Common Stock to PacifiCare in exchange for $1.00 per share;
(ii) Neptune Sub has issued 100 shares of Common Stock to Holding in exchange
for $1.00 per share, and (iii) Company Sub has issued 100 shares of Common Stock
to Holding in exchange for $1.00 per share. No other shares of stock or
securities have been issued by Holding, Neptune Sub or Company Sub. The
directors and officers of Holding, Neptune Sub and Company Sub consist solely of
officers of PacifiCare and no other persons. Neither Holding, Neptune Sub nor
Company Sub has acquired any property, incurred any liabilities, or engaged in
any business or activity whatsoever other than (i) its organization as described
above, (ii) the adoption of stockholder and director resolutions in connection
therewith and to authorize execution and delivery of this Agreement, adoption of
the Holding Restated Certificate of Incorporation, consummation of the Mergers
and the transactions contemplated hereby, and performance of its obligations
hereunder, and (iii) the execution and delivery of this Agreement.
ARTICLE 4
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME; ADDITIONAL AGREEMENTS
4.1 INFORMATION AND ACCESS.
(a) During the period from the date of this Agreement through the Effective
Time, the Company shall afford, and shall cause the independent auditors,
counsel, financial and other advisors and representatives (collectively,
"Representatives") of the Company and its subsidiaries to afford, to PacifiCare
and to PacifiCare's Representatives, reasonable access to the properties, books,
records, financial and operating data (including audit work papers and other
such information) and other
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information and personnel of the Company and its subsidiaries in order that
PacifiCare and PacifiCare's Representatives may have a full opportunity to make
such investigation as PacifiCare reasonably desires to make of the Company and
its subsidiaries.
(b) Without limiting the generality of Section 4.1(a), during the period
from the date of this Agreement through the Effective Time, the Company shall
promptly provide PacifiCare with copies of any notice, report or other document
filed with or sent to any Governmental Authority in connection with any of the
transactions contemplated by this Agreement.
(c) No investigation by PacifiCare or any of its Representatives pursuant
to this Section 4.1 shall limit or otherwise affect any representations or
warranties of the Company or any condition to any obligation of PacifiCare.
(d) During the period from the date of this Agreement through the Effective
Time, the Company shall promptly advise PacifiCare in writing of (A) any
Material Adverse Effect on the Company and (B) the occurrence of any event which
causes the representations and warranties made by the Company in this Agreement
or the information included in the Company Disclosure Schedule to be incomplete
or inaccurate in any material respect.
(e) The rights and obligations of PacifiCare and the Company in this
Section 4.1 shall apply, MUTATIS MUTANDIS, to the Company and PacifiCare.
4.2 CONDUCT OF BUSINESS OF THE COMPANY.
(a) Except as provided in Section 4.2(b), during the period from the date
of this Agreement through the Effective Time, (i) the Company shall conduct its
business, and shall cause each of its subsidiaries to conduct its business, in
the ordinary and usual course consistent with past practice and (ii) the Company
shall use, and shall cause each of its subsidiaries to use, all commercially
reasonable efforts to maintain and preserve intact its business organization, to
keep available the services of its officers and employees and to maintain
satisfactory relations with lessors, suppliers, contractors, distributors,
customers and others having business relationships with the Company or any of
its subsidiaries (it being recognized, however, that nothing in this Agreement
shall be construed to hold the Company liable for any adverse effect that the
announcement of the transactions contemplated by this Agreement may have on such
business organizations and relationships, including on decisions of officers and
employees whether to continue to provide services to the Company or its
subsidiaries).
(b) Except as expressly contemplated by this Agreement, during the period
from the date of this Agreement through the Effective Time, the Company shall
not do, and shall not permit any of its subsidiaries to do, any of the
following, without PacifiCare's prior written consent:
(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock, except (A) regular dividends
on the Company Series A Preferred Stock and (B) dividends from the
subsidiaries of the Company to the Company sufficient to allow the Company
to make the dividends referred to in clause (A);
(ii) split, combine or reclassify any capital stock of the Company or
repurchase, redeem or otherwise acquire any capital stock of the Company or
any of its subsidiaries, except pursuant to contractual rights in existence
on the date of the Original Agreement;
(iii) except for (x) the issuance of up to 900,000 Talbert stock options
to be granted to Talbert employed or managed physicians in connection with
the separation of Talbert from the Company, (y) the issuance of up to 10,000
Company Options per individual and the issuance of up to 75,000 Company
Options in the aggregate to be granted in connection with the Company's new
hires, outstanding performances or promotions, or (z) previously authorized
automatic grants of Company Options to the Company's or its subsidiaries'
directors, issue, deliver, pledge, encumber, sell or transfer, or authorize
or propose the issuance, delivery, pledge, encumbrance, sale or transfer of,
any shares of capital stock of the Company or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any
such shares of capital stock or other
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convertible securities (except that the Company may issue Company Common
Stock upon the exercise of Company Options issued and outstanding or upon
the conversion of Company Series A Preferred Stock into Company Common
Stock), or, except as expressly contemplated herein, make any change in its
equity capitalization or to the terms of any option, warrant or other equity
security of the Company or any of its subsidiaries that is currently
outstanding;
(iv) except as expressly contemplated herein, amend the Certificate of
Incorporation, Bylaws or other organizational or charter documents of the
Company or any of its subsidiaries, or amend its Restated Rights Plan;
(v) acquire (by merging or consolidating with, by purchasing any
material portion of the capital stock or assets of or by any other means)
any business or any corporation, partnership, association or other business
organization or division thereof;
(vi) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with
past practice or consistent with written disclosure made to PacifiCare prior
to the date of the Original Agreement;
(vii) except pursuant to lines of credit and subject to credit limits in
effect prior to the date of the Original Agreement, incur any indebtedness
for borrowed money, or issue or sell any debt securities or guarantee,
endorse or otherwise become responsible for any obligation of any other
person, provided that this Section 4.2(b)(vii) shall not apply to
indebtedness for borrowed money, debt securities or guaranties that
aggregate up to $20,000,000 or the proceeds of which are used to capitalize
Talbert in accordance with Section 4.15;
(viii) except as specifically contemplated by Section 4.8, adopt or amend
in any material respect any collective bargaining agreement or Company
Employee Plan, or enter into or amend any employment agreement, severance
agreement, special pay arrangement with respect to termination of employment
or other similar arrangement or agreement with any director or officer, or
enter into or amend any severance or termination arrangement with any
director or officer;
(ix) change in any material respect the accounting methods or practices
followed by the Company (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;
(x) except in the ordinary course of business consistent with past
practice or as permitted in Section 4.4(a), enter into any material contract
or agreement involving payments in excess of market rates;
(xi) except as specifically contemplated by Section 4.8, change any
compensation payable or to become payable to any of its officers or
employees (other than any adjustment to the salary of any employee that is
made in the ordinary course of business consistent with past practice and
that does not exceed the higher of 6% of such employee's previous salary or
$10,000 or that is made in accordance with a budget approved in writing by
PacifiCare);
(xii) make any capital expenditures in excess of $2,500,000 in the
aggregate, except those set forth in a budget to be reviewed and approved by
PacifiCare and the Company within two weeks following the date of the
Original Agreement;
(xiii) make any loan to or engage in any transaction with any director or
officer;
(xiv) settle or compromise any lawsuit or other Proceeding against the
Company or any of its subsidiaries for an amount in excess of $5,000,000;
provided, however, that in no event shall the Company or its subsidiaries
settle or compromise any matter in a manner which would have a material
non-financial adverse impact on the Company or its Material Subsidiaries;
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(xv) cause or permit any material amendment, modification or premature
termination to any Company Material Contract as defined Section 2.5(a)
without the prior approval of PacifiCare, such approval not to be
unreasonably withheld and to be given or not given on a timely basis;
(xvi) cause or agree to the termination or material modification of any
material licensure, qualification, or authorization of the Company or any
Material Subsidiary;
(xvii) enter into any new contract or amend or modify any existing
contract between the Company or any subsidiary and Talbert or to cause any
capital transfer to or from the Company or any subsidiary and from or to
Talbert, except as contemplated by Section 4.15; or
(xviii) enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.
4.3 CONDUCT OF BUSINESS OF PACIFICARE. Except as expressly contemplated by
this Agreement, during the period from the date of this Agreement through the
Effective Time, PacifiCare shall not, without the Company's prior written
consent:
(a) declare, set aside or pay any dividend or make any other distribution
in respect of any capital stock;
(b) split, combine or reclassify any capital stock of PacifiCare or
repurchase, redeem or otherwise acquire any capital stock of PacifiCare, except
pursuant to contractual rights presently in existence;
(c) issue, deliver, pledge, encumber, sell or transfer, or authorize or
propose the issuance, delivery, pledge, encumbrance, sale or transfer of, any
shares of capital stock of PacifiCare or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any such
shares of capital stock or other convertible securities (except that PacifiCare
may issue PacifiCare Class A Common Stock or PacifiCare Class B Common Stock
upon the exercise of PacifiCare Options issued and outstanding on the date of
the Original Agreement in accordance with their present terms), or, except as
expressly contemplated herein, make any change in its equity capitalization or
to the terms of any option, warrant or other equity security of the Company or
any of its subsidiaries that is currently outstanding;
(d) except as expressly contemplated herein, amend the Certificate of
Incorporation, Bylaws or other organizational or charter documents of PacifiCare
or any of its subsidiaries;
(e) acquire (by merging or consolidating with, by purchasing any material
portion of the capital stock or assets of or by any other means) any business or
any corporation, partnership, association or other business organization or
division thereof;
(f) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with past
practice or consistent with written disclosure made to Company prior to the date
of the Original Agreement;
(g) except pursuant to lines of credit and subject to credit limits in
effect prior to the date of the Original Agreement, incur any indebtedness for
borrowed money, or issue or sell any debt securities or guarantee, endorse or
otherwise become responsible for any obligation of any other person, provided
that this Section 4.2(g) shall not apply to indebtedness for borrowed money,
debt securities or guaranties that aggregate up to $20,000,000 or to financing
the purpose of which is to consummate the Mergers;
(h) change in any material respect the accounting methods or practices
followed by PacifiCare (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;
(i) or enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.
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4.4 NEGOTIATION WITH OTHERS.
(a) The Company shall not, and it shall not authorize or permit any of its
subsidiaries, officers, directors or employees or any of its or its
subsidiaries' Representatives, directly or indirectly, to (i) solicit, initiate
or knowingly encourage or induce the making of any Acquisition Proposal (as
defined in Section 7.1), (ii) furnish non-public information regarding the
Company or any of its subsidiaries in connection with an Acquisition Proposal or
potential Acquisition Proposal, (iii) negotiate or engage in discussions with
any third party with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants). Notwithstanding the
foregoing, nothing in this Section 4.4 shall be construed to prohibit the
Company or its Board of Directors from taking any actions or permitting any
actions described above (other than any action described in clause (i) above)
with respect to any Acquisition Proposal to the extent that the Board of
Directors of the Company shall conclude in good faith, based upon the advice of
its outside counsel, that such action is required in order for the Board of
Directors of the Company to act in a manner that is consistent with its
fiduciary obligations under applicable law (PROVIDED that, in the event any
letter of intent, contract or other instrument of the type described in clause
(v) of the preceding sentence is entered into, the consummation of any
transaction contemplated by the Acquisition Proposal to which such instrument
relates must be expressly conditioned upon the prior and valid termination of
this Agreement and the payment of any fee due under Article 7 hereof).
(b) The Company shall immediately advise PacifiCare orally and in writing
of the receipt of any Acquisition Proposal or any inquiry relating to an
Acquisition Proposal prior to the Effective Time, including a full description
of the terms of such Acquisition Proposal.
(c) Notwithstanding anything to the contrary contained herein, the Company
shall not furnish any information to any third party pursuant to clause (ii) of
the first sentence of Section 4.4(a) unless such third party has executed and
delivered to the Company a nondisclosure agreement that is not substantially
less restrictive than the nondisclosure agreement then in effect between the
Company and PacifiCare.
(d) The Company shall immediately cease and cause to be terminated any
discussions or negotiations with any parties existing as of the date of this
Agreement and that relate to any Acquisition Proposal and shall request the
return or destruction of all information previously disclosed to such parties in
accordance with the terms of any confidentiality agreements with such parties,
and shall use commercially reasonable efforts to ensure that such information is
returned or destroyed.
4.5 REGISTRATION STATEMENT; PROSPECTUS/PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement, Holding
and PacifiCare shall prepare, with the assistance of the Company, and cause to
be filed with the SEC the S-4 Registration Statement, together with the
Prospectus/Proxy Statement and any other documents required by the Securities
Act or the Exchange Act in connection with the Mergers. Each of Holding,
PacifiCare and the Company shall use all commercially reasonable efforts to
cause the S-4 Registration Statement to comply with the rules and regulations
promulgated by the SEC, to respond promptly to any comments of the SEC or its
staff and to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. The Company shall
promptly furnish to Holding and PacifiCare all information concerning the
Company, its subsidiaries and its stockholders as may be required or reasonably
requested in connection with any action contemplated by this Section 4.5. Each
of Holding, PacifiCare and the Company shall (i) notify the other promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff for amendments or supplements to the S-4 Registration Statement
or the Prospectus/Proxy Statement or for additional information and (ii) shall
supply the other with copies of all correspondence with the SEC or its staff
with respect to the S-4 Registration Statement or the Prospectus/Proxy
Statement.
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Neither Holding, PacifiCare nor the Company shall file any amendment or
supplement to the S-4 Registration Statement or the Prospectus/Proxy Statement
to which the other shall have reasonably objected. Whenever any event occurs
that should be set forth in an amendment or supplement to the S-4 Registration
Statement or the Prospectus/Proxy Statement, Holding, PacifiCare or the Company,
as the case may be, shall promptly inform the other of such occurrence and shall
cooperate in filing with the SEC or its staff, and, if appropriate, mailing to
stockholders of the Company and PacifiCare, such amendment or supplement.
(b) Prior to the Effective Time, Holding shall make all required filings
with state regulatory authorities and the NASD and shall use all commercially
reasonable efforts to obtain all regulatory approvals needed to ensure that the
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
to be issued in the Mergers (i) will be qualified under the securities or "blue
sky" law of every jurisdiction of the United States in which any registered
stockholder of the Company or PacifiCare has an address of record on the record
date for determining the stockholders entitled to notice of and to vote on the
Mergers and (ii) will be approved for quotation at the Effective Time on the
Nasdaq National Market or the NYSE.
(c) Prior to the Effective Time, Holding shall file either the Holding
Restated Certificate of Incorporation or the Holding Restated Certificate of
Incorporation without Series A, as the case may be, with the Secretary of State
of the State of Delaware.
4.6 STOCKHOLDERS' MEETINGS.
(a) The Company shall take all action necessary in accordance with
applicable law to call and convene a meeting of the holders of Company Common
Stock and Company Series A Preferred Stock (the "Company Stockholders' Meeting")
to consider, act upon and vote upon the adoption and approval of this Agreement,
the Company Merger and the Series A Amendment. The Company Stockholders' Meeting
will be held within 60 days after the S-4 Registration Statement is declared
effective by the SEC. The Company shall ensure that the Company Stockholders'
Meeting is called, held and conducted, and that all proxies solicited in
connection with the Company Stockholders' Meeting are solicited, in compliance
with applicable law.
(b) The Board of Directors of the Company has unanimously recommended (and
the Prospectus/ Proxy Statement shall include a statement to the effect that the
Board of Directors of the Company has unanimously recommended) that the holders
of Company Common Stock and Company Series A Preferred vote in favor of and
adopt and approve this Agreement, the Company Merger and the Series A Amendment
at the Company Stockholders' Meeting and any related amendment to the Company's
Certificate of Incorporation, which unanimous recommendation shall not be
withdrawn, amended or modified in a manner adverse to PacifiCare. For purposes
of this Agreement, it shall constitute a modification adverse to PacifiCare if
such recommendation shall no longer be unanimous.
(c) PacifiCare shall take all action necessary in accordance with
applicable law to call or convene a meeting of the holders of PacifiCare Class A
Common Stock and the PacifiCare Class B Common Stock (the "PacifiCare
Stockholders' Meeting") to consider, act upon and vote upon the approval of this
Agreement, the PacifiCare Merger, the PacifiCare Amendment and any related
matters. The PacifiCare Stockholders' Meeting will be held as close to the date
of the Company Stockholders' meeting as is practicable. PacifiCare shall ensure
that the PacifiCare Stockholder's Meeting is called, held and conducted, and
that all proxies solicited in connection with such meeting are solicited, in
compliance with applicable law.
(d) The Board of Directors of PacifiCare has recommended, with no
dissenting votes (and the Prospectus/Proxy Statement shall include a statement
to the effect that the Board of Directors has so recommended) that the holders
of PacifiCare Class A Common Stock vote in favor of this Agreement, the
PacifiCare Merger, and related matters and that the holders of PacifiCare Class
A Common Stock and PacifiCare Class B Common Stock vote in favor of the
PacifiCare Amendment.
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(e) Notwithstanding the foregoing, nothing in Section 4.5 or in this
Section 4.6 shall prevent the Board of Directors of the Company or PacifiCare
from withdrawing, amending or modifying its recommendation in favor of the
respective Mergers and approval and adoption of this Agreement and related
matters (and the Prospectus/Proxy Statement may reflect such withdrawal,
amendment or modification) to the extent that such Board of Directors of the
Company or PacifiCare shall conclude in good faith, based upon the advice of its
outside counsel, that such withdrawal, amendment or modification is required in
order for such Board of Directors to act in a manner that is consistent with its
fiduciary obligations under applicable law. Nothing contained in this Section
4.6(e) shall limit the Company's or PacifiCare's obligation to convene the
Company Stockholders' Meeting and the PacifiCare Stockholders' Meeting
(regardless of whether the recommendation of the Board of Directors of the
Company or PacifiCare, as the case may be, shall have been withdrawn, amended or
modified).
4.7 REGULATORY APPROVALS.
(a) Holding, the Company and PacifiCare shall use all reasonable efforts to
file and to cause any stockholders of the Company or PacifiCare, as the case may
be, to file as soon as practicable after the date of this Agreement all notices,
reports and other documents required by law to be filed with any Governmental
Authority with respect to the Mergers and the other transactions contemplated by
this Agreement and to submit promptly any additional information requested by
any such Governmental Authority. Without limiting the generality of the
foregoing, Holding, the Company and PacifiCare shall within fifteen (15)
business days from the date of the Original Agreement prepare and file the
notifications required under the HSR Act in connection with the Mergers.
Holding, the Company and PacifiCare shall respond as promptly as practicable to
(i) any inquiries or requests received from the Federal Trade Commission or the
Antitrust Division of the Department of Justice for additional information or
documentation and (ii) any inquiries or requests received from any state
attorney general or other Governmental Authority in connection with antitrust or
related matters.
(b) Holding, the Company and PacifiCare shall (i) give each other prompt
notice of the commencement of any Proceeding by or before any court or
Governmental Authority with respect to the Mergers or any of the other
transactions contemplated by this Agreement, (ii) keep each other informed as to
the status of any such Proceeding and (iii) except as may be prohibited by any
Governmental Authority or by any law or court order or decree, permit the other
party to be present at each meeting or conference relating to any such
Proceeding and to have access to and be consulted in advance in connection with
any document filed or provided to any Governmental Authority in connection with
any such Proceeding.
4.8 EMPLOYEE BENEFITS PLANS.
(a) At least twenty (20) days before the date of the Company Stockholders'
Meeting, PacifiCare shall notify the Company if it wishes to provide a mechanism
to cash out either vested or all outstanding Company Options. If PacifiCare
wishes to provide such a mechanism, PacifiCare shall offer (in a form reasonably
acceptable to the Company) to each holder of applicable Company Options, the
right to receive on the Effective Date, in return for the cancellation of such
option, an amount equal to (i) the product of the value of the consideration to
be received for each share of Company Common Stock covered by the cash out (with
stock values of Holding Common Stock measured by the average closing price as
quoted in the Wall Street Journal of PacifiCare's Class A Common Stock during
the twenty trading days ending the date immediately prior to the date of the
Company's Stockholder Meeting for Holding Class A Common Stock and by the
Average Pre-Vote Closing Share Price for Holding Class B Common Stock) times the
number of shares of Company Common Stock with respect to which such option is
exercisable, less (ii) the aggregate exercise price of such shares. The amount
paid to any holder of Company Options following such payment and cancellation
shall be net of applicable withholding taxes.
(b) On the Closing Date, and subject to any required approval of the
holders of Company Options, which the Company hereby covenants to exercise its
best efforts to obtain, Holding and PacifiCare will cause each Company Option to
be replaced effective as of the Effective Time, by a
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substitute option of Holding (an "Exchange Option") issued under a Holding stock
option plan that complies in all respects with the applicable requirements of
Rule 16b-3 promulgated under the Exchange Act. The per share exercise price of
an Exchange Option shall equal the quotient, rounding up to the nearest cent, of
(i) the per share exercise price of the corresponding Company Option, less the
average closing price at which the rights to acquire Talbert stock trade on
their first five trading days after issuance, as quoted in the Wall Street
Journal ("rights to acquire Talbert stock" for this purpose means the portion of
such a right into which one share of Company Common Stock is converted in part),
divided by (ii) the fraction of a share of Holding Class B Common Stock that the
holder of such Company Option is entitled to purchase for each share of Company
Common Stock subject to such Company Option, as determined in the next sentence.
For each share of Company Common Stock subject to such Company Option, the
Exchange Option shall entitle the holder thereof to purchase a fraction of a
share of Holding Class B Common Stock equal to the sum of (i) the fraction of a
share of Holding Class B Common Stock into which one (1) share of Company Common
Stock actually outstanding at the Effective Time is converted pursuant to
Article 1, plus (ii) the fraction of a share of Holding Class B Common Stock
that could be purchased at the Average Pre-Vote Closing Share Price for the
value of the PacifiCare Class A Common Stock into which one (1) share of Company
Common Stock actually outstanding at the Effective Time is converted pursuant to
Article 1, which value shall be the average closing price as quoted in the Wall
Street Journal of the PacifiCare Class A Common Stock during the same trading
days that the Average Pre-Vote Closing Share Price is determined, plus (iii) the
fraction of a share of Holding Class B Common Stock that could be purchased at
the Average Pre-Vote Closing Share Price for $17.50. Any restriction on the
exercise of any Company Option shall apply to the Exchange Option and the term,
exercisability, vesting schedule and other provisions of such Company Option
shall similarly apply to the Exchange Option; provided, however, that each such
Exchange Option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction subsequent to the Effective Time;
provided, further, that in the case of an Exchange Option of a person who is an
employee of the Company or one of its subsidiaries, such Exchange Option shall
provide that (i) any unvested shares, the vesting of which depends on
achievement by the Company of earnings or financial performance of the Company
for a fiscal year beginning on or after July 1, 1996, shall instead vest no
later than 25% per year over a four year period, with the first 25% vesting on
July 1, 1997 and (ii) if the holder of such Exchange Option is terminated
without cause after the Closing Date and before the date as of which, determined
as of execution of this Agreement and assuming no termination of any employee
and the application of the vesting schedule set forth in clause (i) above, there
would remain no more than 100,000 of such Exchange Options in the aggregate that
are not vested, such option shall thereupon become fully vested; provided
further that in the case of an Exchange Option of a person who is an employee of
Talbert, if the rights offering described in Section 4.15(c) is consummated in
such a manner that Talbert would no longer be considered a subsidiary of FHP for
purposes of such Exchange Option, the employment of such person by FHP or one of
its subsidiaries shall be deemed terminated for the convenience of the Company
and the accelerated vesting rights set forth in the foregoing proviso shall not
apply; further provided, that, in the case of a holder of an Exchange Option who
is a director of the Company or one of its subsidiaries and who is not an
employee of the Company or any of its subsidiaries, the Exchange Option shall
vest immediately when such holder no longer is serving as a director of Holding
or Company or one of their subsidiaries. The Company, Holding and PacifiCare
shall take such reasonable actions, and cooperate with each other in all action,
that may be necessary and permissible to effectuate the provisions of this
Section 4.8(b), including without limitation, timely sending notice of the
Company's Board of Director's determination to suspend acceleration of vesting
of Company Options issues under the Company's Executive Incentive Plan. The
provisions of this Section 4.8(b) shall not limit in any manner PacifiCare's
right to cash out the vested portion of outstanding Company options under
Section 4.8(a). To the extent required under applicable law, the terms of the
applicable Company Option plans or under any agreement thereunder, the Company
shall obtain stockholder approval of the transactions contemplated by this
Section 4.8(b) and shall use its best efforts to obtain the consent of any
optionee whose consent may be required. As soon as practicable
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after the Effective Time, Holding shall file with the SEC a registration
statement on Form S-8 with respect to the shares of Holding Class B Common Stock
underlying the Exchange Options and use its reasonable best efforts to have such
registration statement declared effective under the Securities Act. The Company
may amend the employment agreements described in Schedule 2.6 of the Company
Disclosure Schedule to adjust the terms and conditions for vesting of Company
Options held by employees party to such agreements, provided the adjusted
vesting is no more favorable than acceleration upon a "Change of Control" as
defined in such agreements and does not render nondeductible to the Company any
amounts under Section 280G of the Code, and further provided any such adjustment
shall neither increase other benefits or amounts payable by the Company nor
increase the number of shares or decrease the exercise price under any Company
Option now outstanding.
(c) Either (i) the Company shall cause the Company's Employee Stock
Purchase Plan to be terminated immediately prior to the Effective Time, and such
termination shall have the effects set forth in such Plan, or (ii) prior to the
Effective Time, Holding, Company and PacifiCare shall cause each right to
purchase Company Common Stock to be replaced, effective as of the Effective
Time, by a substitute right to purchase shares of Holding Class B Common Stock
("Exchange Purchase Right") issued under a Holding Employee Stock Purchase Plan
("Holding Purchase Plan") that is intended to comply with Section 423 of the
Code. The purchase price of shares of Holding Class B Common Stock under an
Exchange Purchase Right shall be equal to 85% of the fair market value of
Holding Class B Common Stock on the first date on which shares of Holding Class
B Common Stock are purchased under the terms of the Holding Purchase Plan. The
terms and conditions of each Exchange Purchase Right shall satisfy the
requirements of Section 424(a) of the Code.
(d) As of the Effective Time and for a period of not less than one year
thereafter, except to the extent required to satisfy applicable, governing law,
Holding shall, or shall cause the Company Surviving Corporation and its
subsidiaries, to provide employee benefits other than those addressed in Section
4.8(a), 4.8(b) or 4.8(c) which are either (i) no less favorable on an aggregate
basis to the benefits provided by the Company or its subsidiaries prior to the
Effective Time or (ii) as provided to similarly situated employees of PacifiCare
and its subsidiaries. Thereafter, to the extent that employees of the Company
Surviving Corporation or its subsidiaries participate in benefit plans of
Holding, for purposes of eligibility of such employees for such employee
benefits, Holding agrees to credit such employee's service with the Company or
its subsidiaries for such purposes as vesting, calculation of benefits, and
eligibility to participate and, if applicable, to waive any pre-existing
condition limitations related thereto to the extent permitted by such plans as
currently in effect and applicable law. Holding and PacifiCare shall cause the
Company's and its subsidiaries' employees to be offered the right to participate
in Holding's and its subsidiaries' stock option plans and arrangements upon
substantially consistent terms.
(e) STOCK OPTIONS OF PACIFICARE. At the Effective Time, each outstanding
option to purchase shares of PacifiCare Class B Common Stock (a "PacifiCare
Class B Option") under any of PacifiCare's stock options plans, shall be
canceled and Holding shall issue in substitution therefor an option to purchase
Holding Class B Common Stock (a "Holding Class B Substitute Option") issued
under a Holding stock option plan to be adopted by Holding prior to the
Effective Time. The exercise price and the number of shares of Holding Class B
Common Stock subject to each Holding Class B Substitute Option shall be
identical to the exercise price and the number of shares of PacifiCare Class B
Common Stock subject to the PacifiCare Class B Option that such Holding Class B
Substitute Option replaces. In compliance with Section 424(a) of the Code, each
such Holding Class B Substitute Option shall be subject to substantially all of
the other terms and conditions of PacifiCare stock option it replaces. At the
Effective Time, each outstanding option to purchase shares of PacifiCare Class A
Common Stock (a "PacifiCare Class A Option") shall be converted into an option
to purchase shares of Holding Class A Common Stock (a "Holding Class A
Substitute Option") MUTATIS MUTANDIS. The exercise price and the number of
shares of Holding Class A Common Stock subject to each Holding Class A
Substitute Option shall be identical to the exercise price and the number of
shares of PacifiCare Class A Common Stock subject to the PacifiCare Class A
Option that such Holding Class A Substitute
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Option replaces. In compliance with Section 424(a) of the Code, each such
Holding Class A Substitute Option shall be subject to substantially all of the
other terms and conditions of the PacifiCare stock option it replaces.
4.9 INDEMNIFICATION.
(a) With respect to actions, omissions and events occurring through the
Effective Time, all rights to indemnification existing in favor of the current
directors and officers of the Company and PacifiCare as provided in their
respective Certificates of Incorporation and indemnification agreements, each as
in effect as of the date of the Original Agreement, shall survive the Mergers
and shall be observed by Holding, PacifiCare Surviving Corporation and Company
Surviving Corporation.
(b) In addition to and without limiting Section 4.9(a), Holding shall, from
and after the Closing, to the fullest extent permitted under applicable laws,
indemnify, defend and hold harmless the current officers and directors of
PacifiCare and the Company (collectively, the "Indemnified Parties") against all
losses, expenses, claims, damages, liabilities or amounts that are paid in
settlement of (subject to Section 4.9(c)), or otherwise incurred in connection
with, any claim, action, suit, proceeding or investigation by reason of the fact
that such Indemnified Party was a director or officer of PacifiCare or the
Company prior to the Effective Time and arising out of actions, omissions and
events occurring at or prior to the Effective Time or in connection with the
Mergers and the actions taken in connection therewith (a "Claim") and shall pay
expenses in advance of the final disposition of any such Claim to each
Indemnified Party upon receipt from the Indemnified Party to whom expenses are
advanced of an undertaking reasonably satisfactory to Holding to repay such
advances if legally required to do so PROVIDED, HOWEVER, that Holding will not
be liable under this Section 4.9(b) to any Indemnified Party for any action
found by a court of competent jurisdiction to constitute a violation of law, a
breach of fiduciary duty to the Company (or any subsidiary) or wilful
misconduct.
(c) For purposes of Section 4.9(b), in the event any Claim is brought
against any Indemnified Party, Holding will be entitled to participate therein
at its own expense. In such event, the Indemnified Parties shall cooperate with
and provide all information reasonably requested by Holding. Except as otherwise
provided below, Holding may, at its option, assume the defense of any Claim,
with counsel reasonably satisfactory to the Indemnified Party. After notice from
Holding to the Indemnified Party of the election by PacifiCare to assume the
defense thereof, Holding will not be liable to the Indemnified Party under
Section 4.9(b) for any legal or other expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. The Indemnified Party
shall have the right to employ separate counsel in connection with such Claim,
but the fees and expenses of such counsel incurred after notice from Holding of
its assumption of the defense thereof shall be at the expense of the Indemnified
Party unless (i) the employment of counsel by the Indemnified Party has been
authorized by Holding, (ii) the Indemnified Party shall have reasonably
concluded that there is, under applicable standards of professional conduct, an
actual conflict between the interests of Holding and the Indemnified Party in
the conduct of the defense of such action or (iii) Holding shall not have
employed counsel to assume the defense of such action, in each of which cases
the reasonable fees and expenses of the Indemnified Party's separate counsel
shall be at the expense of Holding. In any case where the expense of defending a
Claim is to be borne by Holding, the Indemnified Parties as a group shall be
entitled to no more than one law firm (in addition to local counsel) to
represent them with respect to such Claim unless there is, under applicable
standards of professional conduct (as reasonably determined by counsel to the
Indemnified Parties), an actual conflict between the interests of any two or
more Indemnified Parties, in which event such additional counsel as may be
required by reason of such conflict may be retained by the Indemnified Parties.
Holding shall not be liable to indemnify the Indemnified Party under Section
4.9(b) for any amounts paid in any settlement of any Claim if such settlement is
effected without Holding's written consent. Holding shall be permitted to settle
any Claim, except that Holding shall not settle any Claim
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in any manner which would impose any non-monetary penalty or material limitation
(or any monetary penalty with respect to which the Indemnified Party is not
entitled to indemnification pursuant to Section 4.9(b)) on the Indemnified Party
without the Indemnified Party's consent.
Any Indemnified Party wishing to claim indemnification under Section 4.9
upon learning of any such Claim shall promptly notify Holding (although the
failure so to notify Holding shall not relieve Holding from any liability that
Holding may have under Section 4.9, except to the extent such failure materially
prejudices Holding's position with respect to such Claim), and shall deliver to
Holding the undertaking specified in Section 4.9(b) above.
(d) Holding shall maintain in effect for a period of not less than five
years from the Effective Time the current policy of directors' and officers'
liability insurance maintained by PacifiCare and the Company, as the case may
be, with respect to matters occurring prior to the Effective Time; PROVIDED,
HOWEVER, that (i) Holding may substitute therefor policies of comparable
coverage (with carriers comparable to PacifiCare's and the Company's existing
carriers) and (ii) Holding shall not be required to pay an annual premium for
such insurance in excess of two hundred percent (200%) of the last annual
premium paid by PacifiCare or the Company, as the case may be, for such
insurance prior to the date of this Agreement (the "200% Amount"). In the event
the annual premium for such insurance exceeds the 200% Amount, Holding shall be
entitled to reduce the amount of coverage of such insurance to the amount of
coverage that can be obtained for a premium equal to the 200% Amount.
(e) In the event Holding or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any Person, then, and in each such case, to the extent necessary to
effectuate the purposes of this Section 4.9, proper provision shall be made so
that the successors and assigns of Holding assume the obligations set forth in
this Section 4.9 and none of the actions described in clause (i) or (ii) shall
be taken until such provision is made.
4.10 ADDITIONAL AGREEMENTS.
(a) Subject to Section 4.10(b), Holding, PacifiCare and the Company agree
to use all commercially reasonable efforts to take, or cause to be taken, all
actions necessary to consummate the Mergers and make effective the other
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, but subject to Section 4.10(b), Holding, PacifiCare and the
Company shall use all commercially reasonable efforts to (i) obtain the consent
and approval of each Governmental Authority, lessor or other person whose
consent or approval is required (by virtue of any contractual provision or legal
requirement or otherwise) in order to permit the consummation of the Merger or
any of the other transactions contemplated by this Agreement or in order to
enable Holding, PacifiCare Surviving Corporation and Company Surviving
Corporation to conduct their respective businesses in the manner in which such
business is currently being conducted or is proposed to be conducted, (ii)
effect all registrations and filings necessary to consummate the Mergers and
(iii) lift any restraint, injunction or other legal bar to the Mergers.
(b) Notwithstanding anything to the contrary contained in Section 4.10(a)
or elsewhere in this Agreement, (i) Holding shall not have any obligation under
this Agreement to dispose or cause any of its subsidiaries to dispose of any
material assets, (ii) Holding shall not have any obligation to make any changes
to its operations or proposed operations or to the operations or proposed
operations of any of its subsidiaries and (iii) Holding shall not have any
obligation to make any commitment (to any Governmental Authority or otherwise)
regarding its future operations, or the future operations of any of its
subsidiaries, or the future operations of PacifiCare Surviving Corporation or
the Company Surviving Corporation or any of their respective Material
Subsidiaries which would, in each of case (ii) and (iii) above, have a material
adverse effect thereon (even though the disposition of such assets or the making
of such change or commitment might facilitate the obtaining of a required
approval from a Governmental Authority or might otherwise facilitate the
consummation of the Mergers).
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4.11 DISCLOSURE. PacifiCare and the Company will (i) mutually agree on the
text of any press release and (ii) consult with each other before making any
other public statement with respect to this Agreement and the transactions
contemplated by this Agreement, except, in each such case, as may be required by
applicable law (including disclosure requirements) or any listing or similar
agreement with any national securities exchange or the Nasdaq National Market.
4.12 AFFILIATE AGREEMENTS. The Company shall deliver to PacifiCare, within
ten days after the date of this Agreement, a letter from the Company identifying
all persons who may be "affiliates" of the Company as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act ("Company
Affiliates"). The Company shall use all commercially reasonable efforts to cause
each person who is or becomes a Company Affiliate to execute and deliver to
PacifiCare, on or prior to the date of the mailing of the Prospectus/Proxy
Statement, an Affiliate Agreement in the form attached hereto as Exhibit 4.12.
PacifiCare shall use all commercially reasonable efforts to cause each person
who is or becomes an affiliate of PacifiCare to execute and deliver a similar
agreement on or prior to such date.
4.13 TAX QUALIFICATION AND OPINION BACK-UP CERTIFICATES. Each of Holding,
the Company and PacifiCare will use its reasonable best efforts to cause the
transactions contemplated by this Agreement, other than the transactions with
respect to Talbert contemplated by Section 4.15 hereof, to qualify as transfers
subject to the provisions of Section 351(a) of the Code and to deliver, in
connection with the tax opinions referred to in Sections 5.9 and 6.8,
certificates of representation reasonable under the circumstances ("Tax
Certificates").
4.14 FINANCING. PacifiCare has received from Bank of America NT&SA a
commitment letter dated August 2, 1996 (the "Commitment Letter") containing its
commitment, subject to the terms and conditions thereof, to provide sufficient
financing to permit PacifiCare and Holding to consummate the transactions
contemplated hereby. A true and accurate copy of the Commitment Letter has been
provided to the Company. PacifiCare and Holding shall enter into the definitive
credit agreements contemplated by the Commitment Letter (or any revised
commitment letter more favorable to PacifiCare and Holding) prior to the date on
which the Proxy/Prospectus is mailed to the Company's Stockholders.
4.15 TALBERT.
(a) The Company shall negotiate a written agreement with Talbert under
which all Talbert contracted medical providers or sites agree to provide
professional services to members of HMOs and enrollees in insurance products of
the Company and Company Surviving Corporation and their subsidiaries in exchange
for a current market rate capitation payment ("Capitated Contract"). The
Capitated Contract shall be subject to the review and approval of PacifiCare
prior to execution. In addition to the Capitated Contract, the Company and
Talbert shall enter into an agreement for the Company to render administrative
services (information systems, payroll, accounts payable, employee benefits
administration and the like) for a period not to exceed one year following the
Effective Date at a rate and on other terms approved by PacifiCare. PacifiCare
shall negotiate in good faith with the Company and Talbert in determining
whether to give its approval.
(b) Following execution of the Capitated Contract, the Company shall
capitalize Talbert to increase its net worth to approximately $60,000,000
("Capital Contribution"); provided, however, that in all events the net worth of
Talbert shall be equal to the proceeds of the rights offering referred to in
Section 4.15(c) below, assuming all such rights are exercised.
(c) Following the Capital Contribution, simultaneous with consummation of
the Mergers or as soon thereafter as legally permissible, Holding shall cause
the issuance of rights to all holders of Company Common Stock and Company Series
A Preferred Stock outstanding immediately prior to the Effective Time (other
than holders who have perfected appraisal rights in accordance with Section 1.8)
and allocated among them on a Company common share equivalent basis, exercisable
until the first business day on or after the thirtieth day after the date of the
Effective Time and expiring thereafter, to purchase, directly or indirectly
through one or more other corporations formed to
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facilitate such purchase all of Company's interest in Talbert. In connection
with the purchase, Holding, PacifiCare, the Company and Talbert shall discuss
the possibility of a Code section 338(h)(10) election in connection with such
purchase; provided however, that no such election shall be made without the
prior written consent of PacifiCare, which consent shall not be withheld unless
there is an adverse impact to PacifiCare.
(d) Before the Effective Time and with the prior consent of PacifiCare as
to significant actions, the Company and Talbert shall take such steps as are
reasonably required to consummate the separation of Talbert from the Company.
The Company and Talbert shall have the right to continue to prosecute the
application now pending before the California Department of Corporations for the
issuance of stock options to employees of Talbert and to carry out transactions
consistent with such application as permitted by Section 4.2(b) if and when a
permit is granted pursuant thereto.
(e) The Company will not assign any of its rights under that certain Stock
Purchase Agreement dated as of March 15, 1996 by and between the Company,
Talbert Medical Management Corporation, Talbert Health Services Corporation and
certain management investors, as amended (the "Talbert Stock Purchase
Agreement"). From and after the Effective Time, Holding will cause the committee
of the Company that makes the determinations required by Section 5.3 of the
Talbert Stock Purchase Agreement to consist of the members of the Compensation
Committee of Holding and one member of the Board of Directors of Talbert,
designated by the Board of Directors of Talbert and reasonably acceptable to the
Board of Directors of Holding.
4.16 7% SENIOR NOTES DUE 2003. Holding shall, if required by applicable
law or the terms of the Company's 7% Senior Notes Due 2003 (the "Senior Notes"),
assume the Senior Notes.
4.17 NOTICES OF CERTAIN EVENTS. Each of Holding, the Company and
PacifiCare shall promptly notify the other of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any governmental body, agency,
official or authority in connection with the transactions contemplated by this
Agreement that indicates such body, agency, official or authority intends to
take action that would prevent or materially interfere with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations, proceedings or health or
insurance related proceedings or market conduct examinations or audits commenced
or, to the best of Company's or PacifiCare's knowledge (as the case may be)
threatened against, relating to or involving or otherwise affecting the Company
or PacifiCare or any of their subsidiaries which, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Section
2.7 or 3.7 or which relate to the consummation of the transactions contemplated
by this Agreement.
4.18 CERTAIN CORPORATE MATTERS WITH RESPECT TO PACIFICARE.
(a) PacifiCare shall cause Holding to take all necessary corporate action
for the establishment of the Holding stock option plans contemplated by Section
4.8 hereof and agrees to vote the shares of capital stock of Holding owned by it
in favor of the adoption of such plans as required under the laws of the State
of Delaware.
(b) From the date hereof until the Effective Time, PacifiCare shall cause
Holding (x) not to take any action inconsistent with the provisions of this
Agreement and (y) not to conduct business or activity other than in connection
with this Agreement.
4.19 COMPLIANCE WITH REGULATIONS. PacifiCare and the Company will each use
reasonable commercial efforts, and will cause their subsidiaries to use
reasonable commercial efforts, to comply with applicable rules and regulations
of the Health Care Financing Administration relating to so-called physician
incentive plans.
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4.20 ASSUMPTION BY SUCCESSOR. Holding, effective as of the Effective Time,
assumes expressly and agrees to perform the employment agreements described in
Schedule 2.6 of the Company Disclosure Schedule in the same manner and to the
same extent that the Company would be required to perform them.
4.21 NO ACTIVITY BY HOLDING. From the date of the Original Agreement until
the Effective Time, PacifiCare shall not cause or permit Holding, Neptune Sub or
Company Sub to (i) issue any stock or securities or (ii) acquire any property,
incur any liabilities or engage in any business or activity whatsoever, other
than to consummate the Mergers and transactions contemplated hereby (including
the financing thereof) and to carry out its obligations hereunder.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING
The obligations of PacifiCare and Holding to effect the Mergers and
otherwise consummate the transactions contemplated by this Agreement are subject
to the fulfillment, at or prior to the Closing, of each of the following
conditions:
5.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) The representations and warranties of the Company contained in this
Agreement shall have been accurate in all material respects as of the date of
the Original Agreement.
(b) The representations and warranties of the Company contained in this
Agreement shall be accurate in all respects as of the date of the Closing as if
made on and as of the date of the Closing, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered individually and collectively) do not
constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on the Company (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
Material Adverse Effect qualifications shall be disregarded and (ii) any update
of or modification to the Company Disclosure Schedule made or purported to have
been made after the date of the Original Agreement shall be disregarded).
5.2 COMPLIANCE WITH COVENANTS. The Company shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by the Company on or prior to the date of the
Closing.
5.3 NO MATERIAL ADVERSE EFFECT. Since the date of the Original Agreement,
there shall not have been any Material Adverse Effect on the Company and there
shall not have occurred any change or development, or any combination of changes
or developments, that would reasonably be expected to have a Material Adverse
Effect on the Company.
5.4 CERTIFICATE. The Company shall have delivered to PacifiCare a
certificate of the Chief Executive Officer of the Company evidencing compliance
with the conditions set forth in Sections 5.1, 5.2 and 5.3.
5.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
5.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the Required Company Vote and
the Required PacifiCare Vote, as applicable.
5.7 AFFILIATES AGREEMENTS. The Affiliates Agreements described in Section
4.12 shall have been executed by each party therein described and delivered to
PacifiCare.
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5.8 LEGAL OPINION. PacifiCare shall have received an opinion of Sheppard,
Mullin, Richter & Hampton LLP, counsel to the Company, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to PacifiCare and
its counsel.
5.9 TAX OPINION. Subject to receipt by PacifiCare's counsel of the Tax
Certificates, PacifiCare shall have received a written opinion from PacifiCare's
counsel, dated as of the date of the Closing (reasonably satisfactory in form
and substance to PacifiCare), to the effect that neither PacifiCare nor any of
its stockholders will recognize gain or loss for United States federal income
tax purposes as a result of the PacifiCare merger. For purposes of rendering
such opinion, PacifiCare's counsel shall be entitled to rely upon the Tax
Certificates.
5.10 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.
5.11 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from Holding or PacifiCare or any of their subsidiaries any damages that
may be material to Holding or PacifiCare; (c) seeking to prohibit or limit in
any material respect Holding's ability to vote, receive dividends with respect
to or otherwise exercise ownership rights with respect to the stock of
PacifiCare Surviving Corporation or Company Surviving Corporation (PacifiCare
Surviving Corporation and Company Surviving Corporation being sometimes referred
to below as "Surviving Corporations"); or (d) which would materially and
adversely affect the right of Holding, the Surviving Corporations or any
subsidiary thereof to own the assets or operate the business of PacifiCare, the
Company or any of their subsidiaries.
5.12 NO OTHER LITIGATION. There shall not be pending any Proceeding in
which there is a reasonable possibility of an outcome that would have a Material
Adverse Effect on Holding, PacifiCare or the Company: (a) challenging or seeking
to restrain or prohibit the consummation of either of the Mergers; (b) relating
to either of the Mergers and seeking to obtain from Holding or PacifiCare or any
of its subsidiaries any damages that may be material to Holding or PacifiCare;
(c) seeking to prohibit or limit in any material respect Holding's ability to
vote, receive dividends with respect to or otherwise exercise ownership rights
with respect to the stock of the Surviving Corporations; or (d) which would
affect adversely the right of Holding, the Surviving Corporations or any of
their subsidiaries to own the assets or operate the business of PacifiCare, the
Company or any of their subsidiaries.
5.13 HSR ACT. The waiting periods applicable to the consummation of the
Mergers, and the acquisitions of voting securities of Holding by the
stockholders of Company and PacifiCare, if any, under the HSR Act shall have
expired or been terminated.
5.14 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and, if applicable,
Holding Series A issuable in the Mergers shall have been approved for quotation
on the Nasdaq National Market or listing on the NYSE upon official notice of
issuance thereof.
5.15 OTHER REQUIRED CONSENTS AND APPROVALS. Holding, PacifiCare and the
Company shall have received all material approvals, licenses, consents,
assignments and authorizations of Governmental Authorities and other persons,
including those set forth on the Company Disclosure Schedule, as may be required
(a) to permit the performance by Holding, PacifiCare and the Company of their
respective obligations under this Agreement and the consummation of the Mergers
and (b) to permit Holding and the Surviving Corporations and their respective
subsidiaries to conduct their business and operations in the manner currently
conducted.
5.16 TAKECARE BOARD REPRESENTATION. The rights of certain former
stockholders of TakeCare to board representation on the Board of Directors of
the Company shall have been terminated.
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5.17 RESTATED RIGHTS PLAN. The Restated Rights Plan shall have been
amended to provide that the transactions contemplated by this Agreement do not
give rise to any rights or benefits under the Restated Rights Plan.
5.18 TALBERT. The net worth of Talbert shall not exceed $60,000,000.
ARTICLE 6
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to effect the Company Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) The representations and warranties of PacifiCare contained in this
Agreement shall have been accurate in all material respects as of the date of
the Original Agreement.
(b) The representations and warranties of PacifiCare contained in this
Agreement shall be accurate in all respects as of the date of the Closing as if
made on and as of the date of the Closing, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered individually and collectively) do not
constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on PacifiCare (it being understood that, for purposes of
determining the accuracy of such representations and warranties as of the date
of the Closing, (i) all Material Adverse Effect qualifications shall be
disregarded and (ii) any update of or modification to the PacifiCare Disclosure
Schedule made or purported to have been made after the date of this Agreement
shall be disregarded).
6.2 COMPLIANCE WITH COVENANTS. PacifiCare shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by PacifiCare on or prior to the date of the
Closing.
6.3 NO MATERIAL ADVERSE EFFECT. Since the date of the Original Agreement,
there shall not have been any Material Adverse Effect on PacifiCare, and there
shall not have occurred any change or development, or any combination of changes
or developments, that would reasonably be expected to have a Material Adverse
Effect on PacifiCare.
6.4 CERTIFICATE. PacifiCare shall have delivered to the Company a
certificate of an executive officer of PacifiCare evidencing compliance with the
conditions set forth in Sections 6.1, 6.2 and 6.3.
6.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the Required Company Vote and
the Required PacifiCare Vote, as applicable.
6.7 LEGAL OPINION. The Company shall have received an opinion of Cooley
Godward Castro Huddleson & Tatum, counsel to PacifiCare, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to the Company and
its counsel.
6.8 TAX OPINION. Subject to receipt by the Company's counsel of the Tax
Certificates, the Company shall have received a written opinion from the
Company's counsel dated as of the date of the Closing to the effect that the
Company Merger will constitute a contribution of Company Common Stock and
Company Series A Preferred Stock to Holding in exchange for Holding capital
stock as part of a transaction governed by Section 351 of the Code. For purposes
of rendering such opinion, the Company's counsel shall be entitled to rely upon
the Tax Certificates.
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6.9 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.
6.10 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from the Company or any of its subsidiaries any damages that may be
material to the Company (c) seeking to prohibit or limit in any material respect
Holding's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporations; or (d) which would materially and adversely affect the right of
Holding, the Surviving Corporations or any subsidiary thereof to own the assets
or operate the business of PacifiCare or the Company or any of their
subsidiaries.
6.11 HSR ACT. The waiting period applicable to the consummation of the
Mergers under the HSR Act shall have expired or been terminated.
6.12 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and, if applicable,
Holding Series A issuable in the Mergers shall have been approved for quotation
on the Nasdaq National Market or listing on the NYSE upon official notice of
issuance thereof.
ARTICLE 7
TERMINATION OF AGREEMENT
7.1 TERMINATION. This Agreement may be terminated prior to the Closing
Date, whether before or after approval of the Mergers by the stockholders of the
Company and PacifiCare:
(a) by mutual written consent of the respective Boards of Directors of
PacifiCare and the Company;
(b) by either PacifiCare or the Company if either of the Mergers shall not
have been consummated by April 30, 1997 (unless the failure to consummate such
Merger is attributable to a failure on the part of the party seeking to
terminate this Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);
(c) by either PacifiCare or the Company if a court of competent
jurisdiction or Governmental Authority shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
either of the Mergers;
(d) by either PacifiCare or the Company if (i) the Company Stockholders'
Meeting shall have been held and (ii) this Agreement and the Company Merger
shall not have been adopted and approved at such meeting by the Company Required
Vote;
(e) by PacifiCare (at any time prior to the adoption and approval of this
Agreement and the Company Merger by stockholders of the Company by the Company
Required Vote) if a Triggering Event (as defined below) shall have occurred;
(f) by either PacifiCare or the Company if (i) the PacifiCare Stockholders'
Meeting shall have been held and (ii) this Agreement, the PacifiCare Merger and
any related matters shall not have been adopted and approved at such meeting by
the Required PacifiCare Vote;
(g) by PacifiCare if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially inaccurate
as of the date of the Original Agreement, or if any of the Company's covenants
contained in this Agreement shall have been breached in any material respect;
PROVIDED, HOWEVER, that if an inaccuracy in the Company's representations and
warranties or a breach of a covenant by the Company is curable by the Company
and the Company is
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continuing to exercise all commercially reasonable efforts to cure such
inaccuracy or breach, then PacifiCare may not terminate this Agreement under
this Section 7.1(g) on account of such inaccuracy or breach; or
(h) by the Company if any of PacifiCare's or Holding's representations and
warranties contained in this Agreement shall be or shall have become materially
inaccurate as of the date of the Original Agreement, or if any of PacifiCare's
or Holding's covenants contained in this Agreement shall have been breached in
any material respect; PROVIDED, HOWEVER, that if an inaccuracy in PacifiCare's
or Holding's representations and warranties or a breach of a covenant by
PacifiCare or Holding is curable by PacifiCare or Holding and PacifiCare or
Holding is continuing to exercise all commercially reasonable efforts to cure
such inaccuracy or breach, then the Company may not terminate this Agreement
under this Section 7.1(h) on account of such inaccuracy or breach.
A "Triggering Event" shall be deemed to have occurred if (i) the Board of
Directors of the Company shall have failed to recommend, shall for any reason
have withdrawn or shall have amended or modified in a manner adverse to
PacifiCare its unanimous recommendation in favor of the Company Merger or
approval or adoption of this Agreement, or the Company shall have failed to
include in the Prospectus/Proxy Statement the unanimous recommendation of the
Board of Directors of the Company in favor of the Company Merger and approval
and adoption of this Agreement and related matters; (ii) the Board of Directors
of the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (iii) the Company shall have entered into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants); or (iv) the Company
shall have failed to hold the Company Stockholders' Meeting within 60 days after
the S-4 Registration Statement is declared effective and any Acquisition
Proposal shall have been made during such 60-day period.
"Acquisition Proposal" shall mean any proposal (other than any proposal by
PacifiCare or Neptune Sub or in connection with the transactions contemplated in
Section 4.15 regarding Talbert) regarding (i) any merger, consolidation, share
exchange, business combination or other similar transaction or series of related
transactions involving the Company; (ii) any sale, lease, exchange, transfer or
other disposition of the assets of the Company or any subsidiary of the Company
constituting more than 50% of the consolidated assets of the Company or
accounting for more than 50% of the consolidated revenues of the Company in any
one transaction or in a series of related transactions; and (iii) any offer to
purchase, tender offer, exchange offer or any similar transaction or series of
related transactions made by any Person involving more than 50% of the
outstanding shares of the capital stock of the Company or the filing of any
Statement on Schedule 14D-1 with the SEC in connection therewith.
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7.1, this Agreement shall be of no further
force or effect; PROVIDED, HOWEVER, that (i) this Section 7.2, Section 7.3 and
Article 8 shall survive the termination of this Agreement and shall remain in
full force and effect, (ii) such termination shall have no effect on the
Confidentiality Agreement dated July 22, 1996 between PacifiCare and the Company
which shall remain in full force and effect and, (iii) subject to Section 7.3(b)
and 7.3(c) below, the termination of this Agreement shall not relieve any party
from any liability for any breach of this Agreement.
7.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Mergers are consummated.
(b) In consideration of the substantial time, expense and forgoing of other
opportunities that PacifiCare and Holding have invested in the transactions
contemplated hereby:
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(i) If this Agreement is terminated pursuant to Section 7.1(d) at any
time after the occurrence of a Triggering Event or if this Agreement is
terminated by PacifiCare pursuant to Section 7.1(e), then the Company shall
pay to PacifiCare a fee, in immediately available funds, of $50,000,000 (the
"Termination Amount"). In the case of termination of this Agreement by the
Company pursuant to Section 7.1(d), the Termination Amount shall be paid
prior to such termination, and in the case of termination of this Agreement
pursuant to Section 7.1(e) or by PacifiCare pursuant to Section 7.1(d), the
Termination Amount shall be paid within one business day of such
termination. If the Company fails to pay such fee by the date provided
herein, in addition to any other remedies that may be available to
PacifiCare for such breach by the Company, said fee shall bear interest at
the lower of 10% per annum and the maximum rate allowable by law from the
date such payment was due until the date such fee is actually paid.
(ii) If this Agreement is terminated pursuant to Section 7.1(d) (and
Section 7.3(b)(i) is not applicable) and within 12 months of the date of the
Company Stockholders' Meeting the Company enters into an agreement relating
to an Acquisition Proposal, the Company shall pay to PacifiCare, within one
business day of entering into such agreement, a fee in immediately available
funds, of the Termination Amount. If the Company fails to pay such fee by
the date provided herein, in addition to any other remedies that may be
available to PacifiCare for such breach by the Company, said fee shall bear
interest at the lower of 10% per annum and the maximum rate allowable by law
from the date such payment was due until the date such fee is actually paid.
(c) In consideration of the substantial time, expense and forgoing of other
opportunities that the Company has invested in the transactions contemplated
hereby if this Agreement is terminated pursuant to Section 7.1(f) or if the
Mergers are not consummated solely by reason of a breach by PacifiCare caused by
its failure to enter into definitive agreements related to the financing
contemplated by the Commitment Letter, or the termination of such agreements or
the failure of PacifiCare to receive the funding contemplated by the Commitment
Letter, and after diligent efforts to find commercially reasonable alternative
financing (a "Financing Breach"), then PacifiCare shall pay the Company a fee,
in immediately available funds, of $50,000,000, in the case of a termination
pursuant to Section 7.1(f) or $100,000,000 in the case of a Financing Breach. In
the case of a termination by PacifiCare pursuant to Section 7.1(f), the
Termination Amount shall be paid upon termination. In the case of a termination
by the Company pursuant to Section 7.1(f) or the failure to consummate the
transactions contemplated hereby solely because of a Financing Breach,
PacifiCare shall pay the Termination Amount promptly following such event.
If PacifiCare fails to pay such fee by the date provided, in addition to
such other remedies as may be available to the Company for such breach by
PacifiCare, said fee shall bear interest on such fee at the lower of 10% per
annum and the maximum rate allowable by law from the date such fee was due until
the date it was actually paid.
(d) Each of PacifiCare and the Company acknowledge that the fees payable
pursuant to Sections 7.3(b) and 7.3(c) (and, if applicable, any interest thereon
and attorneys' fees and costs related to any suit to enforce such provisions)
are the sole remedies of such parties for termination or failure to consummate
the Mergers under the circumstances described in such sections (other than any
willful breach of any agreement or covenant set forth in this Agreement).
ARTICLE 8
MISCELLANEOUS
8.1 AMENDMENT. This Agreement may be amended with the approval of the
respective Boards of Directors of Holding, the Company and PacifiCare at any
time before or after approval of this Agreement by the stockholders of the
Company and the stockholders of PacifiCare; PROVIDED, HOWEVER, that after any
such stockholder approval, no amendment shall be made which would have a
material
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adverse effect on the stockholders of the Company or the stockholders of
PacifiCare without the further approval of such stockholders. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
8.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Mergers.
8.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and the
other agreements referred to herein and the Confidentiality Agreement dated as
of July 22, 1996 between PacifiCare and the Company constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among or between any of the parties with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one and the same
instrument, and shall be governed in all respects by the laws of the State of
Delaware without regard to its conflicts of laws principles.
8.5 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
8.6 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors; PROVIDED, HOWEVER, that this Agreement may not be
assigned by any party without the prior written consent of the other parties,
and any attempted assignment without such consent shall be void and of no
effect. Nothing in this Agreement, express or implied, is intended to or shall
confer upon any person except the parties hereto and their respective successors
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
8.7 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
To PacifiCare:
PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
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with a copy to:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
and:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
To Holding:
N-T Holdings, Inc.
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
and:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
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To the Company:
FHP International Corporation
3120 West Lake Center Drive
Santa Ana, CA 92704
Attention: President
Telephone: (714) 825-6600
Fax: (714)
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attention: John D. Hussey, Esq.
Telephone: (213) 620-1780
Fax: (213) 620-1398
To the Company Sub or Neptune Sub:
Tree Acquisition Corp. or Neptune Merger Corp. (as the case may be)
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
with a copy to:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
and
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication, (c) in the case of delivery by
nationally-recognized, overnight courier, on the business day following dispatch
and (d) in the case of mailing, on the fifth business day following such
mailing.
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8.8 COOPERATION. Each of the Company and PacifiCare agrees to cooperate
fully with the other and to execute and deliver such further documents,
certificates, agreements and instruments and to take such other actions as may
be reasonably requested by the other to evidence or reflect the Mergers and to
carry out the intent and purposes of this Agreement.
8.9 CERTAIN TERMS. As used in this Agreement:
(a) the word "person" refers to any (i) individual, (ii) corporation,
partnership, limited liability company or other entity, or (iii) Governmental
Authority; and
(b) the words "include" and "including," and variations thereof, shall not
be deemed to be terms of limitation, but rather shall be deemed to be followed
by the words "without limitation."
(c) representations or warranties made to the "knowledge of" or to the
"knowledge of the Company" or "knowledge of PacifiCare" shall include only
matters that are known or should have been known by the officers of those
corporations.
8.10 TITLES. The titles and captions of the Articles and Sections of this
Agreement are included for convenience of reference only and shall have no
effect on the construction or meaning of this Agreement.
8.11 ARTICLES, SECTIONS AND EXHIBITS. Except as otherwise indicated, all
references in this Agreement to "Articles," "Sections" and "Exhibits" are
intended to refer to Articles and Sections of this Agreement and Exhibits to
this Agreement.
8.12 JURISDICTION. Any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated by this Agreement may be brought
against any of the parties in the United States District Court for the Central
District of California or any state court sitting in Orange County, California,
and each of the parties hereto hereby consents to the exclusive jurisdiction of
such courts (and of the appropriate appellate courts) in any such suit, action
or proceeding and waives any objection to venue laid therein. Process in any
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the State of California. Without limiting the
generality of the foregoing, each party hereto agrees that service of process
upon such party at the address referred to in Section 8.7, together with written
notice of such service to such party, shall be deemed effective service of
process upon such party.
8.13 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
8.14 SCHEDULES. Any disclosure on a PacifiCare Disclosure Schedule or
Company Disclosure Schedule made with respect to an identified Section shall be
deemed to be a disclosure for the purpose of other sections of the applicable
Disclosure Schedule to which such disclosure is applicable on its face.
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IN WITNESS WHEREOF, the parties hereby have executed this Amended and
Restated Agreement and Plan of Reorganization as of the date first above
written.
PACIFICARE HEALTH SYSTEMS, INC.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
N-T HOLDINGS, INC.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
NEPTUNE MERGER CORP.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
TREE ACQUISITION CORP.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
--------------------------------------
Its: President
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EXHIBIT 1.4
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
N-T HOLDINGS, INC.
I
The name of this Corporation is: N-T Holdings, Inc.
II
The address of its registered office in the State of Delaware is 1013 Centre
Road, Wilmington, Delaware. The name of its registered agent at such address is
The Prentice-Hall Corporation System, Inc.
III
The nature of business or purposes to be conducted or promoted is to engage
in any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
IV
A. N-T Holdings, Inc. ("Corporation") is authorized to issue three classes
of shares of stock to be designated, respectively, "Class A Common Shares,"
"Class B Common Shares," and "Preferred Shares." The total number of shares of
stock which the Corporation shall have authority to issue is two hundred forty
million (240,000,000). The total number of Class A Common Shares which the
Corporation shall have authority to issue is one hundred million (100,000,000),
and the par value of each such Class A Common Share shall be one cent ($0.01).
The total number of Class B Common Shares which the Corporation shall have
authority to issue is one hundred million (100,000,000), and the par value of
each such Class B Common Share shall be one cent ($0.01). The total number of
Preferred Shares which the Corporation shall have the authority to issue is
forty million (40,000,000), and the par value of each such Preferred Share shall
be one cent ($0.01).
B. The powers, preferences and rights of the holders of Class A Common
Shares and Class B Common Shares (collectively, the "Common Shares"), and the
qualifications, limitations or restrictions thereof, shall be in all respects
identical, except as otherwise required by law or expressly provided in this
Certificate of Incorporation, as amended, and subject to the powers, preferences
and rights of the holders of Preferred Shares, as provided in or as otherwise
determined by the Board of Directors pursuant to paragraph C of this Article IV.
1. DIVIDENDS. Dividends may be declared and paid to the holders of the
Class A Common Shares and the Class B Common Shares in cash, property, or other
securities of the Corporation out of any funds legally available therefore. If
and when dividends on the Class A Common Shares and the Class B Common Shares
are declared payable from time to time by the Board of Directors, whether
payable in cash, in property or in securities of the Corporation, the holders of
the Class A Common Shares and the holders of the Class B Common Shares shall be
entitled to share equally, on a per share basis, in such dividends, except that,
dividends or other distributions payable on the Common Shares in Common Shares
shall be made to all holders of Common Shares and may be made (i) in Class B
Common Shares to the record holders of Class A Common Shares and to the record
holders of Class B Common Shares, (ii) in Class A Common Shares to the record
holders of Class A Common Shares and in Class B Common Shares to the record
holders of Class B Common Shares, or (iii) in any other authorized class or
series of capital stock to the holders of both classes of Common Shares.
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2. DISTRIBUTION ON DISSOLUTION, ETC. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the remaining
net assets of the Corporation shall, after payment in full of the liquidation
preference, if any, of any outstanding Preferred Shares, be distributed pro rata
to the holders of the Class A Common Shares and the Class B Common Shares in
accordance with their respective rights and interests.
3. VOTING RIGHTS.
(a) At each annual or special meeting of the shareholders, each holder of
Class A Common Shares shall be entitled to one (1) vote in person or by proxy
for each Class A Common Share standing in his name on the stock transfer records
of the corporation in connection with the election of directors and all other
actions submitted to a vote of shareholders; holders of Class B Common Shares
shall not vote on any matters except as otherwise provided by this Certificate
of Incorporation, as amended, and the Delaware General Corporation Law.
(b) The holders of Class B Common Shares shall be entitled to vote
separately as a group only with respect to (i) proposals to change the par value
of the Class B Common Shares, (ii) amendments to this Certificate of
Incorporation that alter or change the powers, preference or special rights of
the holders of Class B Common Shares so as to affect them adversely, and (iii)
such other matters as may require separate group voting under this Certificate
of Incorporation, as amended, and the Delaware General Corporation Law.
(c) The number of authorized Class B Common Shares may be increased or
decreased (but not below the number of shares then outstanding) by the
affirmative vote of the holders of a majority of the Class A Common Shares.
4. CONVERSION.
(a) All outstanding Class B Common Shares may be converted into Class A
Common Shares on a share-for-share basis by the Board of Directors if, as a
result of the existence of the Class B Common Shares, either the Class A Common
Shares or Class B Common Shares is or both are excluded from trading on the New
York Stock Exchange, the American Stock Exchange and all other principal
national securities exchanges then in use and also is excluded from quotation on
the National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market and other comparable national quotation systems then in use. In
making such determination, the Board of Directors may conclusively rely on any
information or documentation available to it, including filings made with the
Securities and Exchange Commission, any stock exchange, the National Association
of Securities Dealers, Inc. or any other governmental or regulatory agency or
any written instrument purporting to be authentic.
(b) All outstanding Class B Common Shares shall be converted into Class A
Common Shares on a share-for-share basis if at any time the number of
outstanding Class A Common Shares, as reflected on the stock transfer records of
the Corporation, falls below ten percent (10%) of the aggregate number of
outstanding Class A Common Shares and of Class B Common Shares. For purposes of
the immediately preceding sentence, any Common Shares repurchased and held as
treasury shares or canceled by the Corporation shall no longer be deemed
"outstanding" from and after the date of repurchase.
(c) In the event of any conversion of the Class B Common Shares pursuant to
subparagraph 4(a) or 4(b), certificates which formerly represented outstanding
shares of Class B Common Shares will thereafter be deemed to represent a like
number of shares of Class A Common shares and all authorized Common Shares shall
consist of only Class A Common Shares.
5. CLASS B COMMON SHARE PROTECTION PROVISION.
(a) If, after the effective time (the "Effective Time") of the PacifiCare
Merger (the "PacifiCare Merger"), as that term is defined in the Amended and
Restated Agreement and Plan of Reorganization dated as of November 11, 1996,
among PacifiCare Health Systems, Inc., N-T Holdings, Inc., Neptune Merger Corp.,
Tree Acquisition Corp. and FHP International Corporation, as amended (the
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"Reorganization Agreement"), any person or group acting in concert acquires
beneficial ownership of shares representing 10% or more of the then issued and
outstanding Class A Common Shares (excluding the number of shares beneficially
owned by such person or group at or before the Effective Time and other than
upon the issuance or sale by the Corporation, by operation of law, including a
merger, consolidation or reorganization of a beneficial owner, by will or the
laws of descent and distribution, by gift or by foreclosure of a bona fide
loan), and such person or group (a "Significant Shareholder") does not own an
equal or greater percentage of the Class B Common Shares acquired after the
Effective Time, such Significant Shareholder must, within a ninety (90) day
period beginning the day after becoming a Significant Shareholder, make a public
cash tender offer in compliance with all applicable laws and regulations to
acquire additional Class B Common Shares as provided in this subparagraph B (5)
of Article IV (a "Class B Protection Transaction").
(b) In each Class B Protection Transaction, the Significant Shareholder must
make a public tender offer to acquire that number of Class B Common Shares
determined by (i) multiplying the percentage of outstanding Class A Common
Shares beneficially owned by such Significant Shareholder and acquired after the
Effective Time by such Significant Shareholder by the total number of shares of
Class B Common Shares outstanding on the date such person or group became a
Significant Shareholder, and (ii) subtracting therefrom the total number of
shares of Class B Common Shares beneficially owned on such date and acquired
after the Effective Time by such Significant Shareholder (including shares
acquired on such date at or prior to the time such person or group became a
Significant Shareholder). The Significant Shareholder must acquire all of such
shares validly tendered; provided, however, that if the number of Class B Common
Shares tendered to the Significant Shareholder exceeds the number of shares
required to be acquired pursuant to the formula set forth in this subparagraph
5(b), the number of Class B Common Shares acquired from each tendering holder
shall be pro rata in proportion to the total number of Class B Common Shares
tendered by all tendering holders.
(c) The offer price for any Class B Common Shares required to be purchased
by the Significant Shareholder pursuant to this subparagraph B(5) shall be the
greater of (i) the highest price per share paid by the Significant Shareholder
for any Class A Common Share in the six month period ending on the date such
person or group became a Significant Shareholder or (ii) the highest bid price
of a Class A Common Share or Class B Common Share on the Nasdaq National Market
(or such other exchange or quotation system as is then the principal trading
market for such shares) on the date such person or group became a Significant
Shareholder or (iii) the highest bid price of a Class A Common Share or Class B
Common Share on the Nasdaq National Market (or such other exchange or quotation
system as is then the principal trading market for such shares) on the date
preceding the date the Significant Shareholder makes the tender offer required
by this subparagraph B(5). For purposes of subparagraph B(5)(d) below, the
applicable date for the calculations required by clauses (i) and (ii) of the
preceding sentence shall be the date on which the Significant Shareholder
becomes required to engage in a Class B Protection Transaction. In the event
that the Significant Shareholder has acquired Class A Common Shares in the six
month period ending on the date such person or group becomes a Significant
Shareholder for consideration other than cash, the value of such consideration
per Class A Common Share shall be as determined in good faith by the Board of
Directors.
(d) A Class B Protection Transaction shall also be required to be effected
by any Significant Shareholder each time that the Significant Shareholder
acquires beneficial ownership of the next higher integral multiple of 5% (e.g.,
15%, 20%, 25%, etc.) of the outstanding Class A Common Shares after the
Effective Time (other than upon the issuance or sale by the Corporation, by
operation of law, including a merger, consolidation or reorganization of a
beneficial owner, by will or the laws of descent and distribution, by gift, or
by foreclosure of a bona fide loan) if such Significant Shareholder does not
then own an equal or greater percentage of the Class B Common Shares acquired
after the Effective Time. Such Significant Shareholder shall be required to make
a public tender offer to acquire that
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number of Class B Common Shares prescribed by the formula set forth in
subparagraph B(5)(b) above, and must acquire all shares validly tendered or a
pro rata portion thereof, as specified in subparagraph B(5)(b), at the price
determined pursuant to subparagraph B(5)(c) above.
(e) If any Significant Shareholder fails to make an offer required by this
subparagraph B(5) of Article IV, or to purchase shares validly tendered and not
withdrawn (after proration, if any), such Significant Shareholder shall not be
entitled to vote any Class A Common Shares beneficially owned by such
Significant Shareholder unless and until such requirements are complied with or
unless and until all Class A Common Shares causing such offer requirement to be
effective are no longer beneficially owned by such Significant Shareholder.
(f) The Class B Protection Transaction requirement shall not apply to any
increase in percentage ownership of Class A Common Shares resulting solely from
a change in the total amount of Class A Common Shares outstanding, provided that
any acquisition after such change which resulted in any person or group owning
10% or more of the Class A Common Shares (excluding in the case of the numerator
but not the denominator of the calculation of such percentage, Class A Common
Shares held by such Significant Shareholder immediately after the Effective
Time) shall be subject to any Class B Protection Transaction requirement that
would be imposed with respect to a Significant Shareholder pursuant to this
subparagraph B(5) of Article IV.
(g) All calculations with respect to percentage ownership of issued and
outstanding shares of either class of Common Shares will be based upon the
numbers of issued and outstanding shares reported by the Corporation on the last
to be filed of (i) the Corporation's most recent annual report on Form 10-K,
(ii) its most recent Quarterly Report on Form 10-Q, or (iii) its most recent
Current Report on Form 8-K.
(h) For purposes of this subparagraph B(5) of this Article IV, the term
"person means a natural person, corporation, partnership, trust, association,
government, or political subdivision, agency or instrumentality of a government,
or other entity. "Beneficial ownership" shall be determined pursuant to Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or any successor regulation. The formation or existence of a
"group" shall be determined pursuant to Rule 13d-5(b) under the 1934 Act or any
successor regulation.
6. MERGER OR CONSOLIDATION. In the event of a merger or consolidation of
the Corporation with or into another entity (whether or not the Corporation is
the surviving entity), the holders of Class B Common Shares shall be entitled to
receive the same per share consideration as the per share consideration, if any,
received by any holder of the Class A Common Shares in such merger or
consolidation; provided, however, that this restriction shall not apply to the
PacifiCare Merger.
7. SPLITS, SUBDIVISIONS, ETC. If the Corporation shall in any manner
split, subdivide or combine the outstanding Class A Common Shares or Class B
Common Shares, the outstanding shares of the other such class of Common Shares
shall be proportionally subdivided or combined in the same manner and on the
same basis as the outstanding shares of the other class of Common Shares have
been split, subdivided or combined.
8. NO PREEMPTIVE RIGHTS. No holder of Class A Common Shares or Class B
Common Shares shall, by reason of such holding, have any preemptive right to
subscribe to any additional issue of stock of any class or series of the
Corporation or to any security of the Corporation convertible into such stock.
9. CONSIDERATION FOR SALE FOR SHARES. The Board of Directors shall have
the power to issue and sell all or any part of any class of stock herein or
hereafter authorized to such persons, firms, associations or corporations, and
for such consideration as the Board of Directors shall from time to time, in its
discretion, determine, whether or not greater consideration could be received
upon the issue or sale of the same number of shares of another class, and as
otherwise permitted by law.
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10. CONSIDERATION FOR PURCHASE OF SHARES. The Board of Directors shall
have the power to purchase any class of stock herein or hereafter authorized
from such persons, firms, associations or corporations, and for such
consideration as the Board of Directors shall from time to time, in its
discretion, determine, whether or not less consideration could be paid upon the
purchase of the same number of shares of another class, and as otherwise
permitted by law.
C. The Preferred Shares may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Shares Designation") pursuant to the Delaware General Corporation
Law, to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restriction of any wholly unissued series of Preferred Shares, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. The Board of Directors shall designate each series
to distinguish it from other series and classes of stock of the Corporation,
shall specify the number of shares to be included in the series, and shall fix
the terms, rights, restrictions and qualifications of the shares of the series,
including any preferences, voting powers, dividend rights and redemption,
sinking fund and conversion rights. Subject to the express terms of any other
series of Preferred Shares outstanding at the time, the Board of Directors may
increase or decrease the number of shares or alter the designation or classify
or reclassify any unissued shares of a particular series of Preferred Stock by
fixing or altering in any one or more respects from time to time before issuing
the shares, any terms, rights, restrictions and qualifications of the shares. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series. The Board of Directors shall have the power
to purchase any of the Preferred Shares herein or hereafter authorized from such
persons, firms, or corporations, and for such consideration as the Board of
Directors shall from time to time, in its discretion, determine, whether or not
less consideration could be paid upon the purchase of the same number of shares
of another class, and as otherwise permitted by law.
There shall be a series of Preferred Stock designated "Series A Cumulative
Convertible Preferred Shares" (the "Convertible Preferred Shares") which shall
have the powers, preferences and rights as follows:
1. RANK. The Convertible Preferred Shares shall have a par value of $1.00
per share. The Convertible Preferred Shares will rank, with respect to dividend
rights and rights on liquidation, winding-up and dissolution, (i) senior to all
classes of common stock of the Corporation, as they exist on the date hereof or
as such stock may be constituted from time to time, and each other class or
series of capital stock or preferred stock established by the Board of Directors
to the extent the terms of such stock do not expressly provide that it ranks
senior to or on a parity with the Convertible Preferred Shares as to dividend
rights and rights on liquidation, winding-up and dissolution (collectively,
together with the Common Shares, the "Junior Securities"), (ii) on a parity with
each other class or series of capital stock or of preferred stock issued by the
Corporation established by the Board of Directors to the extent the terms of
such stock expressly provide that it will rank on a parity with the Convertible
Preferred Shares as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively, the "Parity Securities"), and (iii) junior to each
other class of capital stock or series of preferred stock established by the
Board to the extent the terms of such stock expressly provide that it will rank
senior to the Convertible Preferred Shares as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, the "Senior Securities").
Each share of the Convertible Preferred Shares shall rank equally in all respect
with each other share of the Convertible Preferred Shares.
2. AUTHORIZED NUMBER. The authorized number of shares constituting the
Convertible Preferred Shares shall be 11,000,000 shares.
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3. DIVIDENDS. Holders of Convertible Preferred Shares will be entitled to
receive, when, as and if declared by the Board of Directors out of funds of the
Corporation legally available therefor, cash dividends at an annual rate of 4%
of the Stated Value per share of Convertible Preferred Shares, payable quarterly
in arrears on March 15, June 15, September 15, and December 15, of each year,
commencing , 199 [first dividend date following the Mergers], provided that the
dividend payable on , 199 [first dividend date following the Mergers]
shall be in an amount determined by assuming that the Convertible Preferred
Shares (a) had been outstanding on , 199 [the date immediately following
the last dividend payment date on the FHP Series A Cumulative Convertible
Preferred Stock] (the "Transition Period Commencement Date"), and (b) had been
entitled to receive, when, as and if declared by the Board of Directors out of
funds of the Corporation legally available therefor, cash dividends at an annual
rate of (i) 5% of an amount equal to twice the Stated Value per share from such
date through , 199 [the date of the Merger] (the "Effective Date") and
(ii) 4% of the Stated Value per share from , 199 [the date immediately
following the date of the Merger] through , 199 [the first dividend date
following the Merger]. Each dividend will be payable to holders of record as
they appear on the books of the Corporation at the close of business on a record
date, not more than 60 nor less than 15 days before the payment date, fixed by
the Board of Directors. Dividends will be cumulative from the date of original
issuance of the Convertible Preferred Shares, which will be the Effective Date,
provided that, for purposes of dividends payable on , 199 [the first
dividend payment date following the Mergers] in respect of the period from the
Transition Period Commencement Date through the Effective Date (the "Transition
Period"), the Transition Period Commencement Date will be treated as the
issuance date for the Convertible Preferred Shares. Except as otherwise provided
in this subparagraph 3, dividends for each full dividend period will be computed
by dividing the annual dividend rate by four and dividends payable for any
period less than a full dividend period, which may include, without limitation,
dividends payable with respect to the Transition Period, will be computed on the
basis of a 360-day year consisting of twelve 30-day months. The Convertible
Preferred Shares will not be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends. No interest, or sum
of money in lieu of interest, will be payable in respect of any accrued and
unpaid dividends. No full dividends may be declared or paid or funds set apart
for the payment of dividends on any Parity Securities (except dividends on
Parity Securities paid in shares of Junior Securities) for any period unless
full cumulative dividends to be paid hereunder prior to the date thereof shall
have been paid, or contemporaneously are declared and paid, or declared and a
sum sufficient for payment thereof is set apart for such payment on the
Convertible Preferred Shares in accordance with the terms hereof. If full
dividends are not so paid, the Convertible Preferred Shares shall share
dividends PRO RATA with the Parity Securities according to the amount of
dividends due and payable with respect to each. No dividends may be paid or set
apart for such payment, or other distributions made on Junior Securities (except
dividends on Junior Securities paid in additional shares of Junior Securities),
and no Convertible Preferred Shares, Parity Securities or Junior Securities may
be repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, nor shall the Corporation permit any corporation
or entity directly or indirectly controlled by the Corporation to purchase any
Convertible Preferred Shares, Parity Securities or Junior Securities, if full
cumulative dividends to be paid hereunder prior to the date thereof have not
been paid on the Convertible Preferred Shares. Notwithstanding the foregoing,
the Corporation may (i) make redemptions, purchases or other acquisitions of
Convertible Preferred Shares, Parity Securities or Junior Securities payable in
Junior Securities or repurchases of Convertible Preferred Shares, Parity
Securities or Junior Securities in the ordinary course of business pursuant to
the terms of any current or future employee stock incentive plan or similar plan
adopted by the Board and (ii) make redemptions of Rights (as defined in Section
6 below) distributed pursuant to a Rights Agreement (as defined in Section 6
below).
4. LIQUIDATION RIGHTS. The Stated Value of each share of Convertible
Preferred Shares shall be $25.00. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, after satisfaction of
the claims of creditors and any holders of Senior Securities and
6
<PAGE>
before any payment or distribution of assets is made on any Junior Securities,
including, without limitation, the Common Shares, (i) the holders of Convertible
Preferred Shares shall receive a liquidation preference equal to the Stated
Value of their shares, and shall be entitled to receive an amount equal to all
accrued and unpaid dividends through the date of distribution (whether or not
declared), and (ii) the holders of any Parity Securities shall be entitled to
receive an amount equal to the full respective liquidation preferences
(including any premium) to which they are entitled and shall receive an amount
equal to all accrued and unpaid dividends with respect to their respective
shares through and including the date of distribution (whether or not declared).
If, upon such a voluntary or involuntary liquidation, dissolution or winding-up
of the Corporation, the assets of the Corporation are insufficient to pay in
full the amounts described above as payable with respect to the Convertible
Preferred Shares and any Parity Securities, the holders of the Convertible
Preferred Shares and such Parity Securities will share ratably in any
distribution of assets of the Corporation, first in proportion to their
respective liquidation preferences until such preferences are paid in full, and
then in proportion to their respective amounts of accrued but unpaid dividends.
After payment of any such liquidation preference and accrued but unpaid
dividends, the Convertible Preferred Shares will not be entitled to any further
participation in any distribution of assets by the Corporation. Neither the sale
or transfer of all or any part of the assets of the Corporation for cash,
securities or other property, nor the merger or consolidation of the Corporation
into or with any other corporation or a merger of any other corporation with or
into the Corporation, will be deemed to be a liquidation, dissolution or
winding-up of the Corporation.
5. VOTING RIGHTS.
(a) Except as provided below or as may be required by Delaware law or
provided by the resolution creating any other series of Preferred Shares, the
holders of Convertible Preferred Shares will not be entitled to vote. So long as
any shares of Convertible Preferred Shares are outstanding, the vote or consent
of the holders of 66 2/3% of the outstanding shares of Convertible Preferred
Shares, voting together as a single class, shall be necessary to (i) increase or
decrease the par value of the shares of Convertible Preferred Shares or (ii)
alter or change the powers, preferences, or special rights of the shares of
Convertible Preferred Shares so as to affect them adversely or (iii) authorize
or issue any additional class or series of Parity Securities or Senior
Securities, or any security convertible into Parity Securities or Senior
Securities.
(b) (i) In the event that any accrued dividends (whether or not declared)
on the Convertible Preferred Shares shall not have been paid in an aggregate
amount equal to or greater than six quarterly dividends, the maximum authorized
number of directors of the Corporation will be automatically increased by two,
and holders of Convertible Preferred Shares shall be entitled to vote their
shares of Convertible Preferred Shares, together with the holders of any Parity
Securities upon which like voting rights have been conferred and are exercisable
(the "Voting Parity Securities"), in accordance with the procedures set forth
below, to elect, as a class, an additional two directors. So long as any shares
of Convertible Preferred Shares shall be outstanding, the holders of shares of
Convertible Preferred Shares shall retain the right to vote and elect, with the
holders of such Voting Parity Securities, as a class, two directors until all
accrued but unpaid dividends on the Convertible Preferred Shares are paid in
full or declared and set aside for payment. The period during which holders of
Convertible Preferred Shares retain such right is referred to as a "Default
Period".
(ii) So long as any shares of Convertible Preferred Shares shall be
outstanding, during any Default Period, the voting right described in
subsection (i) above may be exercised initially at a special meeting called
pursuant to subsection (iii) below or at any annual meeting of stockholders.
The absence of a quorum of holders of Common Shares (or any class thereof)
shall not affect the exercise of such voting rights by the holders of
Convertible Preferred Shares and Voting Parity Securities. Holders of
Convertible Preferred Shares and Voting Parity Securities shall be entitled,
as among the class of holders of Convertible Preferred Shares and Voting
Parity Securities, to one vote for each $25.00 of liquidation preference
represented by the shares so held.
7
<PAGE>
(iii) Unless the holders of Convertible Preferred Shares and Voting
Parity Securities, if any are then outstanding, have, during an existing
Default Period, previously exercised their right to elect directors, the
Board may, and upon the request of the holders of record of not less than
10% of the aggregate liquidation preference of Convertible Preferred Shares
and Voting Parity Securities, the Board shall, order the calling of a
special meeting of holders of Convertible Preferred Shares and Voting Parity
Securities, if any are then outstanding, which meeting shall thereupon be
called by the Chairman of the Board, the President, a Vice President or the
Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Convertible Preferred Shares and Voting Parity
Securities are entitled to vote pursuant to this subsection (iii) shall be
given to each holder of record of Convertible Preferred Shares by mailing a
copy of such notice to such holder at such holder's last address as it
appears on the books of the Corporation. Such meeting shall be called for a
date not later than 90 days after such order or request, or, in default of
the calling of such meeting within 90 days after such order or request, such
meeting may be called on similar notice by any stockholder or stockholders
owning in the aggregate not less than 10% of the aggregate liquidation
preference of the Convertible Preferred Shares and Voting Parity Securities.
Notwithstanding the provisions of this subsection (iii), the Corporation
shall not be required to call such a special meeting if such request is
received less then 120 days before the date fixed for the next ensuing
annual meeting of stockholders of the Corporation, at which meeting such
newly created directorships shall be filled by vote of the holders of
Convertible Preferred Shares and Voting Parity Securities.
(iv) During any Default Period, the holders of Class A Common Shares, and
other classes of stock of the Corporation, if applicable, shall continue to
be entitled to elect all of the Directors unless and until the holders of
Convertible Preferred Shares and Voting Parity Securities shall have
exercised their right to elect two Directors voting as a class. After the
exercise of this right (x) the Directors so elected by the holders of
Convertible Preferred Shares and Voting Parity Securities shall continue in
office until the earlier of (A) such time as their successors shall have
been elected by such holders and (B) the expiration of the Default Period,
and (y) any vacancy in the Board of Directors with respect to a Directorship
to be elected pursuant to this subparagraph (b) by the holders of
Convertible Preferred Shares and Voting Parity Securities may be filled by
vote of the remaining Director previously elected by such holders.
References in this subsection (b) to Directors elected by the holders of a
particular class of stock shall include Directors elected by such Directors
to fill vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a Default Period, (x) the right
of the holders of Convertible Preferred Shares to elect Directors pursuant
to this subparagraph (b) shall cease, subject to continuing application of
subparagraph (b)(i) upon each and every subsequent reoccurrence of the event
described therein, (y) the term of any Directors elected by the holders of
Convertible Preferred Shares and Voting Parity Securities pursuant to this
subparagraph (b) shall terminate, and (z) the number of Directors shall be
such number as may be provided for in the Certificate of Incorporation or
bylaws irrespective of any increase made pursuant to subsection (i) of this
subparagraph (b) (such number being subject, however, to subsequent change
in any manner provided by law or in the Certificate of Incorporation or
bylaws).
6. CONVERSION.
(a) RIGHT TO CONVERT. Each share of Convertible Preferred Shares will be
convertible (the rights to convert described in this subsection (a) are referred
to as the "Conversion Rights") at the option of the holder thereof, into such
number of fully paid and non-assessable shares of Class B Common Shares
(together with any Rights (as defined in subsection (b)(iii) below) associated
therewith) as is equal to (A) the sum of (i) twice the Stated Value of the
Convertible Preferred Shares plus (ii) accrued but unpaid dividends in arrears
thereon to which the holder converting such shares is entitled, divided
8
<PAGE>
by (B) the Conversion Price then in effect. The initial "Conversion Price" for
the Convertible Preferred Shares shall be $[ (1)] and shall be subject to
adjustment as described below. The holders of Convertible Preferred Shares at
the close of business on a dividend payment record date shall be entitled to
receive the dividend payable on such shares on the corresponding dividend
payment date notwithstanding the conversion of such Convertible Preferred Shares
or the Corporation's default on payment of the dividend due on such dividend
payment date. However, shares of Convertible Preferred Shares surrendered for
conversion during the period from the close of business on any record date for
the payment of dividends on such shares to the opening of business on the
corresponding dividend payment date (except shares called for redemption to
occur during the period from the record date to the close of business on the
payment date pursuant to Section 7 below) must be accompanied by payment of an
amount equal to the dividend payable on such shares on such dividend payment
date. A holder of Convertible Preferred Shares on a dividend payment record date
who (or whose transferee) tenders shares of Convertible Preferred Shares on a
dividend payment date will be entitled to receive the dividend payable on such
shares by the Corporation on such date, and such converting holder need not
include payment in the amount of such dividend upon surrender of shares of
Convertible Preferred Shares for conversion. Except as provided above, no
payment or adjustment will be made on account of accrued or unpaid dividends
upon the conversion of shares of Convertible Preferred Shares. Shares of
Convertible Preferred Shares called for redemption will not be convertible after
the close of business on the day preceding the date fixed for redemption, unless
the Corporation defaults in payment of the redemption price.
(b) ANTI-DILUTION PROVISIONS. The Conversion Price is subject to
adjustment after the issuance of the Convertible Preferred Shares from time to
time as follows:
(i) In case the Corporation shall (1) pay a dividend or make a
distribution on Common Shares in shares of Common Shares, (2) subdivide its
outstanding shares of Common Shares into a greater number of shares or (3)
combine its outstanding shares of any class of Common Shares into a smaller
number of shares, the Conversion Price in effect immediately prior to such
action shall be adjusted (and any other appropriate action taken by the
Corporation) so that the holder of any Convertible Preferred Shares
thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Shares which such holder would have been entitled
to receive immediately following such action had the holder's Convertible
Preferred Shares been converted immediately prior thereto. An adjustment
made pursuant to this subsection (i) shall become effective immediately
(except as provided in subsection (vi) below) after the record date in the
case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision or combination.
(ii) In case the Corporation shall issue rights, options or warrants to
all holders of its outstanding shares of Common Shares, or of its
outstanding shares of any class or series of Common Shares, entitling them,
for a period expiring within 45 days after the record date mentioned below,
to subscribe for or purchase shares of Common Shares at a price per share
less than the Current Market Price per share (as defined in subsection (v)
below) of such offered Common Shares on the record date mentioned below,
then the Conversion Price in effect immediately prior thereto shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the date of issuance of such
rights, options or warrants by a fraction of which
(1) the numerator shall be the sum of (A) the number of shares of
Common Shares outstanding on the date of issuance of such rights, options
or warrants immediately prior to such issuance plus (B) the number of
shares of such offered Common Shares which the aggregate offering price
of the total number of shares so offered would purchase at such
- ------------------------
(1) A price equal to the FHP existing conversion price of $31 per share times a
fraction, the numerator of which is $1.00 and the denominator of which is
the Final Exchange Ratio as defined in the Reorganization Agreement.
9
<PAGE>
Current Market Price (determined by multiplying such total number of
shares offered for subscription or purchase by the sum of the exercise
price of such rights, options or warrants plus the value of any
consideration per share paid to the Corporation for such rights, options
or warrants and dividing the product so obtained by such Current Market
Price), and
(2) the denominator shall be the sum of (A) the number of shares of
Common Shares outstanding on the date of issuance of such rights, options
or warrants immediately prior to such issuance plus (B) the number of
additional shares of Common Shares which are so offered for subscription
or purchase.
Such adjustment shall be made successively whenever any rights, options
or warrants are issued, and shall become effective immediately (except as
provided in subsection (vi) below) after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants; provided, however, in the event that all the shares of Common
Shares offered for subscription or purchase are not delivered upon the
exercise of such rights, options or warrants, upon the expiration of such
rights, options or warrants the Conversion Price shall be readjusted to the
Conversion Price which would have been in effect had the numerator and the
denominator of the foregoing fraction and the resulting adjustment been made
based upon the number of shares of Common Shares actually delivered upon the
exercise of such rights, options or warrants rather than upon the number of
shares of Common Shares offered for subscription or purchase. In determining
the value of any consideration received by the Corporation for such rights,
options or warrants, the determination of the Board of Directors in good
faith shall be conclusive and shall be described in a Board resolution.
(iii) Notwithstanding subsection (ii) above, any adjustments to the
Conversion Price to account for the issuance of rights ("Rights") under a
shareholder rights plan or agreement, "poison pill" or similar arrangement
(a "Rights Agreement") adopted subsequent to the date hereof shall be made
when such Rights become exercisable or exchangeable by the holder thereof
for Common Shares (Common Shares issued pursuant to the exercise of, or
exchange by the Corporation for, such Rights are referred to as "Rights
Stock") pursuant to a Rights Agreement at a price per share less than the
Current Market Price per share of such Common Shares on the date of such
exercise or exchange. The Conversion Price in effect immediately prior to
such exercise or exchange shall be adjusted so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
to the date of such exercise or exchange by a fraction of which
(1) the numerator shall be the sum of (A) the number of shares of
Common Shares of the type issued pursuant to the exercise of, or exchange
by the Corporation for, such Rights outstanding on the date of issuance
of such Rights Stock immediately prior to such issuance plus (B) the
number of shares of Common Shares of the type issued pursuant to the
exercise of, or exchange by the Corporation for, such Rights which the
aggregate consideration received for the total number of shares of Rights
Stock so issued would purchase at such Current Market Price (determined
by multiplying such total number of shares of Rights Stock by the
consideration received per share of such Rights Stock and dividing the
product so obtained by such Current Market Price), and
(2) the denominator shall be the sum of (A) the number of shares of
Common Shares of the type issued pursuant to the exercise of, or exchange
by the Corporation for, such Rights outstanding on the date of issuance
of such Rights Stock immediately prior to such issuance plus (B) the
number of additional shares of Rights Stock which are so issued.
Such adjustment shall be made successively whenever any Rights Stock is
issued, and shall become effective immediately (except as provided in
subsection (vi) below) after the issuance of Rights Stock. If after the
applicable "Distribution Date" or a similar date (as defined in a Rights
Agreement) holders converting shares of Convertible Preferred Shares are,
for any reason, not entitled to receive the Rights or similar rights,
options or warrants which would otherwise be attributable (but for the date
of conversion) to the shares of Common Shares received upon such
10
<PAGE>
conversion), then a reducing adjustment shall be made in the Conversion
Price to reflect the fair market value of the Rights or similar rights,
options or warrants. If such an adjustment is made and the Rights or similar
rights, options or warrants are later exchanged, redeemed, invalidated or
terminated, then a corresponding reversing adjustment shall be made to the
Conversion Price, on an equitable basis, to take account of such event.
However, the Corporation may elect to provide that such shares of Common
Shares issuable upon conversion of the Convertible Preferred Shares, whether
or not issued after the Distribution Date or such similar date for such
Rights, will be accompanied by the Rights which would otherwise be
attributable (but for the date of conversion to such shares of Common
Shares, in which event the preceding two sentences shall not apply).
(iv) In case the Corporation shall distribute to substantially all
holders of Common Shares, or to substantially all holders of its outstanding
shares of any class or series of Common Shares, evidences of indebtedness,
equity securities (including equity interests in the Corporation's
subsidiaries) other than Common Shares or other assets (other than cash
dividends paid out of earned surplus of the Corporation or, if there shall
be no earned surplus, out of net profits for the fiscal year in which the
dividend is made and/or the preceding fiscal year), or shall distribute to
substantially all holders of Common Shares or to substantially all holders
of any class or series of Common Shares, rights, options or warrants to
subscribe to securities (other than any rights, options or warrants referred
to in subsection (ii) above or Rights referred to in subparagraph (iii)
above), then in each such case the Conversion Price shall be adjusted so
that it shall equal the price determined by multiplying the Conversion Price
in effect immediately prior to the date of such distribution by a fraction
of which the numerator shall be the Current Market Price per share of the
Common Shares (as determined below) on the record date mentioned below less
the quotient of the then fair market value of the assets, evidences of
indebtedness and equity securities so distributed, or of such subscription
rights, warrants or options, divided by the number of shares of Common
Shares outstanding on such record date, and of which the denominator shall
be such Current Market Price of the Common Shares. For the purposes of this
subsection (iv), in the event of a distribution of shares of capital stock
or other securities of any subsidiary of the Corporation as a dividend on
shares of Common Shares, the "then fair market value" of the shares or other
securities so distributed shall be the value of such shares or other
securities on the record date mentioned below as determined by the Board of
Directors, whose good faith determination shall be conclusive evidence of
such value, and shall be described in a Board resolution. Such adjustment
shall become effective immediately (except as provided in subsection (vi)
below) after the record date for the determination of stockholders entitled
to receive such distribution.
(v) For the purpose of any computation under subsection (ii), (iii) or
(iv) above, the "Current Market Price" per share of stock on any date shall
be (A) deemed to be the average of the last sale prices of a share of such
shares for the fifteen consecutive trading days commencing 20 trading days
before the earliest of the date in question and the date before the "ex
date" with respect to the issuance or distribution requiring such
computation, or (B) in each case where the Current Market Price per share is
to be determined with respect to the two classes or series of Common Shares
considered together, deemed to equal the quotient of (i) the sum of (a) AvgA
multiplied by Na and (b) AvgB multiplied by Nb, divided by (ii) Nt, where
<TABLE>
<S> <C> <C>
AvgA = the average of the last sale prices of a share of Class A Common
Shares for the fifteen consecutive trading days commencing 20
trading days before the earliest of the date in question and the
date before the "ex date" with respect to the issuance or
distribution requiring such computation,
AvgB = the average of the last sale prices of a share of Class B Common
Shares for the fifteen consecutive trading days commencing 20
trading days before the earliest of the date in question and the
date before the "ex date" with respect to the issuance or
distribution requiring such computation,
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Na = the average number of shares of Class A Common Shares outstanding
during the fifteen consecutive trading days commencing 20 trading
days before the earliest of the date in question and the date before
the "ex date" with respect to the issuance or distribution requiring
such computation,
Nb = the average number of shares of Class B Common Shares outstanding
during the fifteen consecutive trading days commencing 20 trading
days before the earliest of the date in question and the date before
the "ex date" with respect to the issuance or distribution requiring
such computation, and
Nt = the sum of Na and Nb.
</TABLE>
For purposes of this subsection (v), the term "ex date," when used with
respect to any issuance or distribution, means the first date on which the
stock trades regular way on the principal national securities exchange on
which the stock is listed or admitted to trading (or if not so listed or
admitted, on Nasdaq, or a similar organization if Nasdaq is no longer
reporting trading information) without the right to receive such issuance or
distribution.
(vi) In any case in which this Section shall require that an adjustment
be made immediately following a record date or immediately following the
exercise of, or exchange of a right, option or warrant, the Corporation may
elect to defer the effectiveness of such adjustment (but in no event until a
date later then the later of the "ex date" as defined above and the
effective date of the event giving rise to such adjustment), in which case
the Corporation shall, with respect to any Convertible Preferred Shares
converted after the date of such exercise or exchange or such record date,
as the case may be, and before such adjustment shall have become effective
(1) defer making any cash payment or issuing to the holder of such
Convertible Preferred Shares the number of shares of Common Shares and other
capital stock of the Corporation issuable upon such conversion in excess of
the number of shares of Common Shares and other capital stock of the
Corporation issuable thereupon only on the basis of the Conversion Price
prior to adjustment, and (2) not later than five business days after such
adjustment shall have become effective, pay to such holder the appropriate
cash payment and issue to such holder the additional shares of Common Shares
and other capital stock of the Corporation issuable on such conversion.
(vii) No adjustment in the Conversion Price shall be required if the
holders of Convertible Preferred Shares are to participate in the
transaction on a basis and with notice that the Board of Directors
determines in good faith to be fair and appropriate in light of the basis
and notice on which holders of Common Shares participate in the transaction.
In addition, no adjustment in the Conversion Price shall be required unless
such adjustment (plus any adjustments not previously made by reason of this
subsection (vii)) would require an increase or decrease of at least 1% in
the Conversion Price; provided, that any adjustments which by reason of this
subsection (vii) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section shall be made to the nearest cent or to the nearest one-hundredth of
a share, as the case may be.
(viii) Whenever the Conversion Price is adjusted as provided above:
(1) the Corporation shall compute the adjusted Conversion Price and
shall promptly file with the stock transfer or conversion agent, as
appropriate, for the Convertible Preferred Shares, a certificate signed
by a principal financial officer of the Corporation setting forth the
adjusted Conversion Price and showing in reasonable detail the facts upon
which such adjustment is based and the computation thereof; and
(2) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall, as soon as
practicable, be sent by first-class mail to the holders of record of the
Convertible Preferred Shares.
12
<PAGE>
In case:
(A) the Corporation shall take any action which would require an
adjustment to the Conversion Price pursuant to subsection (iv) above;
(B) the Corporation shall authorize the granting to the holders
of its Common Shares of rights, options or warrants entitling them to
subscribe for or purchase any shares of capital stock of any class or
of any other rights;
(C) of any reorganization or reclassification of the Common
Shares or any class or series of Common Shares (other than a
subdivision or combination of its outstanding Common Shares), or of
any consolidation or merger to which the Corporation is a party and
for which approval of any stockholders of the Corporation is
required, or of the sale, lease or transfer of all or substantially
all the assets of the Corporation; or
(D) of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation;
then the Corporation shall cause to be mailed to the stock transfer or
conversion agent, as appropriate, for the Convertible Preferred Shares
and to the holders of record of Convertible Preferred Shares, at least 20
days (for 10 days in any case described in subsections (A) or (B) above)
prior to the applicable record date or effective date specified below, a
notice stating (x) the date as of which the holders of record of Common
Shares to be entitled in such dividend, distribution, rights, options or
warrants are to be determined, or (y) the date on which such
reorganization, reclassification, consolidation, merger, sale, lease,
transfer, liquidation, dissolution or winding-up is expected to become
effective, and the date or dates as of which it is expected that holders
of record of Common Shares shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such
reorganization, reclassification, consolidation, merger, sale, lease,
transfer, liquidation, dissolution or winding-up. Neither the failure to
give the notice required by this subsection (viii), nor any defect
therein, to any particular holder shall affect the sufficiency of the
notice or the legality or validity of any such dividend, distribution,
right, option, warrant, reorganization, reclassification, consolidation,
merger, sale, lease, transfer, liquidation, dissolution or winding-up, or
the vote authorizing any such action with respect to the other holders.
(ix) To the extent permitted by law, the Corporation from time to time
may reduce the Conversion Price by any amount for any period of at least 20
days (or such other period as may then be required by applicable law) if the
Board of Directors has made a determination in good faith that such
reduction would be in the best interests of the Corporation, which
determination shall be conclusive. No reduction in the Conversion Price
pursuant to this subsection (ix) shall become effective unless the
Corporation shall have mailed a notice, at least 15 days prior to the date
on which such reduction is scheduled to become effective, to each holder of
Convertible Preferred Shares. Such notice shall be given by first-class
mail, postage prepaid, at such holder's address as it appears on the books
of the Corporation. Such notice shall state the amount per share by which
the Conversion Price will be reduced and the period for which such reduction
will be in effect.
(x) At its option, the Corporation may make such reduction in the
Conversion Price, in addition to those otherwise required by this Section 6,
as the Board deems advisable to avoid or diminish any income tax to holders
of Common Shares resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes; provided that any such reduction shall not be effective until
written evidence of the action of the Board of Directors authorizing such
reduction shall be filed with the Secretary of the Corporation and notice
thereof shall have been given by first-class mail, postage prepaid, to each
holder of Convertible Preferred Shares at such holder's address as it
appears on the books of the Corporation.
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<PAGE>
(c) CONSOLIDATION, MERGER OR SALE OF ASSETS. If any transaction shall
occur, including without limitation (i) any recapitalization or reclassification
of shares of Common Shares or any class or series of Common Shares (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination of the Common Shares),
(ii) any consolidation or merger of the Corporation with or into another person
or any merger of another person into the Corporation (other than a merger in
which the Corporation is the surviving corporation and that does not result in a
reclassification, conversion, exchange or cancellation of Common Shares, or any
class or series of Common Shares), (iii) any sale, lease or transfer of all or
substantially all of the assets of the Corporation, (iv) any compulsory share
exchange, or (v) any conversion of all of the outstanding Class B Common Shares
into Class A Common Shares, pursuant to any of which holders of Class B Common
Shares shall be entitled to receive other securities, cash or other property,
then appropriate provision shall be made so that the holder of each share of
Convertible Preferred Shares then outstanding shall have the right thereafter to
receive on account of such share only the kind and amount of the securities,
cash or other property that would have been receivable upon such
recapitalization, reclassification, consolidation, merger, sale, lease,
transfer, share exchange or conversion by a holder of the number of shares of
Class B Common Shares issuable upon conversion of such share of Convertible
Preferred Shares immediately prior to such recapitalization, reclassification,
consolidation, merger, sale, lease, transfer or share exchange, and the
Corporation shall not enter into any such merger, consolidation, sale, lease,
transfer or share exchange unless the company formed by such consolidation or
resulting from such merger or that acquires such assets or that acquires the
Corporation's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document or
certificate of merger or other document effecting any such merger,
consolidation, sale, lease, transfer or share exchange to establish such right.
Upon the occurrence of any transaction described in the preceding sentence
(except clause (i) thereof), the Convertible Preferred Shares then outstanding
shall be deemed converted, subject nevertheless to the provisions of Section 8
to the extent applicable.
(d) ACCRUED DIVIDENDS AND FRACTIONAL SHARES. Dividends shall cease to
accrue on shares of the Convertible Preferred Shares surrendered for conversion
into Class B Common Shares pursuant to this Section or Section 8 below. No
fractional shares of Class B Common Shares shall be issued upon conversion of
the Convertible Preferred Shares, and any portion of Convertible Preferred
Shares surrendered for conversion which would otherwise result in a fractional
share of Class B Common Shares shall be redeemed for cash in an amount equal to
the product of such fraction multiplied by the closing price of the Class B
Common Shares on the last business day prior to conversion.
(e) MECHANICS OF CONVERSION. Before any holder of Convertible Preferred
Shares shall be entitled to convert such stock into shares of Class B Common
Shares and to receive certificates therefor, such holder shall surrender the
certificate or certificates for the Convertible Preferred Shares to be
converted, duly endorsed, at the office of the Corporation or of any transfer
agent for the Convertible Preferred Shares, and shall give written notice to the
Corporation at such office that such holder elects to convert the same. The
Corporation shall, within 10 days after such delivery, issue and deliver at such
office to such holder of the Convertible Preferred Shares (or to any other
person specified in the notice delivered by such holder) a certificate or
certificates for the number of shares of Class B Common Shares to which such
holder shall be entitled as aforesaid and a check payable to the holder for any
cash amounts payable as the result of a conversion into fractional shares of
Class B Common Shares. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Convertible Preferred Shares to be converted, and the Person or
persons entitled to receive the shares of Class B Common Shares issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Class B Common Shares on such date. In case any
certificate for shares of the Convertible Preferred Shares shall be surrendered
for conversion of only a part of the shares represented thereby, the Corporation
shall deliver within 10 days at such office to or upon the written order of the
holder thereof, a certificate or certificates for the number of shares of
Convertible Preferred Shares represented by such surrendered certificate which
are not being converted. Notwithstanding the foregoing, the
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<PAGE>
Corporation shall not be obligated to issue certificates evidencing the shares
of Class B Common Shares issuable upon such conversion unless the certificates
evidencing the Convertible Preferred Shares are either delivered to the
Corporation or its transfer agent or the Corporation or its transfer agent shall
have received evidence satisfactory to it evidencing that such certificates have
been lost, stolen or destroyed and the holder of such Convertible Preferred
Shares executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The issuance of certificates of shares of Class B Common Shares issuable upon
conversion of shares of Convertible Preferred Shares shall be made without
charge to the converting holder for any tax imposed in respect of the issuance
thereof; provided that the Corporation shall not be required to pay any tax
which may be payable with respect to any transfer involved in the issue and
delivery of any certificate in a name other than that of the holder of the
shares of Convertible Preferred Shares being converted.
(f) ADOPTION OF RIGHTS AGREEMENT. The Corporation shall not adopt a Rights
Agreement unless such Rights Agreement shall provide that (i) each holder of a
share of Convertible Preferred Shares shall be entitled to receive thereunder,
upon conversion of such share of Convertible Preferred Shares (in accordance
with the terms hereof), prior to the earlier to occur of the date of redemption
of Rights issued under such Rights Agreement, the date of expiration of the
Rights issued under such Rights Agreement, or the date the Conversion Price of
the Convertible Preferred Shares is adjusted pursuant to subsection 6(b)(iii)
above rights for each share of Common Shares issued upon conversion of such
share of Convertible Preferred Shares in an amount equal to the amount of Rights
issued with respect to each outstanding share of Common Shares issued rights
pursuant to such Rights Agreement and (ii) if such Rights are redeemed prior to
the conversion of any share of Convertible Preferred Shares into Common Shares,
then, upon conversion of such share of Convertible Preferred Shares, the holder
thereof shall receive an amount in cash equal to the amount in cash that such
holder would have received had he converted such share of Convertible Preferred
Shares prior to such redemption.
7. OPTIONAL REDEMPTION. On or after June 17, 1998, the Corporation may, at
its option, redeem all or from time to time any part of the shares of
Convertible Preferred Shares, out of funds legally available therefor, upon
giving a notice of redemption as set forth below, at the following redemption
prices per share (expressed as percentages of the Stated Value thereof), plus an
amount equal to accrued and unpaid dividends, if any (whether or not declared),
up to but excluding the date fixed for redemption, if redeemed during the
twelve-month period commencing on June 17, 1998 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -------------
<S> <C>
1998................................................................... 103.0%
1999................................................................... 102.5%
2000................................................................... 102.0%
2001................................................................... 101.5%
2002................................................................... 101.0%
2003................................................................... 100.5%
2004................................................................... 100.0%
</TABLE>
If fewer than all of the outstanding shares of the Convertible Preferred
Shares are to be redeemed, the number of shares to be redeemed shall be
determined by the Board of Directors in good faith and the shares to be redeemed
will be determined pro rata as nearly as practicable, or by such other method as
the Board of Directors may determine to be fair and appropriate. Convertible
Preferred Shares may not be redeemed unless full cumulative dividends have been
paid on the Convertible Preferred Shares for all past dividend periods.
Notice of redemption of Convertible Preferred Shares will be given by (i)
first-class mail, not less than 30 nor more than 60 days prior to the date fixed
for redemption thereof, to each record holder of shares of Convertible Preferred
Shares to be redeemed at the address of such holder in the books of the
Corporation and (ii) publication in THE WALL STREET JOURNAL. On the date such
notices are
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<PAGE>
mailed, the Corporation shall issue a press release announcing the redemption.
The mailed and published notice shall state, as appropriate: (1) the redemption
date and record date for purposes of such redemption; (2) the number of shares
of Convertible Preferred Shares to be redeemed and, if fewer than all
outstanding shares of Convertible Preferred Shares held by any holder are to be
redeemed, the number of shares to be redeemed from such holder; (3) the place or
places at which certificates for such shares are to be surrendered; (4) the then
current redemption price; and (5) that dividends on the Convertible Preferred
Shares to be redeemed shall cease to accrue on such Redemption Date, except as
otherwise provided herein. If such notice of redemption has been given, from and
after the specified redemption date (unless the Corporation defaults in making
payment of the redemption price), dividends on the Convertible Preferred Shares
so called for redemption will cease to accrue, such shares will no longer be
deemed to be outstanding, and all rights of the holders thereof as stockholders
of the Corporation (except the right to receive the redemption price and any
dividends due on a dividend payment date after the redemption date relating to a
dividend record date prior to such redemption date) will cease.
8. CHANGE IN CONTROL. If there occurs a Change in Control (as defined
below) with respect to the Corporation, then each share of Convertible Preferred
Shares may be converted (the rights to convert described in this Section
referred to as the "Special Conversion Rights"), at the option of the holder
thereof at any time from the date of such Change in Control until the expiration
of 60 days after the date of the Conversion Notice (as defined below) by the
Corporation to all holders of the Convertible Preferred Shares, into, at its
option, either (A) such number of fully paid and non-assessable shares of Class
B Common Shares as is equal to the Stated Value of the Convertible Preferred
Shares divided by the Special Conversion Price (as defined below) or (B) an
amount in cash equal to the Stated Value of the Convertible Preferred Shares
plus an amount equal to any accrued but unpaid dividends thereon. The "Special
Conversion Price" shall be the closing price of the Class B Common Shares on the
last trading day prior to the date the Corporation gives the Conversion Notice
(as defined below) to the holders of Convertible Preferred Shares.
Within five days after the occurrence of a Change in Control, the
Corporation shall give notice of the occurrence of the Change in Control and of
the Special Conversion Rights set forth herein in accordance with the procedures
set forth below to each holder of Convertible Preferred Shares (the "Conversion
Notice").
Each Conversion Notice shall state:
(a) that a Change in Control has occurred (and shall specify the date of
occurrence), and that the holder's Special Conversion Rights may be exercised in
accordance with this Section;
(b) the expiration date of the Special Conversion Rights;
(c) that a holder of Convertible Preferred Shares, in order to exercise
Special Conversion Rights, must deliver on or before the fifth day prior to the
expiration date of the Special Conversion Rights written notice to the
Corporation of the holder's exercise of those rights, together with the
certificate evidencing such holder's shares with respect to which the rights are
being exercised, duly endorsed for transfer;
(d) the Special Conversion Price and the Conversion Price which would
otherwise be applicable;
(e) a description of the procedure which a holder must follow to exercise
its Special Conversion Rights; and
(f) that holders of Convertible Preferred Shares electing to have such
shares converted will be required to surrender the certificates evidencing such
shares for delivery of shares of Class B Common Shares.
The Conversion Notice shall be given by first-class mail, postage paid, to
the holders of record of Convertible Preferred Shares at their respective
addresses as they appear on the books of the Corporation.
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<PAGE>
No failure of the Corporation to give the Conversion Notice shall limit any
holder's right to exercise its Special Conversion Rights.
Exercise of the Special Conversion Rights by a holder of Convertible
Preferred Shares will be irrevocable. The Corporation shall not enter into any
consolidation, merger or sale of assets, unless in connection therewith the
holders of Convertible Preferred Shares exercising Special Conversion Rights
will be entitled to receive the same consideration as received for the number of
shares of Class B Common Shares into which their shares of Convertible Preferred
Shares would have been converted pursuant to the Special Conversion Rights. The
Special Conversion Rights are in addition to the regular Conversion Rights that
apply to the Convertible Preferred Shares.
The Corporation may, at its option, elect to pay holders of Convertible
Preferred Shares exercising Special Conversion Rights an amount in cash equal to
the Stated Value of the Convertible Preferred Shares plus an amount equal to any
accrued but unpaid dividends thereon.
"Change in Control" means any of the following: (i) the sale, lease,
conveyance or other disposition of all or substantially all of the Corporation's
assets as an entirety or substantially as an entirety to any person or "group"
(within the meaning of Section 13(d)(3) of the 1934 Act) in one or a series of
transactions, provided that a transaction where the holders of Common Shares
immediately prior to such transaction own, directly or indirectly, 50% or more
of the common stock of such person or group immediately after such transactions
shall not be a Change in Control; (ii) the acquisition by the Corporation and/or
any of its subsidiaries of 50% or more of the aggregate voting power of the
Common Shares in one transaction or a series of related transactions; (iii) the
liquidation or dissolution of the Corporation, provided that a liquidation or
dissolution of the Corporation which is part of a transaction or series of
related transactions that does not constitute a Change in Control under the
"provided" clause of clause (i) above shall not constitute a Change in Control
under this clause (iii); or (iv) any transaction or series of transactions (as a
result of a tender offer, merger, consolidation or otherwise) that results in,
or that is in connection with, (a) any person, including a "group" (within the
meaning of Section 13(d)(3) of the 1934 Act) that includes such person,
acquiring "beneficial ownership" (as defined in Rule 13d-3 under the 1934 Act),
directly or indirectly, of 50% or more of the aggregate voting power of the
Common Shares of the Corporation or any person that possesses "beneficial
ownership" (as defined in Rule 13d-3 under the 1934 Act), directly, of 50% or
more of the aggregate voting Power of the Common Shares, or (b) less than 50%
(measured by the aggregate voting power of all classes) of the Corporation's
Common Shares being registered under Section 12(b) or 12(g) of the 1934 Act.
9. STATUS OF REACQUIRED SHARES. If shares of Convertible Preferred Shares
are converted pursuant to Section 6 hereof or redeemed pursuant to Section 7
hereof, the shares so converted or redeemed shall, upon compliance with any
statutory requirements, assume the status of authorized but unissued shares of
preferred stock of the Corporation, but may not be reissued as Convertible
Preferred Shares.
10. RESERVED SHARES. So long as any shares of Convertible Preferred Shares
remain outstanding, the Corporation agrees to keep reserved for issuance in
connection with the conversion of the Convertible Preferred Shares at all times
a number of authorized but unissued shares of Class B Common Shares at least
equal to 150% of the number of shares of Class B Common Shares issuable upon
conversion at the Conversion Price of all of the Convertible Preferred Shares
outstanding at such time. The Corporation shall take all action necessary so
that Class B Common Shares so issued will be validly issued, fully paid and
non-assessable. The Corporation shall use its best efforts to list the Class B
Common Shares required to be delivered upon conversion of the shares of
Convertible Preferred Shares, prior to such conversion, upon each national
securities exchange, if any, upon which the outstanding Common Shares are listed
at the time of such delivery.
11. PREEMPTIVE RIGHTS. The Convertible Preferred Shares are not entitled
to any preemptive or subscription rights in respect of any securities of the
Corporation.
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<PAGE>
12. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered by and when sent by telex or
telecopier (with receipt confirmed), provided a copy is also sent by express
(overnight, if possible) courier, addressed (i) in the case of a holder of
Convertible Preferred Shares, to such holder's address as it appears on the
books of the Corporation, and (ii) in the case of the Corporation, to the
Corporation's principal executive offices to the attention of the Corporation's
President,
13. SEVERABILITY OF PROVISIONS. Whenever possible, each provision of this
paragraph C shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid under
applicable law.
V
The number of Directors of the Corporation shall be twelve. The number of
Directors may hereafter be fixed from time to time by bylaw or amendment duly
adopted by the Board of Directors, provided, however, that the number of
Directors shall not be more than twelve nor less than five, except as otherwise
may be required to implement the provisions of paragraph C.5(b) of Article IV
hereof.
VI
A. The Board of Directors shall be and is divided in to three classes,
Class I, Class II and Class III. The number of Directors in each class shall be
the whole number contained in the quotient arrived at by dividing the authorized
number of Directors by three, and if a fraction is also contained in such
quotient then if such fraction is one-third (1/3) the extra Director shall be a
member of Class I and if the fraction is two-thirds (2/3) one of the extra
Directors shall be a member of Class I and the other shall be a member of Class
II. Each Director shall serve for a term ending on the date of the third annual
meeting following the annual meeting at which such Director was elected,
provided, however, that the Directors initially appointed to Class I shall serve
for a term ending on the date of the third annual meeting next following the
date hereof, the Directors initially appointed to Class II shall serve for a
term ending on the date of the second annual meeting next following the date
hereof, and the Directors initially appointed to Class III shall serve for a
term ending on the date of the first annual meeting next following the date
hereof.
B. In the event of any increase or decrease in the authorized number of
Directors, (1) each Director then serving as such shall nevertheless continue as
a Director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal, and (2) the newly
created or eliminated Directorships resulting from such increase shall be
apportioned by the Board of Directors to such class or classes as shall, so far
as possible, bring the number of Directors in the respective classes into
conformity with the formula in this Article, as applied to the new authorized
number of Directors.
C. Notwithstanding any of the foregoing provisions of this Article, each
Director shall serve until his successor is elected and qualified or until his
death, resignation or removal. A Director shall not be removed from office prior
to the expiration of his term except by the affirmative vote or written consent
of not less than sixty-six and two-thirds percent (66 2/3%) of the total votes
entitled to be cast in an election of Directors. Should a vacancy occur or be
created, the remaining Directors (even though less than a quorum) may fill the
vacancy for the full term of the class in which the vacancy occurs or is
created.
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<PAGE>
VII
A. In addition to requirements of any applicable statute, the affirmative
vote or written consent of not less than 66 2/3% of the total votes entitled to
be cast in an election of Directors, considered for purposes of this Article as
one class, shall be required for approval or authorization of any Business
Transaction (as hereinafter defined) between the Corporation and any Control
Person (as hereinafter defined); provided, however, that such additional voting
requirement shall not be applicable if:
(1) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation prior to the acquisition by the
Control Person, together with its Affiliates and Associates (as hereinafter
defined), of stock of the Corporation, which, in the aggregate, bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors; or
(2) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation after the acquisition by the Control
Person, together with its Affiliates and Associates, of stock of the
Corporation, which, in the aggregate, bears the rights to 10% or more of the
total votes entitled to be cast in an election of Directors, and such
acquisition by such Control Person and its Affiliates and Associates was
unanimously approved by the Board of Directors of the Corporation; or
(3) The Business Transaction is solely between the Corporation and
another corporation, 50% or more of the voting stock of which is owned by
the Corporation and none of which is owned by a Control Person, and each
holder of stock of the Corporation receives the same type of consideration
in proportion to his holdings; or
(4) Both of the following are satisfied:
(a) the cash or fair market value of the property, securities or
other consideration to be received per share in the Business Transaction
by holders of the stock of the Corporation is not less than the higher of
(i) the highest price per share (including brokerage commissions,
soliciting dealers' fees, dealer-management compensation, and other
expenses, including, but not limited to, newspaper advertisements,
printing and attorney's fees) paid by such Control Person in acquiring
any of its holdings of the Corporation's stock, or (ii) the highest per
share market price of the stock of the Corporation during the 3-month
period immediately preceding the date of the proxy statement described in
(c) below; and
(b) a proxy statement responsive to the requirements of the 1934 Act
shall be mailed to public stockholders of the Corporation for the purpose
of soliciting stockholder approval of such Business Transaction and shall
contain at the front thereof, in a prominent place, any recommendations
as to the advisability (or inadvisability) of the Business Transaction
which the Continuing Directors, or any of them, may choose to state, and,
if deemed advisable by a majority of the Continuing Directors, an opinion
of a reputable investment banking firm as to the fairness (or unfairness)
of the terms of such Business Transaction, from the point of view of the
remaining public stockholders of the Corporation (such investment banking
firm to be selected by a majority of the Continuing Directors and to be
paid a reasonable fee for their services by the Corporation upon receipt
of such opinion).
B. For the purposes of this Article:
(1) The term "Control Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
Affiliates and Associates, "beneficially owns" (as this term is defined on
the date on which this Article becomes effective in Rule 13d-3 of the
General Rules and Regulations under the 1934 Act) in the aggregate, stock of
the Corporation, which bears the rights to 10% or more of the total votes
entitled to be cast in an election of Directors, and any Affiliate or
Associate (as those terms are defined on the date of which this Article is
adopted in Rule 12b-2 of the General Rules and Regulations under the 1934
Act) of any such individual, corporation, partnership or other person or
entity;
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<PAGE>
(2) The term "Business Transaction" shall mean (a) any merger or
consolidation of the Corporation with or into a Control Person, (b) any
sale, lease, exchange, transfer or other disposition, including without
limitation a mortgage or any other security device, of all or any
Substantial Part (as hereinafter defined) of the assets of the Corporation
(including, without limitation, any voting securities of a subsidiary) or of
a subsidiary, to a Control Person, (c) any merger of consolidation of a
Control Person with or into the Corporation or a subsidiary of the
Corporation, (d) any sale, lease, exchange, transfer or other disposition of
all or any Substantial Part (as hereinafter defined) of the assets of a
Control Person to the Corporation or a subsidiary of the Corporation, (e)
the issuance of any securities of the Corporation or a subsidiary of the
Corporation to a Control Person, (f) the acquisition by the Corporation or a
subsidiary of the Corporation of any securities of a Control Person, (g) any
reclassification or recapitalization (including any reverse stock split)
involving stock of the Corporation, consummated within five (5) years after
a Control Person becomes a Control Person, (h) any plan or proposal by a
Control Person for the dissolution or liquidation of the Corporation, and
(i) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Transaction;
(3) The term "Continuing Director" shall mean any Director who was
elected by the public stockholders of the Corporation prior to the
acquisition by the Control Person, together with its Affiliates and
Associates, in the aggregate, of stock of the Corporation, which bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors, or a person recommended by succeed a Continuing Director by a
majority of Continuing Directors;
(4) The term "Substantial Part" shall mean more than 10% of the total
assets of the Corporation in question as of the end of its most recent
fiscal year ending prior to the time that the termination is being made;
(5) Without limitation, any stock of the Corporation which any Control
Person has the right to acquire at any time pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise, shall
be deemed outstanding and beneficially owned by such Control Person for
purposes of this Article only;
(6) For the purpose of subparagraph 4 of paragraph A of this Article,
the phrase, "other consideration to be received" shall include, without
limitation, stock of the Corporation retained by its existing public
stockholders in the event of a Business Transaction with such Control Person
in which the Corporation is the surviving corporation.
C. The provisions set forth in this Article shall not be repealed or
amended in any respect or in any manner, including any merger of consolidation
of the Corporation with any corporation, unless the surviving corporation's
Certificate of Incorporation contains an Article to the same effect as this
Article, except by the affirmative vote or written consent of not less than
66 2/3% of the total votes entitled to be cast in an election of Directors
attributable to stock owned by persons other than a Control Person.
D. A majority of the Continuing Directors shall have the power and duty to
determine for purposes of this Article on the basis of information known to
them:
(1) Whether any proposed transaction is a Business Transaction and
within the scope of this Article;
(2) Whether a stockholder is a Control Person; and
(3) For the purposes of subparagraph 4 of paragraph A, the per share
market value to be paid to stockholders in the Business Transaction and the
highest per share price paid by the Control Person in acquiring any of its
holdings of the Corporation's stock.
20
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VIII
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, alter or repeal the By-Laws
of the Corporation.
IX
No Director shall be personally liable to the corporation or any stockholder
for monetary damages for breach of fiduciary duty as a director, except for any
matter in respect of which such director shall be liable under Section 174 of
Title 8 of the Delaware Code (relating to the Delaware General Corporation Law)
or any amendment thereto or successor provision thereto or shall be liable by
reason that, in addition to any and all other requirements for such liability,
he (i) shall have breached his duty of loyalty to the corporation or its
stockholders, (ii) shall not have acted in good faith, (iii) shall have acted in
a matter involving intentional misconduct or a knowing violation of law or, in
failing to act, shall have acted in a manner involving intentional misconduct or
a knowing violation of law or, (iv) shall have derived an improper personal
benefit. Neither the amendment nor repeal of this Article Nine, nor the adoption
of any provision of the Certificate of Incorporation inconsistent with this
Article Nine, shall eliminate or reduce the effect of this Article Nine in
respect of any matter occurring or any cause of action, suit or claim that, but
for this Article Nine would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
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<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
Pursuant to the provisions of Section 242 of the General Corporation
Law of the State of Delaware (the "DGCL"), Talbert Medical Management
Holdings Corporation (the "Corporation") hereby certifies as follows:
1. The Certificate of Incorporation of the Corporation was filed
with the Delaware Secretary of State on November 12, 1996.
2. This Amended and Restated Certificate of Incorporation amends
and restates the provisions of the Certificate of Incorporation of the
Corporation. This Amended and Restated Certificate of Incorporation was duly
adopted by the board of directors by resolution dated November 21, 1996, in
accordance with Section 141(f) of the DGCL, and by the unanimous written
consent of the stockholders of the Corporation dated November __, 1996, in
accordance with Section 228 of the DGCL.
3. The text of the Certificate of Incorporation is hereby restated
and amended to read in its entirety as follows:
FIRST: The name of the Corporation is Talbert Medical Management
Holdings Corporation.
SECOND: The address of the Corporation's registered office in the
State of Delaware is 1201 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is sixteen million two hundred thousand shares
(16,200,000), consisting of fifteen million (15,000,000) shares of Common
Stock, of the par value of $.01 per share, and one million two hundred
thousand (1,200,000) shares of Preferred Stock, of the par value of $.01 per
share.
The shares of Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is hereby expressly authorized to fix
and
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<PAGE>
determine by resolution or resolutions the number of shares of each series of
Preferred Stock and the designation thereof, and voting and other powers,
preferences and relative, participating, optional or other special rights, if
any, with such qualifications, limitations or restrictions on such powers,
preferences and rights, if any, as shall be stated in the resolution or
resolutions providing for the issue of such series of Preferred Stock as may
be adopted from time to time by the Board of Directors prior to the issuance
of any shares thereof, in accordance with the General Corporation Law of the
State of Delaware, and to the full extent permitted thereby; including,
without limitation, any dividend rights, dividend rates, conversion rights
and terms, voting rights, redemption rights and terms (including any sinking
fund provisions), redemption price(s) and terms, and rights in the event of
liquidation, dissolution or distribution of assets. Subject to any
limitations or restrictions stated in any resolution or resolutions of the
Board of Directors originally fixing the number of shares constituting any
series, the Board of Directors may by resolution or resolutions likewise
adopted increase or decrease (but not below the number of shares of such
series then outstanding) the number of any such series subsequent to the
issuance of shares of that series, and in case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
FIFTH: No holder of any stock of the Corporation shall be entitled
as of right to purchase or subscribe for any part of any stock of the
Corporation authorized by this Certificate of Incorporation or of any
additional stock of any class to be issued by reason of any increase of the
authorized stock of the Corporation, or of any bonds, certificates of
indebtedness, debentures or other securities convertible into stock of the
Corporation, but any stock authorized by this Certificate of Incorporation,
or any such additional authorized issue of new stock or of securities
convertible into stock may be issued and disposed of by the Board of
Directors to such persons, firms, corporations or associations for such
consideration and upon such terms and in such manner as the Board of
Directors may in their discretion determine, without offering any thereof on
the same terms or on any terms to the stockholders then of record or to any
class of stockholders, unless the Board of Directors, in its sole discretion,
elects to do so.
SIXTH: The Corporation shall be entitled to treat the person in
whose name any share, right or option is registered as the owner thereof, for
all purposes, and shall not be bound to recognize any equitable or other
claim to or interest in such share, right or option on the part of any other
person, whether or not the Corporation shall have notice thereof, save as may
be expressly provided by the laws of the State of Delaware.
A director shall be fully protected in relying in good faith upon
the books of account of the Corporation or statements prepared by any of its
officials as to the value and amount of the assets, liabilities and/or net
profits of the
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Corporation, or any other facts pertinent to the existence and amount of
surplus or other funds from which dividends might properly be declared and
paid.
Without action by the stockholders, the shares of stock may be
issued by the Corporation from time to time for such consideration not less
than the par value thereof, as may be fixed from time to time by the Board of
Directors thereof, and any and all such shares so issued, the full
consideration for which has been paid or delivered, shall be deemed fully
paid stock and not liable to any further call or assessment thereon, and the
holder of such shares shall not be liable for any further call or assessment
thereon or for any further payment thereon.
SEVENTH: The Corporation is to have perpetual existence.
EIGHTH: The private property of the stockholders shall not be
subject to the payment of corporate debts to any extent whatsoever.
NINTH: All corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by statute or by this Certificate of
Incorporation.
Elections of directors need not be by ballot.
The Board of Directors shall consist of such number of directors as
shall be determined from time to time in the manner provided by the Bylaws.
The Board of Directors shall be and is divided into three classes,
Class I, Class II and Class III, which shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the date of the
third annual meeting following the annual meeting at which such director is
elected; provided, however, that each initial director of Class I shall hold
office until the annual meeting of stockholders in 1997; each initial
director in Class II shall hold office until the annual meeting of
stockholders in 1998; and each initial director in Class III shall hold
office until the annual meeting of stockholders in 1999.
In the event of any increase or decrease in the authorized number of
directors, (i) each director then serving as such shall nevertheless continue
as a director of the class of which he is a member until the expiration of
his current term, or his prior death, retirement, resignation or removal, and
(ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to maintain such classes as nearly equal as
possible.
Notwithstanding any of the foregoing provisions of this Certificate
of Incorporation, each director shall serve until his successor is elected
and qualified, or until his death, retirement, resignation or removal.
Should a vacancy occur or be
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created, whether arising through death, resignation or removal of a director,
or through an increase in the number of directors of any class, such vacancy
shall be filled by a majority vote of the remaining directors of the class in
which such vacancy occurs or by the sole remaining director of that class if
only one such director remains, or by the majority vote of the members of the
remaining classes if no such director remains. A director so elected to fill
a vacancy shall serve for the remainder of the then present term of office of
the class to which he is elected.
Notwithstanding any of the provisions of this Certificate of
Incorporation, whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors of the Corporation
by the provisions of this Certificate of Incorporation or any resolution or
resolutions of the Board of Directors fixing the terms and provisions of such
class or series, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by
such class or classes or series thereof then in office, or by the sole
remaining director so elected.
Any director may be removed by the requisite vote of the holders of
the shares of the Corporation then entitled to vote for the election of
directors, but only for cause.
Any amendment, alteration or repeal of this Article NINTH or any
provision hereof shall require the approval of the holders of the shares of
the Corporation representing at least 66-2/3% of the shares then entitled to
vote thereon.
IN FURTHERANCE AND NOT IN LIMITATION OF THE POWERS CONFERRED BY
STATUTE, THE BOARD OF DIRECTORS IS EXPRESSLY AUTHORIZED:
(a) To fix, determine and vary from time to time the amount to be
maintained as surplus and the amount or amounts to be set apart as working
capital.
(b) To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and/or to
abolish any such reserve in the manner in which it was created.
(c) To make, amend, alter, change, add to or repeal Bylaws for the
Corporation without any action on the part of the stockholders. The Bylaws
made by the directors may be amended, altered, changed, added to or
repealed by the stockholders; provided that, if FHP International
Corporation ("FHP") does not acquire in excess of 20% of the outstanding
shares of the Corporation's common stock from unsubscribed shares in the
offering of rights to FHP's stockholders, any amendment relating to an
increase or decrease in
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the authorized number of directors constituting the entire Board of
Directors or to the manner in which the number of directors is determined
shall require the approval of the entire Board of Directors, or, if the
amendment is made by the stockholders with respect to an increase in the
authorized number of directors, by the affirmative vote of the
stockholders of the Corporation representing at least 75% of the shares
then entitled to vote thereon.
(d) To authorize and cause to be executed mortgages and liens,
without limit as to amount, upon the real and personal property of the
Corporation, including after-acquired property.
(e) From time to time to determine whether and to what extent, at
what time and place, and under what conditions and regulations the accounts
and books of the Corporation or any of them shall be open to the inspection
of any stockholders; and no stockholder shall have any right to inspect any
account or book or document of the Corporation except as conferred by
statute or Bylaws or as authorized by a resolution of the stockholders or
Board of Directors.
(f) To authorize the payment of compensation to the directors for
services to the Corporation, including fees for attendance at meetings of
the Board of Directors, of the Executive Committee, and of other
committees, and to determine the amount of such compensation and fees.
TENTH: A director of the Corporation shall not be disqualified by
his office from dealing or contracting with the Corporation either as a
vendor, purchaser or otherwise, nor shall any transaction or contract of the
Corporation be void or voidable by reason of the fact that any director or
any firm of which any director is a member or any corporation of which any
director is a stockholder, officer or director, is in any way interested in
such transaction or contract, provided that such transaction or contract is
or shall be authorized, ratified or approved either (1) by a vote of a
majority of a quorum of the Board of Directors or of the Executive Committee,
without including in such majority or quorum any director so interested or
member of a firm so interested, or a stockholder, officer or director of a
corporation so interested, or (2) by the written consent of the holders of
record of a majority of all the outstanding shares of stock of the
Corporation entitled to vote or the affirmative vote of the holders of a
majority of the stock of the Corporation represented at any meeting at which
a quorum is present, nor shall any director be liable to account to the
Corporation for any profits realized by or from or through any such
transaction or contract of the Corporation authorized, ratified or approved
as aforesaid by reason of the fact that he, or any firm of which he is a
member or any corporation of which he is a stockholder, officer or director
was interested in such transaction or contract. Nothing herein contained
shall create liability in the events above described or prevent the
authorization, ratification or approval of such transactions or contracts in
any other manner permitted by law.
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Any contract, transaction or act of the Corporation or of the Board
of Directors which shall be ratified by the affirmative vote of the holders
of a majority of the stock of the Corporation represented at any meeting at
which a quorum is present and which is called for that purpose, shall be as
valid and binding as though ratified by every stockholder of the Corporation;
provided, however, that any failure of the stockholders to approve or ratify
such contract, transaction or act, when and if submitted, shall not be deemed
in any way to invalidate the same or to deprive the Corporation, its
directors or officers of their right to proceed with such contract,
transaction or action.
ELEVENTH: The affirmative vote of the holders of not less than
66-2/3% of the outstanding voting stock of the Corporation shall be required
for the approval or authorization of any: (i) merger or consolidation of the
Corporation with or into any other corporation; or (ii) sale, lease, exchange
or other disposition of all or substantially all of the assets of the
Corporation to or with any other disposition of all or substantially all of
the assets of the Corporation to or with any other corporation, person or
other entity; provided, however, that such 66-2/3% voting requirement shall
not be applicable if the Board of Directors of the Corporation shall have
approved such transaction in clause (i) or (ii) by a resolution adopted by
66-2/3% of the members of the Board of Directors; provided however, that if
FHP acquires in excess of 20% of the outstanding shares of the Corporation's
common stock from unsubscribed shares in the offering of rights to FHP's
stockholders, the affirmative vote of the holders of a majority of the
outstanding voting stock of the Corporation or a resolution adopted by a
majority of the members of the Board of Directors will be sufficient for such
approval or authorization. For purposes of the immediately preceding
sentence, the term "voting stock" shall mean shares of the capital stock of
the Corporation which have the right to vote generally for the election of
directors of the Corporation. Any amendment, alteration or appeal of this
Article ELEVENTH or any provision hereof shall require the approval of the
holders of shares of the Corporation representing at least 66 2/3% of the
shares then entitled to vote thereon.
TWELFTH: A Director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a Director, except for liability (i) for any breach of
the Director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
Director derived any improper personal benefit. The foregoing sentence
notwithstanding, if the Delaware General Corporation Law hereafter is amended
to authorize further limitations of the liability of a director of a
corporation, then a Director of the Corporation, in addition to the
circumstances in which a Director is not personally liable as set forth in
the preceding sentence, shall be held free from liability to the fullest
extent permitted by the Delaware General Corporation Law as so amended. Any
repeal or modification of the
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foregoing provisions of this Article TWELFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director
of the Corporation existing at the time of such repeal or modification.
Any amendment, alteration or repeal of this Article TWELFTH or any
provision hereof shall require the approval of the holders of the shares of
the Corporation representing at least 66-2/3% of the shares then entitled to
vote thereon.
THIRTEENTH: The stockholders of the Corporation shall not have the
ability to take action by written consent; any action by the stockholders of
the Corporation must be taken at an Annual Meeting or Special Meeting;
provided however, that if FHP acquires in excess of 20% of the outstanding
shares of the Corporation's common stock from unsubscribed shares in the
offering of rights to FHP's stockholders, the stockholders will have the
ability to take action by written consent.
Any amendment, alteration or repeal of this Article THIRTEENTH or
any provision hereof shall require the approval of the holders of the shares
of the Corporation representing at least 75% of the shares then entitled to
vote thereon.
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IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed this ____ day of November, 1996.
TALBERT MEDICAL MANAGEMENT HOLDINGS
CORPORATION
By: /S/ Jack D. Massimino
-----------------------------------
Jack D. Massimino
President
S-1
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
SECTION 1. In addition to its principal office in the State of
Delaware, the Corporation may also have offices at such other places within
or without the State of Delaware as the Board of Directors shall from time to
time determine.
SECTION 2. The annual meeting of the stockholders of the Corporation
shall be held on the fourth Tuesday in April in each year (if that day shall
be a legal holiday then on the next business day) or on such earlier or later
date as the Board of Directors (herein called the Board) may designate, at
such time and place, within or without the State of Delaware, as may be
specified in the notice thereof, as shall be fixed by the Board, for the
purpose of electing directors and for the transaction of only such other
business as is properly brought before such meeting in accordance with these
by-laws. If any annual meeting shall not be held on the day designated or
the directors shall not have been elected thereat or at any adjournment
thereof, thereafter the Board shall cause a special meeting of the
stockholders to be held as soon as practicable for the election of directors.
At such special meeting the stockholders may elect directors and transact
other business with the same force and effect as at an annual meeting of the
stockholders duly called and held.
SECTION 3. Special meetings of the stockholders of the Corporation may
be held, within or without the State of Delaware, only upon notice given by
or at the direction of the Board; provided however, that if FHP International
Corporation ("FHP") acquires in excess of 20% of the outstanding shares of
the Corporation's Common Stock from unsubscribed shares in the offering of
rights to FHP's stockholders, a special meeting of the stockholders of the
Corporation may be called upon the written request of stockholders entitled
to cast in excess of 20% of the votes entitled to be cast at the special
meeting. Such notice shall state the time, place and purposes of the meeting.
SECTION 4. In order to be properly brought before any meeting of the
stockholders held and pursuant to Section 2, business (including the election
of directors) must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board, (b) otherwise
properly brought before the meeting by or at the direction of the Board, or
(c) otherwise properly brought before the meeting by a stockholder. In
addition to any other applicable requirements, in order for any such business
to be properly brought before the meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. In order to be timely, a stockholder's notice must be delivered
to or mailed and received at the
<PAGE>
principal executive offices of the Corporation, not less than 60 days nor
more than 90 days prior to the anniversary date of the immediately preceding
annual meeting of stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within the 30 days before or
after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the 15th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the meeting was made,
whichever first occurs. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the meeting
(i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the meeting,
(ii) the name and record address of the stockholder proposing such business,
(iii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
SECTION 5. Notice of the time and place of every meeting of the
stockholders and of the business to be acted on at such meeting shall be
mailed by the Secretary or the officer performing his duties, at least ten
days before the meeting, to each stockholder of record having voting power
and entitled to such notice at his last known post office address; provided,
however, that if a stockholder be present at a meeting, or in writing waive
notice thereof before or after the meeting, notice of the meeting to such
stockholder shall be unnecessary. Any previously scheduled meeting of the
stockholders may be postponed, and (unless the Certificate of Incorporation
otherwise provides) any special meeting of the stockholders may be cancelled,
by resolution of the Board upon public notice given prior to the date
previously scheduled for such meeting of stockholders.
SECTION 6. The holders of a majority of the stock of the Corporation
having voting power present in person or by proxy shall constitute a quorum,
but in every case, the presiding officer at the meeting or the stockholders
present, although less than a quorum, shall have power to adjourn any meeting
from time to time without notice. The holders of a majority of the stock
present and entitled to vote at a duly qualified meeting of stockholders
shall have power to act; unless the matter is one as to which a different
vote is specified by the Certificate of Incorporation, these Bylaws, or
applicable law or regulation (other than Section 216 of the Delaware General
Corporation Law), in which case the different vote so specified by such law
or regulation shall apply. The foregoing provisions of this Section 6 each
shall be subject the voting rights of holders of any Preferred Stock the
Corporation and any quorum requirements related.
SECTION 7. Unless otherwise specified in the Certificate of
Incorporation, at every meeting of stockholders each stockholder entitled to
vote thereat shall be entitled to one vote for each share of stock held by
him and may vote and otherwise act in person or by proxy; but no proxy shall
be voted upon more than one year after its date unless such proxy provides
for a longer period.
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SECTION 8. At least ten days before each election of directors a
complete list of the stockholders entitled to vote at such election, arranged
in alphabetical order and showing the address and the number of shares
registered in the name of each stockholder, shall be made and filed either at
a place within the city where the election is to be held and which place
shall be specified in the notice of the meeting at which such election is to
take place, or if not so specified, at the place where such meeting is to be
held. Such list shall be open to the examination of any stockholder during
ordinary business hours for a period of at least ten days prior to such
election at the place so filed. Such list shall be produced and kept at the
time and place of such election and be subject to inspection by any
stockholder.
SECTION 9. Certificates of stock shall be of such form and device as
the Board of Directors may elect and shall be signed by the Chairman of the
Board or the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, but in case
any such Certificate is countersigned by a transfer agent, other than the
Corporation or its employee, or by a registrar, other than the Corporation or
its employee, any other signature on such certificate may be a facsimile,
engraved, stamped or printed.
SECTION 10. The stock of the Corporation shall be transferable or
assignable only on the books of the Corporation by the holders in person, or
by attorney, on the surrender of the certificates therefor. The Board of
Directors may appoint one or more transfer agents and registrar of the stock.
SECTION 11. The Board of Directors shall have the power to close the
stock transfer books of the Corporation for a period not exceeding sixty (60)
days preceding the date of any meeting of stockholders, or the date for
payment of any dividend, or the date for the allotment of rights, or the date
when any change or conversion or exchange of capital stock shall go into
effect. In lieu of closing the stock transfer books as aforesaid, the Board
of Directors is hereby authorized to fix in advance, a date, not exceeding
sixty (60) days preceding the date of any meeting of stockholders or the date
for the payment of any dividend or the date for the allotment of rights, or
the date when any change or conversion or exchange of capital stock shall go
into effect, as a record date for the determination of the stockholders
entitled to notice of and to vote at, any such meeting, or entitled to
receive payment of any such dividends, or to any such allotment of rights, or
to exercise the rights in respect of any such change, conversion or exchange
of capital stock, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at, such meeting or to receive
payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation.
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SECTION 12. The affairs of the Corporation shall be managed by a Board
consisting of such number of directors as shall be determined from time to
time by resolution of a majority of the number of directors constituting the
entire Board of Directors at such time, and in the absence of such
determination, the number of directors shall be nine. Any vacancies may be
filled in accordance with Article NINTH of the Corporation's Certificate of
Incorporation.
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors at any meeting of
stockholders. Nominations of persons for election to the Board of Directors
of the Corporation at the annual meeting or any meeting called for the
purpose of electing directors may be made at a meeting of stockholders by or
at the direction of the Board of Directors by any nominating committee or
person appointed by the Board or by any stockholder of the Corporation
entitled to vote for the election of directors at the meeting who complies
with the notice procedures set forth in this Section 12.
In addition to any other applicable requirements, such nominations, other
than those made by or at the direction of the Board of Directors, shall be
made pursuant to timely notice in writing to the Secretary of the
Corporation. In order to be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of the
Corporation, not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within the 30 days before or after such anniversary date,
notice by the stockholder in order to be timely must be so received not later
than the close of business on the 15th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
of the date of the meeting was made, whichever first occurs. Such
stockholder's notice to the Secretary shall contain (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, (i) that person's consent to such nomination, (ii) the name, age,
business address and residence address of the person, (iii) the principal
occupation or employment of the person, and (iv) the class and number of
shares of capital stock of the Corporation which are beneficially owned by
the person and (b) as to the stockholder giving the notice (i) the name and
record address of the stockholder and (ii) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the
stockholder. The Corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as director of
the Corporation. No person shall be eligible for election as a director of
the Corporation unless nominated in accordance with the procedures set forth
herein.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the nomination was not made in accordance with the
foregoing procedure, and if he should so determine, shall so declare to the
meeting and the defective nomination shall
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be disregarded.
SECTION 13. Meetings of the Board of Directors shall be held at the
times fixed by resolutions of the Board or upon call of the Chairman of the
Board or of the President or any five directors and may be held outside the
State of Delaware. The Secretary or officer performing his duties shall give
reasonable notice (which shall not in any event be less than two (2) days) of
all meetings of directors, provided that a meeting may be held without notice
immediately after the annual election, and notice need not be given of
regular meetings held at times fixed by resolution of the Board. Meetings may
be held at any time without notice if all the directors are present or if
those not present waive notice either before or after the meeting. Notice by
mail, telecopy or telegraph to the usual business or residence address of the
directors not less than the time above specified before the meeting shall be
sufficient. One-half of the total number of directors, but not less than five
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors. Less than such a quorum shall
have power to adjourn any meeting from time to time without notice.
SECTION 14. (a) Any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of this Corporation) by reason of the fact
that he is or was or has agreed to become a director, officer, employee or
agent of this Corporation, or is or was serving or has agreed to serve at the
request of this Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of any action alleged to have been taken or omitted in such
capacity, shall be indemnified by this Corporation against costs, charges,
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding and any appeal therefrom, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of this Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgement, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of this Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit, proceeding or
investigation by or in the right of this Corporation to procure a judgement
in its favor by reason of the fact that he is or was or has agreed to become
a director, officer, employee or agent of this Corporation, or is or was
serving or has agreed to serve at the request of this Corporation as a
director,
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<PAGE>
officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to
have been taken or omitted in such capacity, shall be indemnified by this
Corporation against costs, charges and expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit and any appeal therefrom, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of this Corporation, except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to this Corporation unless and only to the extent
that the Court of Chancery of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of such lability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
costs, charges and expenses which the Court of Chancery of Delaware or such
other court shall deem proper.
(c) Notwithstanding the other provisions of this Section, to the
extent that a director, officer, employee or agent of this Corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this Section, or in
defense of any claim, issue or matter therein, he shall be indemnified
against all costs, charges and expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
Section (unless otherwise ordered by a court) shall be made by this
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b) of this Section. Such determination shall be made
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who are not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders, or (4) if a Change in Control has
occurred and the director, officer, employee or agent seeking indemnification
so requests, in a written opinion rendered by independent legal counsel
chosen by the person requesting indemnification and not reasonably objected
to by the Board of Directors. For purposes of subclause (4) of this
subsection (d), "independent legal counsel" shall mean legal counsel other
than an attorney, or a firm having associated with it an attorney, who has
been retained by or who has performed substantial services for either this
Corporation or the person seeking indemnification within the past five years.
The Corporation shall pay the fees of the independent legal counsel. For
purposes of this subsection (d), a "Change in Control" shall be deemed to
have occurred if (i) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "1934 Act")
is or becomes the beneficial owner (as defined in Rule 13d-3 under the 1934
act), directly or indirectly, of securities of this Corporation representing
25% or more of the combined
6
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voting power of this Corporation's then outstanding securities in a
transaction not approved by the Board of Directors sitting immediately prior
to such acquisition, (ii) this Corporation is a party to a merger,
consolidation, sale of assets or other reorganization, or proxy contest, as a
consequence of which members of the Board of Directors sitting immediately
prior to such transaction or event constitute less than five-sixths of the
Board of Directors thereafter, or (iii) during the immediately preceding four
years, individuals who at the beginning of such period constituted the Board
of Directors cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the beginning
of the period was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
(e) Costs, charges and expenses (including attorney's fees) incurred
by a person referred to in subsections (a) and (b) of this Section in
defending a civil or criminal action, suit or proceeding shall be paid
promptly by this Corporation in advance of the final determination of such
action, suit or proceeding; provided, however, that the payment of such
costs, charges and expenses incurred by a director or officer in his capacity
as a director or officer (and not in any other capacity in which service was
or is rendered by such person while a director or officer) in advance of the
final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by or on behalf of the director or officer to repay
all amounts so advanced in the event that it shall ultimately be determined
that such director or officer is not entitled to be indemnified by this
Corporation as authorized by the Section. Such costs, charges and expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
(f) The indemnification provided by this Section shall not be deemed
exclusive of any other rights to which a person seeking indemnification may
be entitled under any law (common or statutory), agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
office or while employed by or acting as agent for this Corporation, it being
the policy of this Corporation that indemnification of the persons specified
in subsections (a) and (b) of this Section shall be made to the fullest
extent permitted by applicable law. The indemnification provided by this
Section shall continue as to a person who has ceased to be a director,
officer, employee or agent, and shall inure to the benefit of the estate,
heirs, executors and administrators of such Person. All rights to
indemnification under this Section shall be deemed to be a contract between
this Corporation and each director, officer, employee or agent of this
Corporation who serves or served in such capacity at any time while this
Section is in effect. Any repeal or modification of this Section or any
repeal or modification of relevant provisions of the Delaware General
Corporation Law or any other applicable law shall not in any way diminish any
rights to indemnification of such director, officer, employee or agent or the
obligation of this Corporation arising hereunder.
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(g) If this Section or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then this Corporation
shall nevertheless indemnify each director, officer, employee and agent of
this Corporation as to costs, charges and expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement with respect to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, including, without limitation, any action by or in the right
of this Corporation, to the full extent permitted by any applicable portion
of this Section that shall not have been invalidated and to the fullest
extent permitted by applicable law.
SECTION 15. The Board of Directors, as soon as may be after the election
of directors in each year, shall appoint one of their number Chairman of the
Board and one of their number President of the Company, and may also appoint
one or more Executive Vice-Presidents, Senior Vice -Presidents, First
Vice-Presidents and Vice Presidents, a Secretary and a Treasurer. The Board
of Directors may from time to time appoint one of their number as
Vice-Chairman and may appoint such other officers as they deem appropriate.
Any person may hold more than one office, except that same Person may not
hold more than one of the offices of President and Secretary. The Chairman
so appointed shall not in such capacity be considered an officer of this
Corporation.
SECTION 16. The term of office of all officers shall be until the next
election of directors and until their respective successors are chosen and
qualified, or until they shall die or resign but any officer may be removed
from office at any time by the Board of Directors. Vacancies in any office
may be filled by the Board at any meeting.
SECTION 17. The officers of the Company shall have such powers and
duties as usually pertain to their offices, except as modified by the Board
of Directors, and shall also have such powers and duties as may from time to
time be conferred upon them by the Board of Directors.
SECTION 18. The Board of Directors is authorized to select such
depositaries as it shall deem proper for the funds of the Corporation. All
checks and drafts against such deposited funds shall be signed and
countersigned by persons to be specified by the Board of Directors.
SECTION 19. The President, or any Vice-President, shall have authority
to execute and deliver all contracts or undertakings of the Corporation.
SECTION 20. The corporation seal of the Corporation shall be in such
form as the Board of Directors shall prescribe.
SECTION 21. The fiscal year of the Corporation shall be the calendar
year.
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SECTION 22. Either the Board of Directors or the stockholders may alter
or amend these Bylaws at any meeting, duly held as above provided, the notice
of which includes notice of the proposed alteration or amendment, as
permitted by the Certificate of Incorporation, these Bylaws or applicable
laws or regulations.
SECTION 23. The Board of Directors may impose restrictions on transfer
of securities of the Corporation pursuant to the Stockholder Rights Agreement
between the Corporation and American Stock Transfer & Trust Company, as and
to the extent required by such Rights Agreement, as amended from time to time.
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<PAGE>
RIGHTS AGREEMENT
by and between
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
and
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Rights Agent
Dated as of ______________
<PAGE>
TABLE OF CONTENTS
PAGE
----
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . 6
Section 3. Issuance of Right Certificates. . . . . . . . . . . . . . . 6
Section 4. Form of Right Certificates. . . . . . . . . . . . . . . . . 8
Section 5. Countersignature and Registration . . . . . . . . . . . . . 9
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen
Right Certificates. . . . . . . . . . . . . . . . . . . . . 9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8. Cancellation and Destruction of Right Certificates. . . . . 12
Section 9. Reservation and Availability of Shares; Registration. . . . 12
Section 10. Record Date . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 11. Adjustment of Purchase Price, Number of Shares or Number
of Rights . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 12. Certification of Adjusted Purchase Price or Number of
Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power . . . . . . . . . . . . . . . . . . . . . . . 21
Section 14. Fractional Rights and Fractional Shares . . . . . . . . . . 24
Section 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . 25
Section 16. Agreement of Right Holders. . . . . . . . . . . . . . . . . 25
Section 17. Right Certificate Holder Not Deemed a Stockholder . . . . . 26
Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . 26
Section 19. Merger or Consolidation or Change of Name of Rights
Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . 27
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Section 21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . 29
Section 22. Issuance of New Right Certificates. . . . . . . . . . . . . 30
Section 23. Redemption. . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 24. Notice of Proposed Actions. . . . . . . . . . . . . . . . . 31
Section 25. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 26. Supplements and Amendments. . . . . . . . . . . . . . . . . 32
Section 27. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 29. Determination and Actions Taken by the Board of
Directors . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 30. Benefits of this Agreement. . . . . . . . . . . . . . . . . 34
Section 31. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 34
Section 32. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 34
Section 33. Section Headings. . . . . . . . . . . . . . . . . . . . . . 34
Section 34. Severability. . . . . . . . . . . . . . . . . . . . . . . . 34
Exhibit A Form of Right Certificate
Exhibit B Form of Summary of Rights
Exhibit C Certificate re Junior Participating Preferred Stock
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<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of ________________, between TALBERT
MEDICAL MANAGEMENT HOLDINGS CORPORATION, a Delaware corporation (the
"Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York
corporation, as Rights Agent.
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company has authorized and
declared the distribution of one right for (i) each share of Common Stock of the
Company ("Common Stock") outstanding at the Close of Business (as hereinafter
defined) on ________________ (the "Rights Record Date"), each right representing
the right to purchase one Unit consisting, initially, of one one-hundredth of a
share of Junior Participating Preferred Stock, and (ii) each additional share of
Common Stock which shall become outstanding between the Rights Record Date and
the earliest of the Distribution Date, the Expiration Date (as such terms are
hereinafter defined) and the date, if any, on which such rights may be redeemed,
all upon the terms and subject to the conditions hereinafter set forth (each
such right being hereinafter referred to as a "Right");
NOW, THEREFORE, the parties agree as follows:
Section 1. CERTAIN DEFINITIONS.
(a) For purposes of this Agreement, the following terms have the
meanings indicated:
"ACQUIRING PERSON" shall mean any Person who or which, alone or
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner (within the meaning of Section 1(b)) of a Substantial
Block of Voting Stock, but shall not include (i) an Exempt Person or
(ii) any Person who or which acquires a Substantial Block of Voting Stock
in connection with a transaction or series of transactions approved prior
to such transaction or transactions by the Board of Directors of the
Company; provided that no person shall become an Acquiring Person solely as
a result of a reduction in the number of shares of Voting Stock
outstanding, unless and until such Person shall thereafter become the
Beneficial Owner of additional shares constituting 1% or more of the
general voting power of the Company.
"AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act, as in effect as of the date hereof.
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"BUSINESS DAY" shall mean any day other than a Saturday, Sunday
or day on which banking institutions in the State of California are
authorized or obligated by law or executive order to close.
"CLOSE OF BUSINESS" on any given date shall mean 5:00 p.m., Los
Angeles time, on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 p.m., Los Angeles time, on the next
succeeding Business Day.
"COMMON STOCK" shall have the meaning assigned to it in the
preamble; and "COMMON STOCK" when used with reference to Persons other than
the Company shall mean: (i) in the case of Persons organized in corporate
form, the capital stock or equity security with the greatest voting power
of such Person or, if such Person is a Subsidiary of another Person, of the
Person or Persons which ultimately control such first-mentioned Person; and
(ii) in the case of Persons not organized in corporate form, the units of
beneficial interest which (A) represent the right to participate generally
in the profits and losses of such Person (including without limitation any
flow-through tax benefits resulting from an ownership interest in such
Person) and (B) are entitled to exercise the greatest voting power of such
Person or, in the case of a limited partnership, shall have the power to
remove the general partner or partners.
"CONTINUING DIRECTOR" shall mean any member of the Board of
Directors of the Company (while such Person is a member of the Board) who
(i) is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, and (ii) either (A) was a member of the Board of
Directors prior to the time any Person became an Acquiring Person, or
(B) became a member of the Board of Directors subsequent to the time any
Person became an Acquiring Person, if such Person's nomination for
election, or re-election, to the Board was recommended, or approved, by a
majority of the Continuing Directors then in office.
"DISTRIBUTION DATE" shall have the meaning assigned to it in
Section 3(a).
"EFFECTIVE TIME" shall mean the effective time of the FHP Merger.
"EQUIVALENT STOCK" shall have the meaning assigned to it in
Section 7(a).
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"EXEMPT PERSON" shall mean (i) the Company, (ii) any Subsidiary
of the Company, (iii) any employee benefit plan or employee stock plan of
the
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<PAGE>
Company or of any Subsidiary of the Company or any trust or other
entity organized, established or holding shares of Common Stock by, for or
pursuant to, the terms of any such plan, (iv) any Person, including FHP,
who, solely as a result of the exercise of Subscription Rights distributed
to such Person or, in the case of FHP, solely as a result of the transfer
by the Company to FHP of Unsubscribed Shares, Beneficially Owns a
percentage of the outstanding Voting Stock (the "Grandfathered Percentage")
equal to or in excess of the Trigger Percentage as of the Subscription
Rights Expiration Date, PROVIDED, HOWEVER, that (A) such Person's
Grandfathered Percentage shall not exceed its FHP Ownership Percentage, or
in the case of FHP, shall not exceed the Unsubscribed Share Percentage, (B)
such Person shall not acquire any additional Voting Stock of the Company
after the Subscription Rights Expiration Date, (C) such Person's
Grandfathered Percentage shall be reduced to the extent such Person
transfers any Voting Stock, and (D) any transferee of such Person's Voting
Stock (other than an Exempt Person within the meaning of clauses (i)-(iii)
above or (v) below) who after such transfer would Beneficially Own Voting
Stock equal to or in excess of the Trigger Percentage shall not be an
Exempt Person; and (v) any transferee of Voting Stock held by FHP (an "FHP
Transferee") who after such transfer would Beneficially Own Voting Stock
equal to or in excess of the Trigger Percentage, but only to the extent of
such FHP Transferee's Beneficial Ownership as a result of such Transfer
(the "FHP Transferee Percentage"), PROVIDED, HOWEVER, that (A) FHP's
Unsubscribed Share Percentage shall be in excess of 20%, (B) such FHP
Transferee shall not acquire any additional Voting Stock after such
transfer, (C) such FHP Transferee's FHP Transferee Percentage shall be
reduced to the extent such FHP Transferee transfers any Voting Stock, and
(D) any transferee of such FHP Transferee's Voting Stock (other than an
Exempt Person within the meaning of clauses (i)-(iii) above) who after such
transfer would Beneficially Own Voting Stock equal to or in excess of the
Trigger Percentage shall not be an Exempt Person.
"EXPIRATION DATE" shall have the meaning assigned to it in
Section 7(a).
"FHP" shall mean FHP International Corporation, a Delaware
corporation.
"FHP MERGER" shall mean the merger of FHP and PacifiCare Health
Systems, Inc., a Delaware corporation.
"FHP OWNERSHIP PERCENTAGE" shall be calculated by dividing the
number of shares of FHP Common Stock (on an as-if-converted basis)
Beneficially Owned by such Person as of the Effective Time by the number of
shares of FHP Common Stock (on an as-if-converted basis) outstanding as of
the Effective Time.
"OFFER DATE" shall have the meaning assigned to it in Section
3(a).
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<PAGE>
"PERSON" shall mean any individual, firm, corporation,
partnership, trust or other entity and shall include any successor by
merger (or otherwise) of any of the foregoing.
"PRINCIPAL PARTY" shall have the meaning assigned to it in
Section 13(b).
"PURCHASE PRICE" shall mean the price payable for one Unit upon
exercise of a Right.
"QUALIFIED OFFER" shall mean a tender or exchange offer for all
outstanding Common Stock at a price and on terms determined to be adequate
and otherwise in the best interests of the Company and its shareholders
(other than the Person or an Affiliate or Associate thereof on whose behalf
the offer is made) by at least a majority of the Continuing Directors who
are not representatives of or affiliated with the Person making such offer
or any Affiliate or Associate of such Person.
"REDEMPTION PRICE" shall have the meaning assigned to it in
Section 23(a).
"RIGHT" shall have the meaning assigned to it in the preamble.
"RIGHTS RECORD DATE" shall have the meaning assigned to it in the
preamble.
"SUBSCRIPTION RIGHTS" shall mean the subscription rights to
purchase the Company's common stock distributed to FHP's stockholders in
connection with the FHP Merger.
"SUBSCRIPTION RIGHTS EXPIRATION DATE" shall mean the expiration
date of the Subscription Rights.
"SUBJECT SHARES" shall mean the class or series of shares then
issuable on exercise of the Rights.
"STOCK ACQUISITION DATE" shall mean the date of the first public
announcement by the Company or an Acquiring Person (which, for purposes of
this definition, shall include, without limitation, a report filed pursuant
to Section 13(d) under the Exchange Act) that an Acquiring Person has
become such.
"SUBSIDIARY" shall mean, with respect to any Person, a
corporation or other entity the securities or other ownership interests of
which having ordinary voting power sufficient to elect a majority of the
board of directors or other
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<PAGE>
persons performing similar functions are at the time directly or indirectly
owned by such Person and any Affiliate of such Person.
"SUBSTANTIAL BLOCK" shall mean a number of shares of Voting Stock
equal to or in excess of the Trigger Percentage.
"TRADING DAY" shall have the meaning assigned to it in Section
11(d).
"TRIGGER PERCENTAGE" shall mean, for a period of 90 days from the
Subscription Rights Expiration Date, 8% of the Company's outstanding Voting
Stock, and following such 90-day period shall mean 15% of the Company's
outstanding Voting Stock.
"UNIT" shall mean the shares or other securities issuable upon
exercise of one Right, initially one one-hundredth of a share of Junior
Participating Preferred Stock of the Company having the rights and
preferences set forth in Exhibit C, before any adjustment pursuant to
Section 11(a)(ii) or Section 13.
"UNSUBSCRIBED SHARES" shall mean shares of the Company's common
stock unsubscribed in the distribution to FHP's stockholders of the
Subscription Rights.
"UNSUBSCRIBED SHARE PERCENTAGE" shall mean the percentage of the
Company's outstanding Voting Stock acquired by FHP through the transfer by
the Company to FHP of Unsubscribed Shares.
"VOTING STOCK" shall mean shares of the Company's capital stock
the holders of which have general voting power.
(b) For purposes of this Agreement, a Person shall be deemed the
"BENEFICIAL OWNER" of any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding, (whether or not in writing) or upon the
exercise of any conversion, exchange or purchase rights (other than the
Rights), warrants or options, or otherwise; provided, however, that a
Person shall not be deemed the "Beneficial Owner" of securities tendered
pursuant to a tender or exchange offer made by or on behalf of such Person
or any of such Person's Affiliates or Associates until such tendered
securities are accepted for payment or exchange; or (B) the right to vote
or to direct the voting of, pursuant to any agreement,
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<PAGE>
arrangement or understanding (whether or not in writing); or (C) the
right to dispose or to direct the disposition of, pursuant to any
agreement, arrangement or understanding (whether or not in writing); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's Affiliates
or Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any securities of the
Company;
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
to Beneficially Own, any security if the agreement, arrangement or understanding
to vote such security (1) arises solely from the grant of a revocable proxy or
consent given to such Person in connection with a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations under the Exchange Act, and (2) is not also then reportable on
Schedule 13D (or any comparable or successor report) under the Exchange Act;
provided, further, that a Person engaged in business as an underwriter of
securities shall not be deemed the "Beneficial Owner" of securities acquired
through such person's participation in good faith in a firm commitment
underwriting until the expiration of the 40-day period immediately following the
date of such acquisition.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of
the Rights in accordance with the terms and conditions hereof, and the Rights
Agent hereby accepts such appointment. The Company may from time to time
appoint such Co-Rights Agent or Agents as it may deem necessary or desirable
and determine the respective duties of the Rights Agent and the Co-Rights
Agents.
Section 3. ISSUANCE OF RIGHT CERTIFICATES.
(a) Until the Close of Business on the earlier of (i) the tenth
Business Day after a Stock Acquisition Date or (ii) the tenth Business Day (or
such later date as the Company's Board of Directors shall determine) after the
date of the commencement by any Person (other than an Exempt Person) of, or the
date of the first public announcement (such commencement date or announcement
date being herein referred to as the "Offer Date") of the intent of any Person
(other than an Exempt Person) to commence, a tender or exchange offer upon the
successful consummation of which such Person, together with its Affiliates and
Associates, would be the Beneficial Owner of Voting Stock equal to or in excess
of the Trigger Percentage (irrespective of whether any shares are actually
purchased pursuant to such offer) (the tenth Business Day after the first to
occur of a Stock Acquisition Date or an Offer Date being herein referred to as
the "Distribution Date"),
(i) the Rights will automatically attach to, and be evidenced
by, the certificates for Common Stock registered in the names of the
holders of
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Common Stock (which certificates for Common Stock shall be deemed also
to be Right Certificates) and not by separate Right Certificates, and
(ii) each Right will be transferable only in connection with
the transfer of the underlying shares of Common Stock.
As soon as practicable after the Distribution Date, the Rights Agent
will mail, by first-class, insured, postage prepaid mail, to each record holder
of Common Stock as of the Close of Business on the Distribution Date, as shown
by the records of the Company at the Close of Business on the Distribution Date,
at the address of such holder shown on such records, a Right Certificate, in
substantially the form of Exhibit A hereto, evidencing one Right for each share
of Common Stock so held.
(b) As soon as practicable after the Rights Record Date, the Company
will send a copy of a Summary of Rights, in substantially the form attached
hereto as Exhibit B, by first-class mail, postage prepaid, to each record holder
of Common Stock as of the Close of Business on the Rights Record Date, at the
address of such holder shown on the records of the Company.
(c) The Company will cause certificates for Common Stock issued after
the Rights Record Date (including replacement certificates for shares of Common
Stock outstanding on or prior to the Rights Record Date), but prior to the
earliest of (i) the Distribution Date, (ii) the Expiration Date and (iii) the
date, if any, on which the Rights may be redeemed, to have impressed on, printed
on, written on or otherwise affixed to them the following legend:
This certificate also entitles the holder hereof to certain Rights as
set forth in the Rights Agreement between the Company and American
Stock Transfer & Trust Company as Rights Agent as the same shall be
amended from time to time (the "Rights Agreement"), the terms of which
are hereby incorporated herein by reference and a copy of which is on
file at the principal executive offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Under certain circumstances
set forth in the Rights Agreement, Rights issued to, or held by, any
Person who is, was or becomes an Acquiring Person or any Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement)
or certain transferees of any thereof, whether currently held by or on
behalf of such Person or by any subsequent holder, may be limited as
provided in Section 7(f) of the Rights Agreement.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with Common Stock represented by such
certificates shall be
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<PAGE>
evidenced by such certificates alone, and the surrender for transfer of any
such certificates shall also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate.
(d) Until the Distribution Date, the surrender for transfer of any of
the certificates for Common Stock outstanding on or after the Rights Record
Date, with or without a copy of the Summary of Rights attached thereto and with
or without the legend set forth in subsection (c) above, shall also constitute
the transfer of the Rights associated with such Common Stock. After the
Distribution Date, the Rights will be evidenced solely by the Right
Certificates.
Section 4. FORM OF RIGHT CERTIFICATES.
(a) The Right Certificates (and the forms of assignment and
certification and of election to purchase shares to be printed on the reverse
thereof) shall be in substantially the form of Exhibit A hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Rights may from time
to time be listed, or to conform to usage.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section
22 that represents Rights Beneficially Owned by: (i) an Acquiring Person or any
Associate or Affiliate of any Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights, or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 7(f), and any Right Certificate
issued pursuant to Section 6 or Section 11 upon transfer, exchange, replacement
or adjustment of any other Right Certificate referred to in this sentence, shall
contain (to the extent feasible and reasonably identifiable as such) the
following legend:
The Rights represented by this Right Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement) or certain transferees thereof. Accordingly, under certain
circumstances as provided in the Rights Agreement, this Right Certificate
and the Rights represented hereby may be limited as provided in Section
7(f) of such Agreement.
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Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Right Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its President or any of its Vice Presidents,
either manually or by facsimile signature, and have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Right Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned. In case
any officer of the Company who shall have signed any of the Right Certificates
shall cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Right Certificates,
nevertheless, may be countersigned by the Rights Agent, issued and delivered
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer (as specified above) of the Company to sign such Right Certificate,
although at the date of the execution of this Rights Agreement any such person
was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept books for registration and transfer of the Right Certificates
issued hereunder. Such books shall show the names and addresses of the
respective holders of the Right Certificates, the number of Rights evidenced on
its face by each Right Certificate, the date of each Right Certificate and the
number of each Right Certificate.
Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
(a) Subject to the provisions of Section 4(b), Section 7(f) and
Section 14, at any time after the Close of Business on the Distribution Date,
and prior to the Close of Business on the Expiration Date or the day prior to
the day, if any, on which the Rights are to be redeemed pursuant to Section 23,
any Right Certificate or Certificates may be transferred, split up, combined or
exchanged for another Right Certificate or Right Certificates, entitling the
registered holder to purchase such number of Units as the Right Certificate or
Right Certificates surrendered then entitled such holder to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Right
Certificate shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate(s) to be transferred, split up,
combined or exchanged, with the form of assignment on the reverse side(s)
thereof duly completed and executed, at the stock transfer office of the Rights
Agent. Thereupon the Rights Agent shall countersign and deliver to the persons
entitled thereto the Right Certificate(s) requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates. Notwithstanding the foregoing, neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
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transfer of any such surrendered Right Certificate unless and until the
registered holder shall have completed and signed the certificate contained
in the form of assignment on the reverse side of such Right Certificate and
shall have provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to the Company and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate, if
mutilated, the Company will execute and deliver a new Right Certificate of like
tenor to the Rights Agent for delivery to the registered owner in lieu of the
Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Subject to Section 7(f), and unless earlier redeemed as provided
in Section 23, the registered holder of any Right Certificate may exercise the
Rights evidenced thereby in whole or in part at any time after the Distribution
Date upon surrender of the Right Certificate, with the form of election to
purchase on the reverse side thereof duly completed and executed, to the Rights
Agent at the stock transfer office of the Rights Agent, together with payment of
the Purchase Price for each Unit as to which the Rights are exercised, at or
prior to the Close of Business on the tenth anniversary of the Rights Record
Date or such other date to which the Rights may be extended as provided in this
Agreement (the latest of such dates being herein referred to as the "Expiration
Date"). If at any time after the Distribution Date but prior to the Expiration
Date the Company is unable, under its Certificate of Incorporation, to issue the
number and class of shares required to be issued upon the exercise of all of the
outstanding Rights, the Company may issue upon exercise of any of the Rights
shares of capital stock or other securities of the Company of equivalent value
to the shares so required to be issued ("Equivalent Stock"), as determined by
the Board of Directors.
(b) The Purchase Price for each Unit pursuant to the exercise of a
Right shall initially be $_____, shall be subject to adjustment from time to
time as provided in Sections 11 and 13 and shall be payable in lawful money of
the United States of America.
(c) Upon receipt of a Right Certificate, with the form of election
to purchase duly executed, accompanied by payment of the Purchase Price for
the Units to be purchased and an amount equal to any applicable transfer tax
in cash, or by certified check, bank draft or money order payable to the
order of the Company, the Rights Agent shall thereupon promptly (i)
requisition from the Company or any transfer agent of the Company a
certificate for the number of shares to be purchased and the Company will
comply, and hereby irrevocably authorizes its transfer agent to comply, with
all such requests, (ii) requisition from the Company the amount of cash to be
paid in lieu of
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issuance of a fractional share, when appropriate, in accordance with Section
14, and (iii) promptly after receipt of such certificate from any such
transfer agent, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names
as may be designated by such holder, and, when appropriate, after receipt
promptly deliver such cash in lieu of a fractional share to or upon the order
of the registered holder of such Right Certificate; provided, however, that
in the case of the purchase, in connection with the exercise of a Right, of
securities other than shares of stock, the Rights Agent shall promptly take
the appropriate actions with respect thereto as shall as nearly as
practicable correspond to the actions described in the foregoing clauses (i)
through (iii).
(d) The Company shall not be required to pay any transfer tax which
may be payable in respect of any transfer involved in the transfer or delivery
of Right Certificates, or the issuance or delivery of certificates in a name
other than that of the registered holder of the Right Certificate evidencing
Rights surrendered for exercise, or to issue or deliver any certificates upon
the exercise of any Rights, until any such tax shall have been paid (any such
tax being payable by the holder of such Right Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
(e) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14.
(f) Notwithstanding any provision of this Agreement to the contrary,
upon the occurrence of any of the events described in any of clauses (A), (B),
(C) or (D) of Section 11(a)(ii), the adjustment provided for under Section
11(a)(ii) shall not apply with respect to any Rights that are at the time of the
occurrence of such event Beneficially Owned by (i) an Acquiring Person or by any
Associate or Affiliate of such Acquiring Person (which Acquiring Person or
Affiliate or Associate engages in, or realizes the benefit of, one or more of
the transactions described in clause (A) or clause (B) of Section 11(a)(ii),
realizes the benefits set forth in clause (C) of Section 11(a)(ii) or, alone or
together, become the Beneficial Owner(s) of a number of shares of Voting Stock
which equals or exceeds the percentage of the general voting power as provided
in clause (D) of Section 11(a)(ii), as the case may be), or (ii) a transferee of
an Acquiring Person or of any Associate or Affiliate of such Acquiring Person
(which Acquiring Person or Associate or Affiliate engages in, or realizes the
benefit of, one or more of the transactions described in clause (A) or clause
(B) of Section 11(a)(ii), realizes the benefits set forth in clause (C) of
Section 11(a)(ii) or, alone or together with such Acquiring Person or any such
Associate or Affiliate, become the Beneficial Owner(s) of a number of shares of
Voting Stock which equals or exceeds the percentage of the general voting power
as provided in clause (D) of Section 11(a)(ii), as the case may be) (A) who
becomes a transferee after the Acquiring Person becomes such, or (B) who becomes
a transferee
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prior to or concurrently with the Acquiring Person becoming such and receives
such Rights pursuant to either (1) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom such Acquiring Person has
any continuing agreement, arrangement or understanding regarding the
transferred Rights or (2) a transfer which the Board of Directors of the
Company has determined is part of a plan, arrangement or understanding which
has as a primary purpose or effect the avoidance of this Section 7(f). Upon
the exercise of such Rights, the holders thereof shall be entitled to
receive, upon payment of the Purchase Price, the number of Units issuable
upon exercise of such Rights without giving effect to the adjustment provided
for under Section 11(a)(ii). The Company shall use all reasonable efforts to
insure that the provisions of this Section 7(f) and Section 4(b) are complied
with, but shall have no liability to any holder of Right Certificates or
other Person as a result of its making or failing to make any determinations
with respect to an Acquiring Person or its Affiliates, Associates or
transferees hereunder.
(g) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Right Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
this Agreement. The Company shall deliver to the Rights Agent for cancellation
and retirement, and the Rights Agent shall so cancel and retire, any other Right
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such can-celled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. RESERVATION AND AVAILABILITY OF SHARES; REGISTRATION.
(a) The Company covenants and agrees that it shall (i) on or prior to
the Rights Record Date, take all such action as shall be necessary to cause to
be reserved and kept available out of its authorized and unissued capital stock,
the number, class and series of shares that will be sufficient to permit the
exercise in full of all Rights to be outstanding as of the Rights Record Date,
(ii) no later than promptly following the Distribution Date, take all such
action as shall be necessary to cause to be reserved and kept available out of
its authorized and unissued capital stock, or its authorized and
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<PAGE>
issued shares held in its treasury, the number of additional shares that
will, from time to time, be sufficient to permit the exercise in full of all
Rights from time to time outstanding, (iii) take all such action as may be
necessary to insure that all shares delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares (subject to
payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable, and (iv) pay when due and payable any and all
federal and state transfer taxes and charges which may be payable in respect
of the issuance or delivery of the Right Certificates or of any shares upon
the exercise of Rights (except as otherwise provided in Section 7(d)).
(b) The Company agrees to take all such action, from and after the
Distribution Date, as may be necessary or appropriate to permit the issuance of
shares in connection with the exercise of the Rights, including any required
registration under (i) the Securities Act of 1933, as amended from time to time
(the "Securities Act"), and (ii) the securities or "blue sky" laws of the
various states. The Company may temporarily suspend, for a period of time not to
exceed 90 days, the exercisability of the Rights in order to prepare and file a
registration statement or statements for the purpose of effecting any such
registration and permit such statement(s) to become effective. At the
commencement and termination of any such suspension, the Company shall issue a
public announcement and shall provide written notice to the Rights Agent,
stating that the exercisability of the Rights has been temporarily suspended, or
that such suspension has terminated, as the case may be.
(c) If and so long as the stock issuable upon the exercise of Rights
is listed on any national securities exchange, the Company shall use its
reasonable efforts to cause all shares reserved for issuance upon exercise of
Rights to be listed on such exchange upon official notice of issuance upon such
exercise.
Section 10. RECORD DATE. Each Person in whose name any stock
certificate is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the shares represented thereby on,
and such certificate shall be dated, the date upon which the Right Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made. Prior to the exercise of the
Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a stockholder of the Company with respect to shares
for which the Rights shall be exercisable, including without limitation the
right to vote or to receive dividends or other distributions, and such holder
shall not be entitled to receive any notice of any proceedings of the Company,
except as provided herein.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER
OF RIGHTS. The Purchase Price, the number and kind of shares or other
securities covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
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(a) (i) In the event the Company shall at any time after the date
of this Agreement (A) declare and pay a dividend on the shares which are
subject to the Rights ("Subject Shares") payable in shares of stock of the
Company, (B) subdivide or split the Subject Shares, (C) combine or
consolidate the Subject Shares into a smaller number of shares or effect a
reverse stock split of the Subject Shares or (D) issue any shares of its
capital stock in a reclassification of the Subject Shares (including any
such reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), then, and in each
such event, except as otherwise provided in this Section 11(a), the
Purchase Price in effect at the time of the record date for such dividend
or of the effective date of such subdivision, split, reverse split,
combination, consolidation or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately
adjusted so that the holder of any Right exercised after such time shall be
entitled to receive the aggregate number and kind of shares of capital
stock which, if such Right had been exercised immediately prior to such
date and at a time when the transfer books of the Company were open, he
would have received upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, split, reverse split, combination,
consolidation or reclassification. If an event occurs which would require
an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the
adjustment provided for in this Section 11(a)(i) shall be in addition to,
and shall be made prior to, any adjustment required pursuant to Section
11(a)(ii).
(ii) In the event that at any time after the date of this
Agreement
(A) any Acquiring Person, or any Associate or Affiliate
of any Acquiring Person, directly or indirectly (1) shall merge into
the Company or any of its Subsidiaries or otherwise combine with the
Company or any of its Subsidiaries and the Company or such Subsidiary
shall be the continuing or surviving corporation of such merger or
combination and the Common Stock shall remain outstanding and the
outstanding shares thereof shall not be changed into or exchanged for
stock or other securities of the Company or of any other Person or
cash or any other property, or (2) shall sell or otherwise transfer in
one or more transactions, assets to the Company or any of its
Subsidiaries in exchange for 20 percent or more of the shares of any
class of capital stock of the Company or any of its Subsidiaries, and
the Common Stock shall remain outstanding and unchanged, or
(B) directly or indirectly, any Acquiring Person, or any
Associate or Affiliate of any Acquiring Person, shall (1) in one or
more transactions, transfer any assets to the Company or any of its
Subsidiaries in exchange (in whole or in part) for shares of any class
of capital stock of the Company or any of its Subsidiaries or for
securities exercisable for or convertible into shares of any class of
capital stock of the Company or any of its Subsidiaries or otherwise
obtain from the Company or any of its
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<PAGE>
Subsidiaries, with or without consideration, any additional shares of
any class of capital stock of the Company or any of its Subsidiaries
or other securities exercisable for or convertible into shares of any
class of capital stock of the Company or any of its Subsidiaries
(other than as part of a PRO RATA distribution by the Company or such
Subsidiary to all holders of Common Stock), (2) sell, purchase, lease,
exchange, mortgage, pledge, transfer or otherwise dispose (in one or
more transactions), to, from or with, as the case may be, the Company
or any of its Subsidiaries, assets on terms and conditions less
favorable to the Company or such Subsidiary than the Company or such
Subsidiary would be able to obtain in arm's-length negotiation with an
unaffiliated third party, (3) receive any compensation from the
Company or any of the Company's Subsidiaries other than compensation
for full-time employment as a regular employee, or fees for serving
as director, at rates in accordance with the Company's (or its
Subsidiaries') past practices, or (4) receive the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance provided
by the Company or any of its Subsidiaries, on terms and conditions
less favorable to the Company or such Subsidiary than the Company or
such Subsidiary would be able to obtain in arm's-length negotiation
with an unaffiliated third party, or
(C) during any such time as there is an Acquiring Person,
there shall be any reclassification of securities (including any
reverse stock split), or recapitalization of the Company, or any
merger or consolidation of the Company with any of its Subsidiaries or
any other similar transaction or series of transactions involving the
Company or any of its Subsidiaries (whether or not with or into or
otherwise involving an Acquiring Person or any Affiliate or Associate
of such Acquiring Person) which has the effect, directly or
indirectly, of increasing by more than one percent the proportionate
share of the outstanding shares of any class of equity securities, or
of securities exercisable for or convertible into equity securities,
of the Company or any of its Subsidiaries which is directly or
indirectly owned by any Acquiring Person or any Associate or Affiliate
of any Acquiring Person, or
(D) any Person shall become an Acquiring Person otherwise
than pursuant to a Qualified Offer,
then, and in each such case, but subject to the provisions of Section 27,
proper provision shall be made so that each holder of a Right, except as
provided below and in Section 7(f), shall, on and after the later of (I) the
date of the occurrence of an event described in clause (A), (B), (C) or (D)
of this Section 11(a)(ii), or (II) the date of the expiration of the period
within which the Rights may be redeemed pursuant to Section 23 (as the same
may have been amended as provided in Section 26), have the right to receive,
upon exercise thereof at the then current Purchase Price, such number of
shares of Common
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Stock as shall equal the result obtained by (x) multiplying the then current
Purchase Price by the then number of Units for which a Right is then
exercisable and dividing that product by (y) 50 percent of the current market
price per share of Common Stock (determined in accordance with Section 11(d))
on the date of the occurrence of the relevant event listed above in clause
(A), (B), (C) or (D) of this subparagraph (ii); PROVIDED, HOWEVER, that if
the transaction that would otherwise give rise to the foregoing adjustment is
also subject to the provisions of Section 13, then only the provisions of
Section 13 shall apply and no adjustment shall be made pursuant to this
Section 11(a)(ii). The Company shall not consummate any such merger,
combination, transfer or transaction referred to in any of such clauses (A),
(B) and (C) unless prior thereto there shall be sufficient authorized but
unissued Common Stock to permit the exercise in full of the Rights in
accordance with the foregoing sentence, unless the Board of Directors has
determined to issue Equivalent Stock in accordance with Section 7(a);
PROVIDED, HOWEVER, that in no case may the Company consummate any such
merger, combination, transfer or transaction if at the time of or immediately
after such transaction there are any rights, warrants or other instruments or
securities outstanding or agreements in effect which would substantially
diminish or otherwise eliminate the benefits intended to be afforded by the
Rights.
In the event that the Company issues Equivalent Stock upon the
exercise of any Rights pursuant to the immediately preceding paragraph, then,
upon any such exercise, proper provision shall be made so that the holder of a
Right (except as provided in Section 7(f)) shall have the right to receive, upon
such exercise at the then current Purchase Price, such number of shares or other
units of Equivalent Stock of the Company as shall equal the result obtained by
(x) multiplying the then current Purchase Price by the number of Units for which
a Right is then exercisable and dividing that product by (y) 50 percent of the
current market price per share or other unit of the Equivalent Stock of the
Company (determined on substantially the same basis as is prescribed by Section
11(d) with respect to the valuation of Common Stock) on the date of occurrence
of the relevant event listed above in clause (A), (B), (C) or (D) of this
subparagraph (ii). In the event that at any time the Company should be
prohibited by law, by any provision of its Certificate of Incorporation, or by
any instrument or agreement to which the Company is a party or by which it is
bound, from issuing, or should be unable under its Certificate of Incorporation
to issue, sufficient Equivalent Stock to permit the exercise of all outstanding
Rights in accordance with the foregoing sentence, then, in lieu of issuing such
Equivalent Stock upon such exercise, the Company shall pay to each holder of a
Right (except as provided in Section 7(f)) upon surrender of the Right as
provided herein but without payment of the Purchase Price, an amount in cash for
each Right equal to the Purchase Price.
(b) In case the Company shall at any time after the Rights Record
Date fix a record date for the issuance of rights or warrants to all holders of
Common Stock or Subject Shares entitling them (for a period expiring within 45
calendar days after such record date) to subscribe for or purchase Common Stock
or Subject Shares or securities convertible into Common Stock or Subject Shares
at a price per share (or having a
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<PAGE>
conversion price per share, if a security convertible into Common Stock) less
than the current market price per share (determined in accordance with
Section 11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, of which the
numerator shall be the total number of shares of Common Stock and Subject
Shares outstanding on such record date plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares so to
be offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price and
of which the denominator shall be the total number of shares of Common Stock
and Subject Shares outstanding on such record date plus the number of
additional shares to be offered for subscription or purchase (or into which
the convertible securities to be offered are initially convertible). In case
such subscription or purchase price may be paid, in whole or in part, in a
form other than cash, the value of such consideration shall be as determined
in good faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent. Shares owned
by or held for the account of the Company shall not be deemed outstanding for
the purpose of any such computation. Such adjustment shall be made
successively whenever such a record date is fixed, and in the event that such
rights or warrants are not so issued, the Purchase Price shall be adjusted to
be the Purchase Price which would then be in effect if such record date had
not been fixed.
(c) In case the Company shall at any time after the Rights Record
Date fix a record date for the making of a distribution on the shares of Common
Stock or the Subject Shares, whether by way of a dividend, distribution,
reclassification of stock, recapitalization, reorganization or partial
liquidation of the Company or otherwise (and including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation), of subscription rights or warrants (excluding those
referred to in Section 11(b)), evidences of indebtedness or other assets (other
than (i) regular periodic cash dividends, (ii) a dividend payable in Common
Stock or (iii) a distribution which is part of or is made in connection with a
transaction to which Section 11(a)(ii) or Section 13 applies), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, of which the numerator shall be the current market price per share of
Common Stock (determined in accordance with Section 11(d)) on such record date,
less the fair market value applicable to one share of Common Stock (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
such assets or evidences of indebtedness or of such subscription rights or
warrants so to be distributed, and of which the denominator shall be such
current market price per share of Common Stock. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
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(d) For the purpose of any computation hereunder, the "current
market price" per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; PROVIDED, HOWEVER,
that in the event that the current market price per share of Common Stock is
determined during a period following the announcement by the issuer of such
Common Stock of a dividend or distribution on such Common Stock payable in
shares of such Common Stock or securities convertible into shares of Common
Stock (other than the Rights), and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, then, and in
each such case, the current market price shall be appropriately adjusted to
reflect the current market price per share of Common Stock in connection with
ex-dividend trading. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the shares of Common Stock are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if the shares of Common Stock are
not listed or admitted to trading on any national securities exchange, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc.,
Automated Quotation System ("NASDAQ"). If on any such date the shares of
Common Stock are not quoted by any such organization, the fair market value
of such shares on such date as determined in good faith by the Board of
Directors of the issuer of such Common Stock shall be used. Any such
determination of current market price shall be described in a statement filed
with the Rights Agent.
For the purpose of any computation hereunder, the "current market
price" of a Unit shall be deemed to be equal to the current market price per
share of Common Stock, and the "current market price" of a Subject Share shall
be deemed to be equal to the current market price per share of Common Stock
divided by the number of Subject Shares which comprise a Unit.
For purposes of this Agreement, the term "Trading Day" shall mean a
day on which the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the transaction of
business or, if the shares of Common Stock are not listed or admitted to trading
on any national securities exchange, a Business Day.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least one percent in such
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to
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<PAGE>
the nearest one-hundredth of a share, as the case may be. Notwithstanding
the proviso to the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i)
three years from the date of the transaction which gives rise to such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) In the event that at any time, as a result of an adjustment made
pursuant to Section 11(a), the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock of the Company other than
shares of Common Stock, thereafter the number of such other shares so receivable
upon exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions, with
respect to such shares, contained in Sections 11(a) through (c), inclusive, and
the provisions of Sections 7, 9, 10, 13 and 14 with respect to the shares of
Common Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall represent the right to
purchase, at the adjusted Purchase Price, the number of shares purchasable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of shares (calculated to
the nearest one-hundredth) obtained by (i) multiplying (x) the number of shares
covered by a Right immediately prior to such adjustment by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price and
(ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of shares purchasable upon the exercise of each Right.
Each of the Rights outstanding after such adjustment of the number of Rights
shall be exercisable for the number of Units for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-hundredth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price.
The Company shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Right Certificates have been
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issued, shall be at least 10 days later than the date of the public
announcement. If Right Certificates have been issued, upon each adjustment
of the number of Rights pursuant to this Section 11(i) the Company shall, as
promptly as practicable, cause to be distributed to holders of record of
Right Certificates on such record date Right Certificates evidencing, subject
to Section 14, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause
to be distributed to such holders of record in substitution and replacement
for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Right Certificates so to be distributed
shall be issued, executed and countersigned in the manner provided for herein
(and may bear, at the option of the Company, the adjusted Purchase Price) and
shall be registered in the names of the holders of record of Right
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of shares issuable upon the exercise of the Rights, the Right
Certificates theretofore and thereafter issued may continue to express the
Purchase Price per share and the number of shares which were expressed in the
initial Right Certificates issued hereunder.
(k) In any case in which this Section 11 requires that an adjustment
in the Purchase Price be made effective as of the record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date the
additional shares or securities of the Company, if any, issuable as a
consequence of such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares or securities upon the
occurrence of such event.
(l) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such adjustments in the number of shares which
may be acquired upon exercise of the Rights, and such adjustments in the
Purchase Price, in addition to those adjustments expressly required by the other
subsections of this Section 11, as and to the extent that the Company, in its
sole discretion, shall determine to be advisable, in order that, in the event of
(i) any reclassification, consolidation or subdivision of the Common Stock,
(ii) any reorganization or partial liquidation of the Company or similar
transaction, (iii) any issuance wholly for cash of any Common Stock at less than
the current market price, (iv) any issuance wholly for cash of Common Stock or
securities which by their terms are convertible into or exchangeable for Common
Stock, (v) any stock dividends or (vi) any issuance of rights, options or
warrants, hereafter made by the Company to holders of its Common Stock as
provided herein-above in this Section 11, (x) the holders of the Rights in any
such event shall be treated equitably and in accordance with the purpose and
intent of this Agreement, and (y) to the extent reasonably possible, such event
shall not, in the opinion of counsel for the Company,
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result in the stockholders of the Company being subject to any United States
federal income tax liability by reason thereof.
Section 12. CERTIFICATION OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES. Whenever an adjustment is made as provided in Section 11 or 13, the
Company shall (i) promptly prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (ii) promptly
file with the Rights Agent and with each transfer agent for the Common Stock a
copy of such certificate, and (iii) mail a brief summary thereof to each holder
of a Right Certificate in accordance with Section 25. Notwithstanding the
foregoing sentence, the failure of the Company to give such notice shall not
affect the validity of, or the force or effect of, the requirement for such
adjustment.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) In the event that, at any time after an Acquiring Person has
become such,
(i) the Company shall consolidate with, or merge with and into,
any other Person and the Company shall not be the continuing or surviving
corporation of such consolidation or merger,
(ii) any other Person(s) shall consolidate or merge with and
into the Company, the Company shall be the continuing or surviving
corporation of such merger and, in connection with such consolidation or
merger, all or part of the Common Stock shall be changed into or
exchanged for stock or other securities of the Company or of any other
Person or cash or any other property, or
(iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating more than 50 percent of
the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any other Person, (other than a pro rata distribution by the
Company of assets (including securities) of the Company or any of its
Subsidiaries to all holders of the Company's Common Stock),
then, on and after the later of (I) the date of the occurrence of an event
described in clause (i), (ii) or (iii) of this Section 13(a), or (II) the date
of the expiration of the period within which the Rights may be redeemed pursuant
to Section 23 (as the same may have been amended as provided in Section 26):
(A) proper provision shall be made so that each holder
of a Right shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price, such number of
shares of common stock of
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the Principal Party as shall be equal to the result obtained by (x)
multiplying the then current Purchase Price by the number of Units
for which a Right is then exercisable and dividing that product by
(y) 50 percent of the current market price per share of the common
stock of the Principal Party (determined in the same manner as the
current market price of Common Stock is determined under
Section 11(d)) on the date of consummation of such consolidation,
merger, sale or transfer;
(B) the Principal Party shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or
transfer, all the obligations and duties of the Company pursuant to
this Agreement, and proper provision shall be made for the foregoing,
provided that the Principal Party shall, prior to the first occurrence
of an event described in clause (i), (ii) or (iii) of this Section
13(a), have caused to be reserved out of its authorized and unissued
shares of common stock (or its authorized and issued shares of common
stock held in its treasury), for issuance pursuant to this Agreement,
the number of shares of common stock that will be sufficient to permit
the exercise in full of the Rights after the occurrence of such event;
(C) the term "Company" wherever used in this Agreement
shall thereafter be deemed to refer to such Principal Party; and
(D) the Principal Party shall, in addition to the
reservation of shares of its common stock as provided in the proviso
to clause (B) above, take such steps (including without limitation
compliance with the Company's other obligations as set forth in
Section 9) in connection with such consummation as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as
nearly as reasonably may be, in relation to the shares of its Common
Stock thereafter deliverable upon the exercise of the Rights;
PROVIDED, HOWEVER, that, upon the subsequent occurrence of any merger,
consolidation, sale of all or substantially all assets,
recapitalization, reclassification of shares, reorganization or other
extraordinary transaction in respect of such Principal Party, each
holder of a Right shall thereupon be entitled to receive, upon
exercise of a Right and payment of the Purchase Price, such cash,
shares, rights, warrants and other property which such holder would
have been entitled to receive had such holder, at the time of such
transaction, owned the shares of common stock of the Principal Party
purchasable upon the exercise of a Right, and such Principal Party
shall take such steps (including, but not limited to, reservation of
shares of stock) as may be necessary to permit the subsequent exercise
of the Rights in accordance with the terms hereof for such cash,
shares, rights, warrants and other property.
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(b) For purposes of this Agreement, "Principal Party" shall mean
(i) in the case of any transaction described in clause (i) or
(ii) of Section 13(a), (A) the Person that is the issuer of the securities
into which shares of Common Stock are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the
common stock of which has the greatest market value, or (B) if no
securities are so issued, (x) the Person that is the other party to the
merger or consolidation and that survives said merger or consolidation, or,
if there is more than one such Person, the Person the common stock of which
has the greatest market value or (y) if the Person that is the other party
to the merger or consolidation does not survive the merger or
consolidation, the Person that does so survive (including the Company if it
survives); and
(ii) in the case of any transaction described in clause (iii) of
Section 13(a), the Person that is the party receiving the greatest portion
of the assets or earning power transferred pursuant to such transaction or
transactions, or, if each Person that is a party to such transaction or
transactions receives the same portion of the assets or earning power so
transferred or if the Person receiving the greatest portion of the assets
or earning power cannot be determined, whichever of such Persons is the
issuer of common stock having the greatest market value of shares
outstanding;
PROVIDED, HOWEVER, that in any such case, (1) if the common stock of such Person
is not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another corporation the common stock of which
is and has been so registered, "Principal Party" shall refer to such other
corporation; (2) if the common stock of such Person is not and has not been so
registered and such Person is not a direct or indirect Subsidiary of another
corporation the common stock of which is and has been so registered, "Principal
Party" shall refer to the corporation which ultimately controls such Person;
(3) in case such Person is a Subsidiary, directly or indirectly, of more than
one corporation, the common stocks of all of which are and have been so
registered, "Principal Party" shall refer to whichever of such corporations is
the issuer of common stock having the greatest market value of shares held by
the public; and (4) if the common stock of such Person is not and has not been
so registered and such Person is owned, directly or indirectly, by a joint
venture formed by two or more Persons that are not owned, directly or
indirectly, by the same Person, the rules set forth in clauses (1), (2) and (3)
above shall apply to each of the chains of ownership having an interest in such
joint venture as if such Person were a "Subsidiary" of both or all of such joint
venturers and the Principal Party in each such chain shall bear the obligations
set forth in this Section 13 in the same ratio as its direct or indirect
interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and the Principal Party shall
have
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executed and delivered to the Rights Agent a supplemental agreement making
valid provision for the results described in clause (A) of Section 13(a) and
confirming that the Principal Party will perform its obligations under this
Section 13(a); PROVIDED, HOWEVER, that in no case may the Company consummate
any such consolidation, merger, sale or transfer if (i) at the time of or
immediately after such transaction there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (ii) prior to, simultaneously with or immediately
after such transaction, the shareholders of the Person which constitutes, or
would constitute, the Principal Party for purposes of this Section 13 shall
have received a distribution of Rights previously owned by such Person or any
of its Affiliates and Associates.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. This Section
13 shall not be applicable to a transaction described in Subparagraphs (i), (ii)
or (iii) of Subsection (a) of this Section if (i) such transaction is
consummated with a Person or Persons who acquired Common Stock pursuant to a
Qualified Offer (or a wholly owned subsidiary of any such Person or Persons),
(ii) the price per share of Common Stock offered in such transaction or
distributable to shareholders upon conclusion of such transaction is not less
than the price per share of Common Stock paid to all holders of Common Stock
whose shares were purchased pursuant to such Qualified Offer and (iii) the form
of consideration being offered to the remaining holders of Common Stock pursuant
to such transaction or distributable to shareholders upon conclusion of such
transaction is the same as the form of consideration paid pursuant to such
Qualified Offer. Upon conclusion of any transaction described in the foregoing
sentence, all Rights shall expire.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights. If the
Company shall elect not to issue such fractional Rights, in lieu of such
fractional Rights, there shall be paid to the registered holders of the Right
Certificates with regard to which such Fractional Rights would otherwise be
issuable an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the average
of the high bid and
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low asked prices in the over-the-counter market, as reported by NASDAQ. If
on any such date the Rights are not quoted by any such organization, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used. Any such determination of current
market value shall be described in a statement filed with the Rights Agent.
(b) The Company shall not be required to issue fractions of shares
upon exercise of a Right or to distribute certificates which evidence fractional
shares. In lieu of fractional shares, the Company shall pay to the registered
holders of Right Certificates at the time such Right Certificates are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of a share of Common Stock. For purposes of this Section 14, the
current market value of a share of Common Stock shall be the closing price of a
share of Common Stock (as determined pursuant to the second sentence of Section
11(d)) for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance thereof expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right.
Section 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement are vested in the respective registered holders of the Right
Certificates (and prior to the Distribution Date, the registered holders of the
Common Stock), and any registered holder of any Right Certificate (or, prior to
the Distribution Date, any registered holder of the Common Stock), without the
consent of the Rights Agent or of the holder of any other Right Certificate (or,
prior to the Distribution Date, any other registered holder of the Common
Stock), may, on his own behalf and for his own benefit, enforce, and may
institute and maintain, any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of the obligations of any Person subject to, this Agreement.
Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) on and after the Distribution Date, the Right Certificates will
be transferable only on the registry books of the Rights Agent and then if
surrendered at the
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stock transfer office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Stock certificate) is registered as the absolute owner thereof
and of the Rights evidenced thereby (notwithstanding any notations of ownership
or writing on the Right Certificates or the associated Common Stock certificate
made by anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary.
Section 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 24), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
Section 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense incurred, without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Right Certificate
or Certificate for Common Stock or for other securities of the Company,
instrument of assignment or transfer, power of attorney, endorsement, affidavit,
letter, notice, direction, consent, certificate, statement, or other paper or
document believed by it, acting with reasonable care, to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons.
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Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
AGENT.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stock transfer business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned,
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Right Certificates so countersigned, and in case at that time
any of the Right Certificates shall not have been countersigned, the Rights
Agent may countersign such Right Certificates either in its prior name or in its
changed name, and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President,
any Vice President, or the Secretary of the Company and
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delivered to the Rights Agent, and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof), nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate, nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
13 or responsible for the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by Right Certificates
after actual notice of any such adjustment), nor shall it by any act hereunder
be deemed to make any representation or warranty as to the authorization or
reservation of any shares of stock to be issued pursuant to this Agreement or
any Right Certificate or as to whether any shares of stock will, when issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performance by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President or the Secretary of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken or suffered to
be taken by it in good faith in accordance with instructions of any such
officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully
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and freely as though it were not Rights Agent under this Agreement. Nothing
herein shall preclude the Rights Agent from acting in any other capacity for
the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first obtaining the Company's approval.
Section 21. CHANGE OF RIGHTS AGENT. Unless the Company and the
Rights Agent agree to a shorter time period, the Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 15 days' notice in writing mailed to the Company and to each transfer agent
of Common Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. Unless the Company and the Rights Agent agree
to a shorter time period, the Company may remove the Rights Agent or any
successor Rights Agent upon 15 days' notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of Common Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 15 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of California (or of any other state of the United States so long
as such corporation is authorized to do business as a banking institution in the
State of California) in good standing, having a stock transfer office in the
State of California, which is authorized under such laws to exercise stock
transfer powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $100,000,000. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or
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deed, but the predecessor Rights Agent shall deliver and transfer to the
successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary
for the purpose. Not later than the effective date of any such appointment,
the Company shall file notice thereof in writing with the predecessor Rights
Agent and each transfer agent of Common Stock and mail a notice thereof in
writing to the registered holders of the Right Certificates. Failure to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of
the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Expiration Date, the Purchase Price per share or the number or
kind or class of shares of stock or other securities or property purchasable
under the Right Certificates made in accordance with the provisions of this
Agreement.
Section 23. REDEMPTION.
(a) The Board of Directors of the Company may, at its option and as
provided herein, and notwithstanding the provisions of Sections 11 and 13 of
this Agreement, elect to redeem all but not less than all of the then
outstanding Rights at a redemption price of $.01 per Right, appropriately
adjusted to reflect any stock split, stock dividend, reclassification or similar
transaction occurring after the date hereof (such redemption price being herein
referred to as the "Redemption Price") at any time up to the Close of Business
on the tenth Business Day after a Stock Acquisition Date; PROVIDED, HOWEVER, the
Board of Directors of the Company may authorize the redemption of the Rights
after the time that an Acquiring Person has become such only if (i) there is at
least one Continuing Director then in office and (ii) a majority of all of the
Continuing Directors then in office approves such redemption.
(b) Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights, the Company shall make a public
announcement thereof, and from and after the date of such announcement, without
any further action and without any further notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. As soon as practicable after the
election of the Board of Directors to redeem the Rights, the Company shall give
notice of such redemption to the holders of the then outstanding Rights by
mailing such notice to all such holders at their last addresses as they appear
upon the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
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Section 24. NOTICE OF PROPOSED ACTIONS. In case the Company, after
the Rights become exercisable, shall propose (i) to pay any dividend payable in
stock of any class to the holders of its Common Stock or the Subject Shares or
to make any other distribution to the holders of its Common Stock or Subject
Shares (other than a regular periodic cash dividend), or (ii) to offer to the
holders of its Common Stock or Subject Shares rights or warrants to subscribe
for or to purchase any additional shares of Common Stock or shares of stock of
any class or any other securities, rights or options, or (iii) to effect any
reclassification of its Common Stock or Subject Shares (other than a
reclassification involving only the subdivision of outstanding shares of Common
Stock) or any recapitalization or reorganization of the Company, or (iv) to
effect any consolidation or merger into or with, or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of more than 50 percent of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to, any other Person, or (v) to effect the liquidation, dissolution or winding
up of the Company, then, in each such case, the Company shall give to each
holder of a Right, in accordance with Section 25, a notice of such proposed
action, which shall specify the record date for the purposes of such dividend,
distribution of rights or warrants, or the date on which such reclassification,
recapitalization, reorganization, consolidation, merger, sale, transfer,
liquidation, dissolution or winding up is to take place and the date of
participation therein by the holders of Common Stock and/or Subject Shares, if
any such date is to be fixed, and such notice shall be so given in the case of
any action covered by clause (i) or (ii) above at least twenty days prior to the
record date for determining holders of the Common Stock and/or Subject Shares
for purposes of such action, and in the case of any such other action, at least
twenty days prior to the date of the taking of such proposed action or the date
of participation therein by the holders of Common Stock and/or Subject Shares,
whichever shall be the earlier. The failure to give notice required by this
Section 24 or any defect thereon shall not affect the legality or validity of
the action taken by the Company or the vote upon any such action.
Section 25. NOTICES. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Corporate Trust Department
Subject to the provisions of Section 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
31
<PAGE>
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, California 92626
Attention: President
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to or on the holder of any Right Certificate shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 26. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution
Date and subject to the penultimate sentence of this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Right Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder (which lengthening or
shortening, after the time that any Acquiring Person has become such, shall be
effective only if (x) there is at least one Continuing Director then in office
and (y) a majority of all of the Continuing Directors then in office have
approved of such action), or (iv) to change or supplement the provisions hereof
in any manner which the Company may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Right Certificates;
PROVIDED, HOWEVER, this Agreement may not be supplemented or amended to
lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating
to when the Rights may be redeemed at such time as the Rights are not then
redeemable, or (B) any other time period, unless such lengthening is for the
purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or
amendment is in compliance with the terms of this Section 26, the Rights Agent
shall execute such supplement or amendment. Prior to the Distribution Date, the
interests of the holders of Rights shall be deemed coincident with the interests
of the holders of Common Stock. Notwithstanding anything contained in this
Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price, the Purchase Price or the number of shares or
Units for which a Right is exercisable.
Section 27. EXCHANGE.
(a) The Board of Directors of the Company may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of the
then outstanding and exercisable Rights (which shall not include Rights that
have become subject to the provisions of Section 7(f) hereof) for Common Stock
at an exchange ratio
32
<PAGE>
of one share of Common Stock per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such exchange ratio being hereinafter referred to as the "Exchange
Ratio").
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such exchange;
PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall
not affect the validity of such exchange. The Company promptly shall mail a
notice of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of the Common Stock for Rights will
be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become subject to the
provisions of Section 7(f) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient authorized Common
Stock to permit an exchange of Rights as contemplated in accordance with this
Section, the Company shall take all such action as may be necessary to authorize
additional Common Stock or Equivalent Stock for issuance upon exchange of the
Rights.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. DETERMINATION AND ACTIONS TAKEN BY THE BOARD OF
DIRECTORS. For all purposes of this Agreement, any calculation of the number of
shares of Common Stock (or other applicable securities hereunder) outstanding at
any particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock (or other securities) of
which any Person is the Beneficial Owner, shall be made in accordance with the
last sentence of Rule 13d-3(d)(1)(i) (as in effect on the date of this
Agreement) of the General Rules and Regulations under the Exchange Act. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to such Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including without limitation the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (B) below, all
33
<PAGE>
omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (A) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (B) not
subject the Board to any liability to the holders of the Rights.
Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the holders of Common Stock) any legal or equitable right,
remedy or claim under this Agreement. This Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the holders of
Common Stock).
Section 31. GOVERNING LAW. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State. The rights and obligations of the Rights
Agent under this Agreement shall be governed by and construed in accordance with
the laws in effect in the State of Delaware.
Section 32. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. SECTION HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, illegal, or unenforceable, (i) such invalid,
illegal or unenforceable term, provision, covenant or restriction shall
nevertheless be valid, legal and enforceable to the extent, if any, provided by
such court or authority, and (ii) the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
THE COMPANY:
By:
------------------------------
THE RIGHTS AGENT:
By:
------------------------------
35
<PAGE>
EXHIBIT A
[Form of Right Certificate]
Certificate No. R- _____ Rights
NOT EXERCISABLE AFTER PUBLIC ANNOUNCEMENT OF
REDEMPTION IS MADE. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT
$.01 PER RIGHT ON THE TERMS SET FORTH IN THE
AGREEMENT. IN THE EVENT THAT THE RIGHTS
REPRESENTED BY THIS CERTIFICATE ARE ISSUED TO
A PERSON WHO IS AN ACQUIRING PERSON OR AN ASSOCIATE
OR AFFILIATE THEREOF (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT) OR CERTAIN TRANSFEREES
THEREOF, THIS RIGHT CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BE SUBJECT TO CERTAIN
LIMITATIONS IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7 OF THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
This certifies that _______________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions
of the Rights Agreement, dated as of ________________ (the "Rights
Agreement"), between Talbert Medical Management Holdings Corporation, (the
"Company"), and American Stock Transfer & Trust Company (the "Rights Agent"),
to purchase from the Company, unless the Rights have been previously
redeemed, at any time after the Distribution Date (as such term is defined in
the Rights Agreement) and prior to the Expiration Date (as such term is
defined in the Rights Agreement), or the date, if any, on which the Rights
evidenced by this Certificate may be redeemed, at the stock transfer office
of the Rights Agent, or its successors as Rights Agent, one one-hundredth of
a fully paid and nonassessable share of Junior Participating Preferred Stock
("Preferred Shares"), at a purchase price of $____ (the "Purchase Price"),
upon presentation and surrender of this Right Certificate with the Form of
Election to Purchase duly completed and executed. The number of Rights
evidenced by this Right Certificate as set forth above (and the number of
shares which may be purchased upon exercise thereof), and the Purchase Price
set forth above, are the number and Purchase Price as of the
A-1
<PAGE>
date of the Rights Agreement based on the shares of Common Stock of the
Company as constituted at such date.
Upon the occurrence of an event described in clause (A), (B), (C) or
(D) of Section 11(a)(ii) of the Rights Agreement, the holder of any Rights that
are, or were, beneficially owned by an Acquiring Person or an Associate or
Affiliate thereof (as such terms are defined in the Rights Agreement) or certain
transferees thereof which engaged in, or realized the benefit of, an event or
transaction or transactions described in clause (A), (B), (C) or (D) of such
Section 11(a)(ii), shall not be entitled to the benefit of the adjustment
described in such Section 11(a)(ii).
As provided in the Rights Agreement, the Purchase Price and the number
and class of shares which may be purchased upon the exercise of the Rights
evidenced by this Right Certificate are subject to modification and adjustment
upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and at the principal office of the Company.
This Right Certificate, with or without other Right Certificates, upon
surrender at the stock transfer office of the Rights Agent set forth above, may
be exchanged for another Right Certificate or Right Certificates of like tenor
and date evidencing Rights entitling the holder to purchase such number of
shares as the Rights evidenced by the Right Certificate or Right Certificates
surrendered shall have entitled such holder to purchase. If this Right
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Right Certificate or Right Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right.
No fractional shares will be issued upon the exercise of any Rights
evidenced hereby, but in lieu thereof a cash payment may be made, as provided in
the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares or of any
other
A-2
<PAGE>
securities of the Company which may at any time be issuable on the exercise
hereof, nor shall anything contained in the Rights Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by this Right Certificate
shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signatures of the proper officers of the
Company. Dated as of ____________, 199_.
Attest:
By:
- ----------------------------------- -----------------------------------
Secretary Title:
Countersigned:
- -----------------------------------
By:
-------------------------------
Authorized Signature
A-3
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ______________________________ hereby sells,
assigns and transfers unto __________________
____________________________________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________
Attorney to transfer the within Right Certificate on the books of the
within-named Corporation, with full power of substitution.
Dated: ____________, 19__ ______________________________
Signature
Signature Guaranteed:
CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the best
knowledge of the undersigned) by checking the appropriate boxes that:
(1) this Right Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined
in the Rights Agreement);
(2) the undersigned [ ] did [ ] did not acquire the Rights evidenced
by this Right Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Date: ______________, 19__ ______________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
A-4
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To the Company and the Rights Agent:
The undersigned hereby irrevocably elects to exercise
_________________ Rights represented by this Right Certificate and to
purchase the shares issuable upon the exercise of such Rights and requests
that certificates for such shares be issued in the name of:
Please insert social security
or other identifying number:
------------------------------
- -------------------------------------------------------------------------------
(Please print name and address)
____________________________________________________________ If such number of
Rights shall not be all the Rights evidenced by this Right Certificate, a new
Right Certificate for the balance remaining of such Rights shall be registered
in the name of and delivered to:
Please insert social security
or other identifying number:
------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please print name and address)
Dated: ______________, 19__
Signature: __________________
(Signature must conform in all respects to name
of holder as specified on the face of this Right
Certificate)
Signature Guaranteed:
A-5
<PAGE>
CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the best
knowledge of the undersigned) by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ] are
not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement);
(2) the undersigned [ ] did [ ] did not acquire the Rights evidenced
by this Right Certificate from any person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Date: ______________, 19__ ______________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any
change whatsoever.
A-6
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
FHP INTERNATIONAL CORPORATION
AND
TALBERT MEDICAL MANAGEMENT CORPORATION,
ON THE ONE HAND,
AND
KATHRYN M. ADAIR,
GLORIA L. AUSTIN,
WILLIAM P. BRACCIODIETA,
LARRY L. GEORGOPOLOUS,
GARY E. GOLDSTEIN, M.D.,
RICHARD D. JACOBS,
R. JUDD JESSUP,
JACK D. MASSIMINO,
BARBARA C. MCNUTT,
KENNETH S. ORD,
WESTCOTT W. PRICE III,
WALTER R. STONE,
MARGARET VAN METER,
AND
MICHAEL J. WEINSTOCK,
ON THE OTHER HAND
March 15, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . 2
1.2 Terms Generally . . . . . . . . . . . . . . . . . . . . . . 2
2. Purchase and Sale of Stock . . . . . . . . . . . . . . . . . . . . 2
2.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . 2
2.2 Closing and Closing Date. . . . . . . . . . . . . . . . . . 3
3. Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Additional Securities. . . . . . . . . . . . . . . . . . . . . . . 4
5. FHP Options to Purchase. . . . . . . . . . . . . . . . . . . . . . 4
5.1 Options Related to Termination of Employment. . . . . . . . 4
5.2 Unrestricted Option . . . . . . . . . . . . . . . . . . . . 4
5.3 Performance Options . . . . . . . . . . . . . . . . . . . . 5
5.4 Mechanics of Option Exercise. . . . . . . . . . . . . . . . 6
5.5 Certain Adjustments . . . . . . . . . . . . . . . . . . . . 7
6. Drag-Along Rights and Tag-Along Rights . . . . . . . . . . . . . . 7
6.1 Drag-Along Rights . . . . . . . . . . . . . . . . . . . . . 7
6.2 Tag-Along Rights. . . . . . . . . . . . . . . . . . . . . . 8
6.3 Same Terms and Conditions . . . . . . . . . . . . . . . . . 8
7. Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . 8
7.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . 8
7.2 Incidental Registration . . . . . . . . . . . . . . . . . . 9
(a) Right to Include Registrable Securities. . . . . . . . 9
(b) Priority in Incidental Registrations . . . . . . . . . 9
(c) Seller Information; Suspension . . . . . . . . . . . . 9
7.3 Underwritten Offerings; Lockup. . . . . . . . . . . . . . . 10
7.4 Indemnification/Indemnification Agreements. . . . . . . . . 10
7.5 Termination of Registration Rights. . . . . . . . . . . . . 10
7.6 Registration Expenses . . . . . . . . . . . . . . . . . . . 11
8. Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9. Representations, Warranties and Agreements . . . . . . . . . . . . 11
9.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . 11
9.2 Investment Representations. . . . . . . . . . . . . . . . . 11
9.3 Legends; Stop Transfer. . . . . . . . . . . . . . . . . . . 13
10. Certain Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 14
10.1 Right of First Refusal. . . . . . . . . . . . . . . . . . . 14
i
<PAGE>
11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.1 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.2 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . 16
11.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.4 No Third Party Beneficiaries. . . . . . . . . . . . . . . . 18
11.5 Assignment by FHP . . . . . . . . . . . . . . . . . . . . . 18
11.6 Time is of the Essence. . . . . . . . . . . . . . . . . . . 18
11.7 Entire Agreement; Amendments. . . . . . . . . . . . . . . . 18
11.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . 19
11.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 19
11.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 19
11.11 Waiver of Jury Trials; Consent to Jurisdiction. . . . . . . 19
11.12 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of March 15, 1996, by and among FHP International Corporation, a
Delaware corporation ("FHP"), Talbert Medical Management Corporation, a Delaware
corporation (the "Company"), Kathryn M. Adair ("Adair"), Gloria L. Austin
("Austin"), William P. Bracciodieta ("Bracciodieta"), Larry L. Georgopolous
("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard D. Jacobs
("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino ("Massimino"), Barbara
C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W. Price III ("Price"),
Walter R. Stone ("Stone"), Margaret Van Meter ("Van Meter"), and Michael J.
Weinstock ("Weinstock"). In this Agreement, Adair, Austin, Bracciodieta,
Georgopolous, Goldstein, Jacobs, Jessup, Massimino, McNutt, Ord, Price, Stone,
Van Meter and Weinstock are referred to individually as a "Management Investor"
and collectively as the "Management Investors."
A. WHEREAS, FHP has formed the Company to function as a physician
practice management company to provide practice management services to certain
professional corporations; and
B. WHEREAS, FHP has acquired 9,100,000 shares of the Class A
Voting Common Stock of the Company, par value $.01 (one cent) per share (the
"Class A Common Stock"), which shares of Class A Common Stock comprise all of
the issued and outstanding shares of Class A Common Stock of the Company, for
consideration in the amount of $91,000.00; and
C. WHEREAS, the Company and FHP regard the services provided to
the Company by the Management Investors as valuable to the Company and FHP, and
have determined that it would be to the advantage and in the best interests of
the Company and FHP to provide for the issuance of shares of Class B Common
Stock of the Company, par value $.01 (one cent) per share (the "Class B Common
Stock," with the Class A Common Stock and the Class B Common Stock collectively
referred to herein as the "Common Stock"), to the Management Investors as
provided for in this Agreement (i) as an inducement to remain in the service of
the Company and FHP, and (ii) as an incentive for increased efforts during such
service; and
D. WHEREAS, FHP desires to provide for the issuance of shares of
Class B Common Stock of the Company to the Management Investors, and the
Management Investors wish to acquire such shares from the Company, all on the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, and for other good and valuable
<PAGE>
consideration, the receipt of which is hereby acknowledged, the parties to this
Agreement mutually agree as follows:
1. DEFINITIONS.
1.1 ACCOUNTING TERMS. In this Agreement, "GAAP" means generally
accepted accounting principles, consistently applied. All accounting terms
not specifically defined herein shall be construed in accordance with GAAP.
1.2 TERMS GENERALLY. The definitions in this Agreement shall apply
equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed by the phrase
"without limitation" if such phrase does not actually appear. The headings
of Sections are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. Unless the context shall otherwise require, any reference to
any agreement or other instrument or statute or regulation is to it as
amended and supplemented from time to time (and, in the case of a statute
or regulation, to any successor provision). Any reference in this
Agreement to a "day" or a number of "days" (without the explicit
qualification of "business") shall be interpreted as a reference to a
calendar day or number of calendar days. If any action or notice is to be
taken or given on or by a particular calendar day, and such calendar day is
not a business day, then such action or notice shall be deferred until, or
may be taken or given, on the next business day.
2. PURCHASE AND SALE OF STOCK.
2.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, each of the Management Investors, severally and not jointly,
agrees to purchase, and FHP agrees to cause the Company to, and the Company
agrees to, issue, sell and transfer to each of the Management Investors,
severally and not jointly, at the Closing (as defined below), for
consideration in the amount of $.01 (one cent) per share, the following: as
to each such Management Investor, the number of shares of the Class B
Common Stock of the Company (the "Stock") set forth in that certain
schedule signed by each of FHP, the Company, and such Management Investor
(each, a "Management Investor Schedule"). The aggregate number of shares
of Stock issued to the Management Investors shall be 900,000, and the Stock
issued to the Management Investors, collectively, initially shall comprise
9% of the total outstanding Common Stock of the Company (the "Management
Stock"). Stock certificates evidencing the Management Stock, in addition
to blank stock
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powers executed by each Management Investor, initially shall be held by the
Assistant Secretary of FHP (the "Escrow Holder"), and shall continue to be
held by the Escrow Holder for the periods set forth in Section 3 below,
subject to the rights and limitations set forth in this Agreement. All
shares of Management Stock shall be fully paid and nonassessable shares.
Except as otherwise provided in this Agreement, each Management Investor
shall have all rights of a shareholder with respect to the Management
Stock, including rights to vote, to receive dividends (including stock
dividends), to participate in stock splits or other recapitalizations, and
to exchange such shares in a merger, consolidation or other reorganization
or exchange of shares.
2.2 CLOSING AND CLOSING DATE. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place on the date
ten (10) days following the date of the execution of this Agreement.
3. RESTRICTIONS. Subject to other limitations contained in this
Agreement, the Management Investors shall not have any right to sell, give,
pledge, hypothecate or otherwise transfer or dispose of any Management Stock
(the "Restrictions") until the Restrictions lapse as provided in this Section 3.
Prior to the lapse of the Restrictions, and subject to the provisions of
Section 3.1 below, the Management Stock shall continue to be held in escrow by
the Escrow Holder and shall be deemed to be "Restricted Securities." The
Restrictions shall lapse, and the Management Stock (and a proportional amount of
any Additional Securities (as defined herein)) shall vest, during the period
commencing on the date of the Closing and ending on July 1, 1999 (the "Vesting
Period") as follows:
3.1 The Restrictions imposed on the Restricted Securities under
this Section 3 shall lapse as to 25% of the shares of the Management Stock
issued to each Management Investor on July 1 of each year during the
Vesting Period. Upon the lapse of the Restrictions on shares of the
Management Stock, such shares shall cease to be Restricted Securities.
Within thirty (30) days after the lapse of the Restrictions on shares of
the Management Stock, the Escrow Holder shall, upon receiving confirmation
from the Company that the Management Investor's withholding obligations, if
any, under Section 8 of this Agreement have been satisfied, transmit to the
Management Investor the certificates evidencing those shares of Management
Stock with respect to which the Restrictions have lapsed; PROVIDED,
HOWEVER, that certificates representing shares of Management Stock which
are subject to a Performance Purchase Option under Section 5.3, below,
shall not be released from escrow until such time as the applicable
Performance Purchase Option has expired without having been exercised.
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3.2 The occurrence of a change in control of the Company or FHP
shall not be an event which causes Restrictions imposed upon and remaining
applicable to Management Stock to terminate.
4. ADDITIONAL SECURITIES. Any securities received as the result of
ownership of Restricted Securities ("Additional Securities"), including, without
limitation, securities received as a stock dividend or stock split, or as a
result of a merger, consolidation, recapitalization or reorganization, shall be
held by the Escrow Holder in the same manner and subject to the same conditions
as the Restricted Securities with respect to which they were issued. Each
Management Investor shall be entitled to direct the Escrow Holder to exercise
any warrant or option received as Additional Securities upon supplying the funds
necessary to do so, in which event the securities so purchased shall constitute
Additional Securities. In the event any Restricted Securities or Additional
Securities consist of a security by its terms or otherwise convertible or
exchangeable for another security at the election of the holder thereof, each
Management Investor may exercise any such right or conversion or exchange, and
any securities so acquired shall be deemed Additional Securities.
5. FHP OPTIONS TO PURCHASE. Notwithstanding the foregoing, the
Management Stock held by the Management Investors shall be subject to the
following terms:
5.1 OPTIONS RELATED TO TERMINATION OF EMPLOYMENT. Prior to the
lapse of the Restrictions on any Restricted Securities, and upon such time
as a Management Investor ceases to be employed by one of the Company, FHP,
or an Affiliate (as defined below) of FHP, FHP shall have the option to
purchase from such Management Investor, and such Management Investor shall
be obligated to sell to FHP, for consideration in the amount of $.01 (one
cent) per share (subject to Section 5.5, below), all or any portion of such
Restricted Securities (including any Additional Securities issued in
respect of such Restricted Securities) at the date of such termination of
employment. As used herein, an "Affiliate" of a Person (as defined in
Section 9.2(a), below) shall mean a Person controlling, under common
control with or controlled by such Person.
5.2 UNRESTRICTED OPTION. At any time prior to October 1, 1999, FHP
shall have the option to purchase from any Management Investor(s), and such
Management Investor(s) shall be obligated to sell to FHP, any or all of the
Management Stock, together with any Additional Securities issued in respect
of such Management Stock, of such Management Investor(s), at a price per
share of $30.00 (subject to Section 5.5, below).
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5.3 PERFORMANCE OPTIONS. FHP shall have the option to purchase
from any Management Investor(s), and such Management Investor(s) shall be
obligated to sell to FHP, for consideration in the amount of $.01 (one
cent) per share (subject to Section 5.5, below), certain amounts of the
Management Stock, together with any Additional Securities issued in respect
of such Management Stock, under the following circumstances (the
"Performance Purchase Options"):
(a) If the Company fails to meet the Financial Goal, as
adjusted, for the fiscal year 1996, as approved by the Audit Committee of
FHP's Board of Directors (the "Audit Committee") in accordance with the
procedures outlined in Section 5.3(d) below, FHP shall have the option to
purchase from each Management Investor that portion of the Management Stock
with respect to which the Restrictions lapsed on July 1, 1996 comprising
20% of the total amount of such Management Stock.
(b) If the Company fails to meet the Financial Goal, as
adjusted, for the fiscal year 1997, as approved by the Audit Committee in
accordance with the procedures outlined in Section 5.3(d) below, FHP shall
have the option to purchase from each Management Investor that portion of
the Management Stock with respect to which the Restrictions lapsed on
July 1, 1997 comprising 20% of the total amount of such Management Stock.
(c) If the Company fails to meet the Financial Goal, as
adjusted, for the fiscal year 1998, as approved by the Audit Committee in
accordance with the procedures outlined in Section 5.3(d) below, FHP shall
have the option to purchase from each Management Investor up to an
additional 20% of the total amount of Management Stock pursuant to the
following formula: for every $100,000 below the amount which is $4 million
below the Financial Goal, FHP shall have the option to purchase from each
Management Investor 0.5% of the total amount of such person's Management
Stock. For example, if the Company's fiscal year 1998 results are $7
million below the Financial Goal for the fiscal year 1998, FHP may purchase
additionally that portion of the Management Stock with respect to which the
Restrictions lapsed on July 1, 1998 comprising 15% of the total amount of
such Management Stock.
(d) The Financial Goals for the fiscal years 1996, 1997 and
1988 shall be as approved by the Audit Committee in accordance with the
following guidelines: The Financial Goal for fiscal year 1996 will be a
pretax loss of $21,784,000 (after allocation of FHP corporate charges and
after net interest income or expense). This pretax loss assumes that the
Fountain Valley Hospital, Salt Lake City
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Hospital, and Westminster subacute facility (collectively the "Hospitals")
were sold on July 1, 1995. The Financial Goal for fiscal year 1996 will be
adjusted to reflect the following: (i) an adjustment will be made to
include the budget of daily operating expenses for every day the Hospitals
are not sold during the fiscal year (the daily expenses to be added to
budget are as follows: Fountain Valley - $35,271, Utah Hospital - $21,271,
and Westminster subacute - $10,000); (ii) an adjustment will be made to
reflect interest on any debt incurred in connection with the formation of
the Company or lease expenses in excess of depreciation for assets leased
from FHP or its subsidiaries. The Financial Goal for fiscal year 1997 will
be equivalent to the Financial Goal for fiscal year 1996 (a pretax loss of
$21,784,000) adjusted to reflect (x) the annual impact of adjustments under
clause (ii) above and (y) an improvement of $20,000,000. The Financial
Goal for fiscal year 1998 will be the Financial Goal for fiscal year 1997
plus an improvement of $20,000,000. The determination of the Financial
Goal for fiscal year 1996 will be approved by the Audit Committee, and the
initial determination of the Financial Goals for fiscal year 1997 and 1998
will be approved by the Audit Committee prior to July 1, 1996, and July 1,
1997, respectively. The Audit Committee may, in its sole discretion
exercised in good faith, adjust the Financial Goals if it determines that
such adjustment is necessary or desirable to accomplish the purposes of
this Agreement. The determination as to whether the Company has met the
Financial Goal for any particular fiscal year shall be made by the Audit
Committee within 90 days after the end of such fiscal year (as to each
fiscal year, the "Determination Date"). The determinations of the Audit
Committee shall be conclusive and binding upon the parties in all respects.
5.4 MECHANICS OF OPTION EXERCISE.
(a) An option granted under Sections 5.1 or 5.2 hereof shall
be exercised by FHP upon 30 days' prior written notice to such effect to
the Management Investor(s) whose shares are subject to the option.
(b) With respect to each Performance Purchase Option granted
under Section 5.3 hereof, FHP shall have 90 days from the Determination
Date for such fiscal year within which to exercise the Performance Purchase
Option for that fiscal year.
(c) In the event that an option under this Section 5 is
exercised, the total purchase price for such shares shall be paid by bank
check at the time the certificate or certificates evidencing the shares
involved are delivered. Delivery of the certificate or certificates
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evidencing the shares involved, properly endorsed, shall be made, against
payment therefor, immediately after the date of exercise of the option
granted under this Section 5, or such other time as may be agreed upon by
the parties to such transaction.
5.5 CERTAIN ADJUSTMENTS. The Audit Committee may, in its sole
discretion exercised in good faith, adjust the number of shares of Management
Stock that may be purchased by FHP at any time upon the exercise of the options
provided in this Section 5, and the purchase price per share pursuant thereto,
if it determines that such adjustment is equitably required to prevent the
dilution or enlargement of the rights of FHP or the Management Investors, as
appropriate, that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in capital structure of
the Company, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities, or
any other corporate transaction or event having an effect similar to any of the
foregoing.
6. DRAG-ALONG RIGHTS AND TAG-ALONG RIGHTS. The provisions of this
Section 6 shall expire at such time as there has been sold or distributed to the
public in a spin-off or in one or more underwritten public offerings pursuant to
one or more Registration Statements (as defined in Section 7) filed with, and
declared effective by, the Commission under the Securities Act (both as defined
in Section 7) an aggregate number of shares of the Common Stock of the Company
equal to at least twenty percent (20%) of the Common Stock of the Company
outstanding after the last such public offering.
6.1 DRAG-ALONG RIGHTS. If FHP proposes a transaction which would
involve the sale or other transfer for consideration by FHP of an amount of
shares of Common Stock of the Company, which, if completed, would result in
a person or entity (other than FHP or its direct or indirect subsidiaries
or affiliates) acquiring 80% or more of the shares of the outstanding
Common Stock of the Company held by FHP (a "Proposed Transaction"), then
FHP shall give written notice (a "Transaction Notice") to the Management
Investors describing the material terms of the Proposed Transaction. FHP
shall be entitled to require each Management Investor to include in such
Proposed Transaction all of such Management Investor's shares of Management
Stock; PROVIDED, HOWEVER, that no Management Investor shall be required to
enter into any Proposed Transaction pursuant to this Section 6.1 unless the
terms and conditions of the Proposed Transaction provide that either (a)
such Management Investor will not be required to participate in any
indemnification of the buyer or buyers, or (b) if such Management Investor
will participate in such indemnification, (i) such Management Investor's
liability
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will be several and not joint and several, and (ii) such Management
Investor's liability will be capped at the market value, determined at the
time of receipt, of the net pre-tax proceeds to be received by such
Management Investor pursuant to the terms of the Proposed Transaction.
6.2 TAG-ALONG RIGHTS. In connection with any Proposed Transaction,
each Management Investor shall have a right to include in such Proposed
Transaction up to the number of shares of Management Stock computed by
multiplying (i) the total number of shares of Common Stock of the Company
proposed to be sold or otherwise disposed of by FHP pursuant to the
Proposed Transaction by (ii) a fraction, the numerator of which shall equal
the aggregate number of shares of Management Stock owned by such Management
Investor and which are no longer subject to the Restrictions provided for
in Section 3 or the Performance Options provided for in Section 5.3 as of
the close of business on the day immediately preceding the date of the
Transaction Notice and the denominator of which shall equal the sum of the
aggregate number of shares of the Common Stock of the Company issued and
outstanding on a fully diluted basis on such date. Any Management Investor
desiring to exercise his or her tag-along right must deliver a written
notice of exercise to FHP within 10 days after the date FHP gives the
Transaction Notice to such Management Investors.
6.3 SAME TERMS AND CONDITIONS. In the case of both the drag-along
rights described in Section 6.1 and the tag-along rights described in
Section 6.2, a sale of Management Stock by a Management Investor shall be
at the same price per share (in both amount and purchase medium) applicable
to the sale of the shares of Common Stock of the Company by FHP and
otherwise shall be on terms and conditions at least as favorable as those
applicable to FHP.
7. REGISTRATION RIGHTS.
7.1 CERTAIN DEFINITIONS. As used in this Section 7 and elsewhere
in this Agreement, the following terms shall have the following respective
meanings: (a) "Commission" shall mean the Securities and Exchange
Commission or any other Federal agency at the time administering the
Securities Act; (b) "Exchange Act" shall mean the Securities Exchange Act
of 1934, or any similar Federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time;
(c) "Registrable Securities" shall mean all Management Stock and Additional
Securities held by the Management Investors which are no longer subject to
the restrictions specified in Section 3 or the purchase options granted to
FHP under Section 5; (d) "Securities Act" shall mean the Securities Act of
1933, or any similar Federal statute, and the rules and regulations
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of the Commission thereunder, all as the same shall be in effect at the
time; and (e) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement
or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
7.2 INCIDENTAL REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company
proposes to register any of its Common Stock under the Securities Act
(other than by a registration on Form S-4 or S-8 or any successor or
similar forms or filed in connection with an exchange offer or any offering
of securities solely to the Company's existing stockholders), whether or
not for sale for its own account, the Company will each such time give
written notice thereof to all Management Investors and, upon the written
request of any Management Investor made within 20 days after the receipt of
any such notice, the Company will use its best efforts to effect the
registration under the Securities Act of the Registrable Securities for
which the Management Investor(s) has requested registration thereof;
PROVIDED, HOWEVER, that if the Company shall determine for any reason (i)
not to register such securities, then the Company shall be relieved of its
obligation to use best efforts to effect registration of the Registrable
Securities, or (ii) to delay registration of such securities, then the
Company shall be permitted to delay registering any Registrable Securities.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration
pursuant to this Section 7 involves an underwritten offering, and the
managing underwriter shall advise the Company that, in its opinion, the
number of securities requested and otherwise proposed to be included in
such registration exceeds the number which can be sold in such offering
within a price range acceptable to the Company, the Company will include in
such registration, to the extent of the number which the Company is so
advised can be sold in such offering, (i) first, all securities proposed to
be sold by the Company, (ii) second, all securities proposed to be sold by
FHP, and (iii) third, the number of Registrable Securities requested to be
included in such registration by the Management Investors and securities of
other persons requested to be included in such registration that, in the
opinion of such managing underwriter, can be sold, such amount to be
allocated among all such Management Investors and other persons pro rata
based upon the respective number of securities each such person has
requested to be included in such registration.
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(c) SELLER INFORMATION; SUSPENSION. The Company may require
each seller of Registrable Securities to furnish the Company such
information regarding such seller and the distribution of such securities
as the Company may from time to time reasonably request. Notwithstanding
any other provision of this Agreement, the Management Investors understand
that there may be periods during which the Company may determine, in good
faith, that it is in the best interest of the Company and its stockholders
to defer disclosure of any material facts regarding the Company business
which the Company requires for reasonable business purposes to remain
confidential (collectively, "Non-Public Information"), until such
information has reached a more advanced stage and that during such periods
sales of Registrable Securities and the effectiveness of any registration
statement covering Registrable Securities may be suspended or delayed.
Each Management Investor agrees by acquisition of such Registrable
Securities that upon receipt of any notice from the Company of (i) the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, or (ii) the
development of any Non-Public Information, then such Management Investor
will forthwith discontinue such Management Investor's disposition of
Registrable Securities pursuant to the registration statement relating to
such Registrable Securities.
7.3 UNDERWRITTEN OFFERINGS; LOCKUP.
In connection with any distribution by one or more underwriters
of the Company's securities registered pursuant to this Section 7, to the extent
not inconsistent with applicable law, each Management Investor agrees as a
condition to such Management Investor's rights under this Agreement not to
effect any public sale or distribution of any equity securities of the Company,
or any securities convertible into or exchangeable or exercisable for such
securities, including a sale pursuant to Rule 144 under the Securities Act (or
any similar provision then in force), during such period as may be agreed to
between the Company and the underwriters, except as part of such underwritten
registration.
7.4 INDEMNIFICATION/INDEMNIFICATION AGREEMENTS. Notwithstanding
the foregoing, the Company may require, as a condition to including any
Management Investor's Registrable Securities in any registration statement filed
pursuant to this Sections 7, that each Management Investor who has requested
that his or her Registrable Securities be included in such registration
statement enter into an indemnification agreement
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with the Company on terms and conditions customary for indemnification
agreements in connection with transactions of this type.
7.5 TERMINATION OF REGISTRATION RIGHTS. The registration rights
granted to the Management Investors pursuant to this Section 7 shall terminate:
(a) As to any particular Registrable Securities, at the time that such
Registrable Securities can be sold by the Management Investor holding such
Registrable Securities pursuant to Rule 144 or successor rules without the
necessity for registration; (b) Upon transfer by the Management Investor of such
Registrable Securities; and (c) In any event, ten years from the date of this
Agreement.
7.6 REGISTRATION EXPENSES. All expenses incurred by the Company
incident to the Company's performance of or compliance with this Section 7,
including, without limitation, all registration and filing fees, fees and
expenses of compliance with state securities or blue sky laws, printing expenses
and fees and disbursements of counsel for the Company and all independent public
accountants (including the expenses of any audit), but excluding underwriting
commissions, and discounts and expenses agreed to be paid to underwriters (all
such expenses being herein called "Registration Expenses"), shall be borne by
the Company.
8. WITHHOLDING. The Management Investors acknowledge that the
Company may withhold compensation (in cash, or, at the Company's option, in
stock) to satisfy all applicable federal, state, and local income, employment
and other tax withholding requirements.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
9.1 AUTHORIZATION. FHP and each Management Investor represent and
warrants that this Agreement, when executed and delivered by each of them, will
constitute a valid and legally binding obligation of each of them, enforceable
against each of them in accordance with its terms.
9.2 INVESTMENT REPRESENTATIONS.
(a) This Agreement is made with the Management Investors in
reliance upon each Management Investor's representation to the Company and
to FHP, which by such Management Investor's execution and delivery hereof
each Management Investor hereby confirms, that the shares of the Management
Stock to be received by such Management Investor will be acquired for
investment for such Management Investor's own account, not as a nominee or
agent, and not with a view to the sale in connection with a public
distribution of any part thereof; and (ii) such Management Investor has no
present intention of selling, granting a
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participation in or otherwise distributing, and does not have any contract,
undertaking, agreement or arrangement with any natural person, corporation,
partnership, association or other entity ("Person") to sell, transfer or
grant a participation to such Person, or to any third Person, with respect
to any of the shares of the Management Stock.
(b) Each Management Investor understands that the Management
Stock has not been registered under the Securities Act on the ground that
the sale and the issuance of Management Stock hereunder is exempt from
registration under the Securities Act pursuant to Section 4(2) thereof and
regulations issued thereunder, and that FHP's and the Company's reliance on
such exemption is predicated on the Management Investors' representations
set forth herein.
(c) Each Management Investor represents that such Management
Investor is an executive officer or director of the Company or FHP. Each
Management Investor further represents that, during the course of the
transaction and prior to such Management Investor's purchase of shares of
the Management Stock, such Management Investor had access to, the
opportunity to ask questions of, and receive answers from, representatives
of FHP and the Company concerning the terms and conditions of the offering
and to obtain additional information (to the extent FHP or the Company
possessed such information or could acquire it without unreasonable effort
or expense) necessary to verify the accuracy of any information furnished
to such Management Investor or to which such Management Investor had
access.
(d) Each Management Investor has relied solely on its own
investigations in making a decision to purchase the Management Stock, and
has received no representation or warranty from FHP or the Company, or any
of the affiliates, employees or agents of either.
(e) Each Management Investor understands that the Management
Stock may not be sold, transferred or otherwise disposed of without
registration or qualification under the Securities Act and the California
Corporate Securities Law of 1968, as amended (the "CSL") or pursuant to an
exemption therefrom, and that in the absence of an effective registration
statement and permit covering the Management Stock or an available
exemption from registration under the Securities Act and qualification
under the CSL, the Management Stock must be held indefinitely. Each
Management Investor represents that, in the absence of such an effective
registration statement and permit covering the Management Stock, such
Management Investor will sell, transfer or otherwise dispose of the
Management Stock only in a manner consistent with his or its
representations set
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forth herein and then only in accordance with the provisions of this
Agreement and applicable laws and regulations.
(f) Each Management Investor agrees that, except as
specifically contemplated hereunder, in no event will such Management
Investor transfer or dispose of any of the Management Stock other than
pursuant to an effective registration statement under the Securities Act,
unless and until (i) there is compliance with all requirements contained in
other sections of this Agreement; (ii) the Management Investor shall have
notified the Company of the proposed disposition and shall have furnished
the Company with a statement of the circumstances surrounding the
disposition; (iii) if requested by the Company, at the expense of the
Management Investor or transferee, such Management Investor shall have
furnished to the Company an opinion of counsel, reasonably satisfactory to
the Company, to the effect that such transfer may be consummated without
registration under the Securities Act; and (iv) the transferee executes and
delivers an assumption agreement, in form and substance satisfactory to
FHP, by which the transferee assumes all obligations of a Management
Investor under this Agreement.
9.3 LEGENDS; STOP TRANSFER.
(a) All certificates for shares of the Stock shall bear a
legend in substantially the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
IN COMPLIANCE WITH SUCH ACT AND LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE NOT
TRANSFERABLE, EXCEPT IN ACCORDANCE WITH THE PROCEDURES AND
RESTRICTIONS SET FORTH IN THE CERTIFICATE OF INCORPORATION AND
THE STOCK PURCHASE AGREEMENT DATED AS OF _________, 1996 AMONG
THE COMPANY, FHP INTERNATIONAL CORPORATION ("FHP"), KATHRYN M.
ADAIR, GLORIA L. AUSTIN, WILLIAM P. BRACCIODIETA, LARRY L.
GEORGOPOLOUS, GARY E. GOLDSTEIN, M.D., RICHARD D. JACOBS, R.
JUDD JESSUP, JACK D. MASSIMINO, BARBARA C. MCNUTT, KENNETH S.
ORD, WESTCOTT W. PRICE III, R. WALTER R. STONE, MARGARET VAN
MATER, AND MICHAEL J. WEINSTOCK (THE "STOCK PURCHASE
AGREEMENT"), INCLUDING BUT NOT LIMITED TO FHP'S OPTION TO
PURCHASE THE SECURITIES REPRESENTED BY THIS CERTIFICATE
PURSUANT TO SECTION 5.2 THEREOF. COPIES OF THE STOCK PURCHASE
AGREEMENT ARE FILED AT THE PRINCIPAL OFFICE OF THE COMPANY AND
ARE
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AVAILABLE TO ANY HOLDER WITHOUT CHARGE UPON WRITTEN REQUEST
THEREFOR. ANY PURPORTED TRANSFER IN VIOLATION OF SUCH
RESTRICTIONS SHALL BE VOID AND OF NO EFFECT. AS USED HEREIN,
"TRANSFER" SHALL MEAN SALE, EXCHANGE, ASSIGNMENT, TRANSFER,
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF ANY INTEREST IN A
SHARE EXCEPT BY OPERATION OF LAW IN CONNECTION WITH A MERGER OR
CONSOLIDATION OF THE COMPANY.
THE VOTING OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS
SUBJECT TO THE PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND THE STOCK PURCHASE AGREEMENT.
(b) The certificates for shares of the Management Stock shall
also bear any legend required by any applicable state securities law.
(c) In addition, the Company shall make a notation regarding
the restrictions on transfer of the Management Stock in its stock records,
and shares of the Management Stock shall be transferred on the records of
the Company only if transferred or sold pursuant to an effective
registration statement under the Securities Act covering such shares or
pursuant to and in compliance with the provisions of subsection 9.2(f)
hereof.
10. CERTAIN COVENANTS.
10.1 RIGHT OF FIRST REFUSAL. The provisions of this Section 10
shall expire at such time as there has been sold or distributed to the
public in a spin-off or in one or more underwritten public offerings
pursuant to one or more Registration Statements filed with, and declared
effective by, the Commission under the Securities Act.
(a) Each Management Investor agrees that such Management
Investor will not sell or otherwise dispose of all or any portion of the
Management Stock held by such Management Investor unless such sale or
disposition (i) involves only those shares of Management Stock (a) with
respect to which the Restrictions have lapsed, and (b) are no longer
subject to any of the options provided in Section 5 hereof, and (ii) is
made (a) for consideration that is payable in cash or cash equivalents at
the time of sale, (b) only in strict accordance with and after full
compliance with the provisions of this Section 10.1, and (c) pursuant to a
good faith offer to purchase such Management Stock in writing from a
responsible third party. In the event of any such proposed sale or other
disposition, the Management Investor proposing to make such sale or other
disposition (the "Selling Investor") will give notice to the Company and
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concurrently to FHP containing a complete description of the transaction
proposed (the "Proposal"), including the number of shares of Management
Stock proposed to be sold or otherwise disposed of (the "Transfer Shares"),
the consideration to be paid per Transfer Share and the names of all other
parties to, and all other material terms of, the proposed transaction, and
a copy of the written offer from the third party.
(b) For a period of thirty (30) business days after delivery
of the Proposal (the "FHP Option Period"), FHP shall have the sole and
exclusive right to purchase all or any portion of the Transfer Shares owned
by the Selling Investor for the consideration stated in the Proposal and on
such other terms and conditions as those offered to the Selling Investor as
set forth in the Proposal.
(c) If within the FHP Option Period FHP does not exercise the
option provided in subsection (b) above as to all of the Transfer Shares,
then for a period of ten (10) days (the "Company Option Period") commencing
upon the expiration of the FHP Option Period (or such earlier time as FHP
has either given notice of exercise pursuant to (e) below or has advised
the Selling Investor that it does not intend to exercise such option), the
Company shall have the sole and exclusive right to purchase all or any
portion of the remaining Transfer Shares for the consideration and on the
other terms and conditions set forth in the Proposal.
(d) After expiration of the FHP Option Period and the Company
Option Period, if FHP and the Company have not exercised their respective
options so as to purchase, in the aggregate, all of the Transfer Shares
proposed to be sold by the Selling Investor, then none of such Transfer
Shares will be sold to either of said parties, and within a period ending
sixty (60) days after the expiration of the Company Option Period, the
Selling Investor may sell or otherwise dispose of the Transfer Shares as
are the subject of the Proposal, but (i) only for cash or cash equivalents,
and (ii) only in strict accordance with the terms and provisions set forth
in the Proposal.
(e) Any option granted under this Section 10.1 may be
exercised by notice in writing to the Selling Investor and the Company
stating that such option is exercised.
(f) In the event that the options under this Section 10.1 have
been exercised so as to purchase all of the Transfer Shares proposed to be
sold by the Selling Investor, delivery of the certificate or certificates
evidencing the Transfer Shares, properly endorsed, shall be made by the
Selling Investor against payment therefor within
15
<PAGE>
ten (10) days after the expiration of the Company Option Period at the
principal office of the Company, unless a different time and place or both
is agreed upon by the parties to such transaction, and the total purchase
price with respect to such option shall be paid in the manner and at the
time or times specified in the Proposal.
(g) Notwithstanding anything to the contrary contained in this
Agreement, a Management Investor shall be permitted to transfer those
shares of such Management Investor's Management Stock with respect to
which the Restrictions have lapsed, to a Permitted Transferee (as defined
below) of such Management Investor. For purposes of this Agreement,
"Permitted Transferee" shall mean (i) any member of the immediate family of
such Management Investor, (ii) any trust, all of the beneficiaries of which
are members of the immediate family of such Management Investor, or (iii)
the estate or personal representative of such Management Investor if such
Management Investor is deceased; PROVIDED, HOWEVER, that any Permitted
Transferee to whom such shares of Management Stock are transferred pursuant
to this paragraph (g) shall be required, as a condition of such transfer,
to execute and deliver a written assumption agreement by which such
assignee assumes all rights and obligations of a Management Investor under
this Agreement, including but not limited to (i) the restrictions imposed
by Sections 5 hereof, and (ii) the rights and obligations of FHP under
Section 6 hereof. Any reference to a "Management Investor" contained in
this Agreement shall be deemed to include such Management Investor's
Permitted Transferees.
11. MISCELLANEOUS.
11.1 REMEDIES. The parties to this Agreement acknowledge and agree
that breach of any of the covenants of FHP, the Company and the Management
Investors set forth in this Agreement may not be compensable by payment of money
damages and, therefore, that the covenants of FHP, the Company and the
Management Investors set forth in this Agreement may be enforced in equity by a
decree requiring specific performance. Without limiting the foregoing, if any
dispute arises concerning the sale or other disposition of any of the Management
Stock subject to this Agreement, the parties to this Agreement agree that an
injunction may be issued restraining the sale or other disposition of such
Management Stock or rescinding any such sale or other disposition, pending
resolution of such controversy. Such remedies shall be cumulative and non-
exclusive and shall be in addition to any other rights and remedies the parties
may have under this Agreement.
11.2 ATTORNEYS' FEES. If any party to this Agreement brings an
action against another party to enforce its rights under this Agreement, the
prevailing party shall be entitled to
16
<PAGE>
recover its costs and expenses, including without limitation reasonable
attorneys' fees and costs, incurred in connection with such action, including
any appeal of such action. In the event that a party brings such an action
against more than one of the other parties to this Agreement, any attorneys'
fees awarded against such other parties shall be equitably apportioned among
such other parties in light of all of the facts and circumstances surrounding
their involvement in such action.
11.3 NOTICES. Notices and other communication provided for herein
shall be in writing (including wire, telex, telecopy or similar writing) and
shall be sent, delivered, telexed or telecopied to:
The Company: Talbert Medical Management Corporation
9900 Talbert Avenue
Fountain Valley, CA 92708
Attn: President
With a copy to:
FHP: FHP International Corporation
9900 Talbert Avenue
Fountain Valley, CA 92708
Attn: Secretary
With a copy to:
The Management Kathryn M. Adair
Investors: 7021 Pinebrook Road
Park City, UT 84060
Gloria L. Austin
17 Whispering Wind
Irvine, CA 92714
William P. Bracciodieta
8121 Wadebridge Circle
Huntington Beach, CA 92646
Larry L. Georgopolous
12009 Ibex Avenue N.E.
Albuquerque, NM 87111
Gary E. Goldstein, M.D.
6 Amber Sky Drive
Rancho Palos Verdes, CA 90275
Richard D. Jacobs
17
<PAGE>
4176 W. Jasper
Chandler, AZ 85226
R. Judd Jessup
30962 Via Serenidad
Coto de Caza, CA 92679
Jack D. Massimino
25362 Gallup Circle
Laguna Hills, CA 92653
Barbara C. McNutt
5628 Willowcreek Road
N. Las Vegas, NV 89031
Kenneth S. Ord
11 Emerald Glen
Laguna Niguel, CA 92677
Westcott W. Price III
1505 Emerald Bay
Laguna Beach, CA 92651
Walter R. Stone
6492 Doral Drive
Huntington Beach, CA 92648
Margaret Van Meter
#1 Cala Churcha Street
Barrigada Heights, GU 96921
Michael J. Weinstock
8 Morning Sun
Irvine, CA 92715
11.4 NO THIRD PARTY BENEFICIARIES. Nothing contained in this
Agreement, express or implied, is intended to confer upon any person or entity
other than the parties hereto and their successors in interest and permitted
assignees, any rights or remedies under or by reason of this Agreement unless
expressly so stated otherwise in this Agreement.
11.5 ASSIGNMENT BY FHP. This Agreement shall be binding upon and
inure to the benefit of any successor or successors of FHP. This Agreement is
assignable by FHP to (i) any purchaser of all or substantially all of FHP's
shares of the capital stock of the Company, (ii) any wholly-owned subsidiary of
FHP, or (iii) the Company; PROVIDED, HOWEVER, that such assignee shall execute
and deliver a written assumption agreement by which such assignee assumes all
obligations of FHP under this Agreement. In the event of an assignment by FHP
pursuant to this Section 11.5, FHP shall have the ability to delegate the
functions to be performed by the Audit Committee hereunder
18
<PAGE>
(including any discretionary functions) to any committee of such assignee with
substantially similar functions.
11.6 TIME IS OF THE ESSENCE. Time is of the essence in respect to
all provisions of this Agreement in which a definite time for performance is
specified.
11.7 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Exhibits
and Schedules specifically referred to herein represents the entire, final
agreement of the parties hereto with respect to the subject matter hereof,
superseding all prior agreements, understandings, discussions, negotiations and
commitments of any kind. This Agreement may not be amended or supplemented, nor
may any rights hereunder be waived, except in a writing signed by each of the
parties affected thereby.
11.8 SEVERABILITY. In the event that any provision or any part of
any provision of this Agreement is held to be illegal, invalid or unenforceable,
such illegality, invalidity or unenforceability shall not affect the validity or
enforceability of any other provision or part hereof.
11.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.10 GOVERNING LAW. The validity, interpretation, enforceability,
and performance of this Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
11.11 WAIVER OF JURY TRIALS; CONSENT TO JURISDICTION. WITH RESPECT
TO ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR ANY RELATED TRANSACTION, THE
PARTIES EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A JURY TRIAL AND AGREE THAT
ANY SUCH LITIGATION SHALL BE TRIED BY A JUDGE WITHOUT A JURY. Each party agrees
to non-exclusive personal jurisdiction and venue in the United States District
Court for the Central District of California (and any California State court
within that District) for that purpose, and appoints the person set forth in
Section 11.3 as its agent for service of process in such jurisdiction.
11.12 WAIVER. The waiver by any party of any instance of any other
party's noncompliance with any obligation or responsibility herein shall not be
deemed a waiver of other instances or of any party's remedies for such
noncompliance.
[the next page is the signature page]
19
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above mentioned.
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
--------------------------
Name: Burke F. Gumbiner
Title: Senior Vice President
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
---------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
/s/ Kathryn M. Adair /s/ Jack D. Massimino
-------------------- ---------------------
Kathryn M. Adair Jack D. Massimino
/s/ Gloria L. Austin /s/ Barbara C. McNutt
-------------------- ---------------------
Gloria L. Austin Barbara C. McNutt
/s/ William P. Bracciodieta /s/ Kenneth S. Ord
--------------------------- --------------------
William P. Bracciodieta Kenneth S. Ord
/s/ Larry L. Georgopolous /s/ Westcott W. Price III
------------------------- -------------------------
Larry L. Georgopolous Westcott W. Price III
/s/ Gary E. Goldstein, M.D. /s/ Walter R. Stone
--------------------------- --------------------
Gary E. Goldstein, M.D. Walter R. Stone
/s/ Richard D. Jacobs /s/ Margaret Van Meter
--------------------- ----------------------
Richard D. Jacobs Margaret Van Meter
/s/ R. Judd Jessup /s/ Michael J. Weinstock
------------------ ------------------------
20
<PAGE>
R. Judd Jessup Michael J. Weinstock
21
<PAGE>
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT, dated as of May 31, 1996
(the "Amendment"), is made by and among FHP International Corporation, a
Delaware corporation ("FHP"), Talbert Medical Management Corporation, a Delaware
corporation (the "Company"), Talbert Health Services Corporation, a Delaware
corporation ("THSC"), Kathryn M. Adair, Gloria L. Austin, William P.
Bracciodieta ("Bracciodieta"), Larry L. Georgopolous, Gary E. Goldstein, M.D.,
Richard D. Jacobs, R. Judd Jessup, Jack D. Massimino, Barbara C. McNutt, Kenneth
S. Ord, Westcott W. Price III, Walter R. Stone, Margaret Van Meter, and Michael
J. Weinstock. Defined terms not defined herein shall have the meanings assigned
to them in the Stock Purchase Agreement.
WHEREAS, FHP, the Company and the Management Investors are parties to that
certain Stock Purchase Agreement, dated as of March 15, 1996 (the "Stock
Purchase Agreement"); and
WHEREAS, the Management Stock has not yet been issued to the Management
Investors pursuant to the Stock Purchase Agreement; and
WHEREAS, Bracciodieta is no longer in the employ of the Company; and
WHEREAS, FHP, the Company and the Management Investors desire to amend the
Stock Purchase Agreement in these and certain other respects as set forth below.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto agree
as follows:
1. AMENDMENTS TO STOCK PURCHASE AGREEMENT. The Stock Purchase Agreement
is hereby amended as follows:
(a) PURCHASE OF CLASS A COMMON STOCK AND THSC COMMON STOCK.
(1) The recitals on page 1 of the Stock Purchase Agreement are
hereby amended to read as follows:
"A. WHEREAS, FHP has formed the Company to function as a
physician practice management company to provide practice
management services to certain professional corporations; and
"B. WHEREAS, FHP has formed THSC to provide ancillary
medical services; and
<PAGE>
"C. WHEREAS, FHP has acquired 9,100,000 shares of the Class
A Voting Common Stock of the Company, par value $.01 (one cent)
per share (the "TMMC Class A Common Stock", with the TMMC Class A
Common Stock and the Class B Common Stock of the Company, par
value $.01 (one cent) per share, collectively referred to herein
as the "TMMC Common Stock"), which shares of TMMC Class A Common
Stock comprise all of the issued and outstanding shares of the
common stock of the Company, for consideration in the amount of
$91,000.00; and
"D. WHEREAS, FHP has acquired 500 shares of the Common
Stock of THSC, no par value (the "THSC Common Stock"), which
shares of THSC Common Stock comprise all of the issued and
outstanding shares of the common stock of THSC, for consideration
in the amount of $1,000.00; and
"E. WHEREAS, the Company, FHP and THSC regard the services
provided to the Company by the Management Investors as valuable
to the Company, FHP, and THSC and have determined that it would
be to the advantage and in the best interests of the Company, FHP
and THSC to provide for the issuance of shares of TMMC Class A
Common Stock and THSC Common Stock to the Management Investors as
provided for in this Agreement (i) as an inducement to remain in
the service of the Company, FHP and THSC, and (ii) as an
incentive for increased efforts during such service; and
"F. WHEREAS, FHP desires to provide for the issuance of
shares of TMMC Class A Common Stock and THSC Common Stock to the
Management Investors, and the Management Investors wish to
acquire such shares from the Company and from THSC, respectively,
all on the terms and subject to the conditions set forth in this
Agreement."
(2) The first two sentences of Section 2.1 of the Stock Purchase
Agreement are hereby amended to read as follows:
"Subject to the terms and conditions of this Agreement, each
of the Management Investors, severally and not jointly, agrees to
purchase, and FHP agrees to cause the Company and THSC to, and
the Company and THSC, respectively, agree to, issue, sell and
transfer to each of the Management Investors, severally and not
jointly, at the Closing (as defined below), the following: (i)
for consideration in the amount of $.01 (one cent) per share, as
to each such Management Investor, the number of shares of the
TMMC Class A Common Stock (the "TMMC Stock") set forth in that
certain schedule signed by each of FHP, the Company, THSC
2
<PAGE>
and such Management Investor (each, a "Management Investor
Schedule"), and (ii) for consideration in the amount of $2.00
(two dollars) per share, as to each such Management Investor, the
number of shares of the THSC Common Stock (the "THSC Stock", with
the TMMC Stock and the THSC Stock collectively referred to herein
as the "Stock") set forth in the Management Investor Schedules.
The aggregate number of shares of TMMC Stock issued to the
Management Investors shall be 880,000 (the "TMMC Management
Stock"), and the TMMC Stock issued to the Management Investors,
collectively, initially shall comprise approximately 8.8% of the
total outstanding common stock of the Company (the "TMMC
Management Stock"); and the aggregate number of shares of THSC
Stock issued to the Management Investors shall be 49, and the
THSC Stock issued to the Management Investors, collectively,
initially shall comprise approximately 8.8% of the total
outstanding common stock of THSC (the "THSC Management Stock,"
with the TMMC Management Stock and the THSC Management Stock
collectively referred to herein as the "Management Stock")."
(3) Pursuant to this Amendment, (i) all rights and obligations
created under the Stock Purchase Agreement between (a) FHP and the Management
Investors with respect to the TMMC Management Stock, and (b) the Company and the
Management Investors with respect to the TMMC Management Stock, shall hereby
also create separate and identical rights and obligations between (x) FHP and
the Management Investors with respect to the THSC Management Stock, and (y) THSC
and the Management Investors with respect to the THSC Management Stock,
respectively, as if two separate and identical sets of such rights and
obligations were originally created thereunder, (ii) all other rights and
obligations created under the Stock Purchase Agreement between (a) FHP and the
Management Investors, and (b) the Company and the Management Investors, shall
hereby also create separate and identical rights and obligations between (x) FHP
and the Management Investors, and (y) THSC and the Management Investors,
respectively, as if two separate and identical sets of such rights and
obligations were originally created thereunder, (iii) all references in the
Stock Purchase Agreement to "the Company," in so far as such references relate
to such rights and obligations created between the Management Investors and the
Company described in clauses (i)(b) and (ii)(b), shall also be references to
THSC and shall relate to such separate and identical rights and obligations
between the Management Investors and THSC as described in clauses (i)(y) and
(ii)(y), above, and (iv) all other references to "the Company" in the Stock
Purchase Agreement shall also be references to THSC; PROVIDED, HOWEVER, that the
foregoing clauses (iii) and (iv) shall not apply to those references to "the
Company" contained in Sections 5.1, 5.3, 8 and 11.5 of the Stock Purchase
Agreement.
(4) All references to "Common Stock" in Section 6 and 7 of the
Stock Purchase Agreement are hereby amended to read "TMMC Common Stock or THSC
Common Stock, as appropriate".
3
<PAGE>
(5) Section 8 of the Stock Purchase Agreement is hereby amended
to read as follows:
"8. WITHHOLDING. The Management Investors acknowledge that
the Company, FHP or THSC, as appropriate, may withhold
compensation (in cash, or, at the option of the Company, FHP or
THSC, as appropriate, in stock) to satisfy all applicable
federal, state, and local income, employment and other tax
withholding requirements."
(6) The parties hereto acknowledge that there exists the
possibility that at some future date, THSC may be merged with or into the
Company, and in the event such merger occurs, it is presently contemplated that
upon the effective time of such merger (the "Effective Time"), each Management
Investor shall receive, in exchange for the shares of THSC Common Stock
purchased by such Management Investor pursuant to the Stock Purchase Agreement,
as amended by this Amendment (or, in the event that THSC and the Company are
merged into a new entity, for the shares of the THSC Common Stock and the shares
of the TMMC Common Stock so purchased by such Management Investor), the number
of shares of TMMC Common Stock (or shares of the common stock of the new entity)
which, when combined with the number of shares of TMMC Common Stock purchased by
such Management Investor pursuant to the Stock Purchase Agreement, as amended by
this Amendment (or which shares of the common stock of the new entity), would
result in the ownership by such Management Investor of the same percentage of
the total outstanding common stock of the Company (or of such merged entity)
immediately after the Effective Time as the percentage of the total outstanding
common stock of the Company owned by such Management Investor immediately prior
to the Effective Time. In such event, immediately following the Effective Time:
(i) all rights and obligations created under this Amendment
between (a) FHP and the Management Investors with respect to the THSC
Management Stock, and (b) THSC and the Management Investors with respect to
the THSC Management Stock, shall become rights and obligations between (x)
FHP and the Management Investors with respect to the TMMC Management Stock,
and (y) the Company and the Management Investors with respect to the TMMC
Management Stock, respectively, as if the separate and identical
obligations created pursuant to Section 1(a)(3)(i), above, had never been
created thereunder;
(ii) all other rights and obligations created pursuant to
this Amendment between (a) FHP and the Management Investors, and (b) THSC
and the Management Investors, shall become rights and obligations between
(x) FHP and the Management Investors, and (y) the Company and the
Management Investors, respectively, as if the separate and identical sets
of rights and obligations created pursuant to Section 1(a)(3)(ii), above,
had never been created thereunder;
4
<PAGE>
(iii) all references in the Stock Purchase Agreement, as
amended by this Amendment, to "the Company," in so far as such references
relate to such rights and obligations created pursuant to Section
1(3)(a)(iii), above, between the Management Investors and THSC, shall be
references only to the Company, and shall no longer be references to THSC,
and shall relate only to the rights and obligations between the Management
Investors and the Company as described in clauses (i)(y) and (ii)(y) of
this Section 1(a)(6); and
(iv) all other references to "the Company" in the Stock
Purchase Agreement, as amended by this Amendment, shall be references to
the Company only.
Each Management Investor hereby agrees and consents that the execution of this
Amendment by such Management Investor shall constitute an agreement by such
Management Investor to (i) consent in writing to a merger of THSC with or into
the Company pursuant to Section 228 of the Delaware General Corporation Law, as
amended (the "DGCL"), and (ii) refrain from demanding any appraisal rights to
which such Management Investor might otherwise be entitled pursuant to Section
262 of the DGCL, or pursuant to any other provision of applicable law, in
connection with such a merger.
(b) REMOVAL OF PARTY TO STOCK PURCHASE AGREEMENT. The Stock Purchase
Agreement is hereby amended to remove all references to "William P.
Bracciodieta" and "Bracciodieta" in the Stock Purchase Agreement. Accordingly,
William P. Bracciodieta shall not be a party to the Stock Purchase Agreement.
2. NOTICES. Notices and other communication provided for herein or in
the Stock Purchase Agreement shall be in writing (including wire, telex,
telecopy or similar writing) and shall be sent, delivered, telexed or
telecopied, if to THSC, to:
Talbert Health Services Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attn: President
3. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
4. NO OTHER AMENDMENTS. The Stock Purchase Agreement, as amended by this
Amendment, is and shall continue to be in full force and effect and is hereby in
all respects ratified and confirmed. Except as provided herein, nothing in this
Amendment shall waive or be deemed to waive or modify (except as expressly set
forth herein) any rights or obligations of any of the parties under the Stock
Purchase Agreement.
5
<PAGE>
5. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one instrument.
6
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
date first above mentioned.
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
------------------------------------
Name: Burke F. Gumbiner
Title: Senior Vice President
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
7
<PAGE>
/s/ Kathryn M. Adair /s/ Jack D. Massimino
- -------------------------------- -----------------------------------
Kathryn M. Adair Jack D. Massimino
/s/ Gloria L. Austin /s/ Barbara C. McNutt
- ------------------------------- -----------------------------------
Gloria L. Austin Barbara C. McNutt
/s/ William P. Bracciodieta /s/ Kenneth S. Ord
- ------------------------------- -----------------------------------
William P. Bracciodieta Kenneth S. Ord
/s/ Larry L. Georgopolous /s/ Westcott W. Price III
- ------------------------------- -----------------------------------
Larry L. Georgopolous Westcott W. Price III
/s/ Gary E. Goldstein /s/ Walter R. Stone
- ------------------------------- -----------------------------------
Gary E. Goldstein, M.D. Walter R. Stone
/s/ Richard D. Jacobs /s/ Margaret Van Meter
- ------------------------------- -----------------------------------
Richard D. Jacobs Margaret Van Meter
- ------------------------------- /s/ Michael J. Weinstock
R. Judd Jessup -----------------------------------
Michael J. Weinstock
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Margaret Van Meter 20,000 TMMC
#1 Cala Churcha Street 1 THSC
Barrigada Heights, GU 96921
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-----------------------------------
Name: Burke F. Gumbiner
---------------------------------
Title: Senior Vice President
--------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
----------------------------------
Title: Assistant Treasurer
---------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Margaret Van Meter
----------------------------------------
Margaret Van Meter
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Walter R. Stone 20,000 TMMC
6492 Doral Drive 1 THSC
Huntington Beach, CA 92648
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Walter R. Stone
----------------------------------------
Walter R. Stone
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Westcott W. Price III 67,500 TMMC
1505 Emerald Bay 4 THSC
Laguna Beach, CA 92651
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Westcott W. Price III
----------------------------------------
Westcott W. Price III
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Kenneth S. Ord 10,000 TMMC
11 Emerald Glen 1 THSC
Laguna Niguel, CA 92677
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Kenneth S. Ord
----------------------------------------
Kenneth S. Ord
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Barbara C. McNutt 15,000 TMMC
8250 Fox Tail Way 1 THSC
Las Vegas, NV 89123
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Barbara C. McNutt
----------------------------------------
Barbara C. McNutt
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Jack D. Massimino 500,000 TMMC
25362 Gallup Circle 27 THSC
Laguna Hills, CA 92653
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Jack D. Massimino
----------------------------------------
Jack D. Massimino
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
R. Judd Jessup 67,500 TMMC
30962 Via Serenidad 4 THSC
Coto de Caza, CA 92679
FHP International Corporation,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
----------------------------------------
R. Judd Jessup
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Richard D. Jacobs 25,000 TMMC
4176 W. Jasper 1 THSC
Chandler, AZ 85226
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Richard D. Jacobs
----------------------------------------
Richard D. Jacobs
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Gary E. Goldstein, M.D. 50,000 TMMC
6 Amber Sky Drive 3 THSC
Rancho Palos Verdes, CA 90275
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
---------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Gary E. Goldstein
----------------------------------------
Gary E. Goldstein, M.D.
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Larry L. Georgopolous 20,000 TMMC
12009 Ibex Avenue N.E. 1 THSC
Albuquerque, NM 87111
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Larry L. Georgopolous
----------------------------------------
Larry L. Georgopolous
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Gloria L. Austin 50,000 TMMC
17 Whispering Wind 3 THSC
Irvine, CA 92714
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Gloria L. Austin
----------------------------------------
Gloria L. Austin
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Kathryn M. Adair 25,000 TMMC
7021 Pinebrook Road 1 THSC
Park City, UT 84060
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Kathryn M. Adair
----------------------------------------
Kathryn M. Adair
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Michael J. Weinstock 10,000 TMMC
8 Morning Sun 1 THSC
Irvine, CA 92715
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
---------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Michael J. Weinstock
----------------------------------------
Michael J. Weinstock
<PAGE>
AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT
This AMENDMENT No. 2 TO STOCK PURCHASE AGREEMENT, dated as of September 17,
1996 (the "Amendment"), is made by and among FHP International Corporation, a
Delaware corporation ("FHP"), Talbert Medical Management Corporation, a Delaware
corporation (the "Company"), Talbert Health Services Corporation, a Delaware
corporation ("THSC"), Kathryn M. Adair, Gloria L. Austin, Larry L. Georgopolous,
Richard D. Jacobs, Jack D. Massimino, Barbara C. McNutt, Kenneth S. Ord,
Westcott W. Price III, Walter R. Stone, Margaret Van Meter and Michael J.
Weinstock. Defined terms not defined herein shall have the meanings assigned to
them in the Stock Purchase Agreement.
WHEREAS, FHP, the Company and the Management Investors are parties to that
certain Stock Purchase Agreement, dated as of March 15, 1996, as amended by that
certain Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996
(collectively, the "Stock Purchase Agreement"); and
WHEREAS, FHP, PacifiCare Health Systems, Inc., a Delaware corporation
("PacifiCare"), N-T Holdings, Inc., a Delaware corporation, Neptune Merger
Corp., a Delaware corporation and Tree Acquisition Corp., a Delaware
corporation, have entered into that certain Amended and Restated Agreement and
Plan of Reorganization, dated September 17, 1996 (the "Reorganization
Agreement"); and
WHEREAS, the Reorganization Agreement provides that the common and
preferred stockholders of FHP will receive transferable rights (the "Rights") to
subscribe for 92.25% of the outstanding shares of either TMMC Common Stock or
the capital stock of an affiliated entity (the "Rights Offering"); and
WHEREAS, prior to the execution of the Stock Purchase Agreement, William P.
Bracciodieta ("Bracciodieta"), originally intended to be a party to the Stock
Purchase Agreement as a Management Investor, ceased to be in the employ of FHP,
and, after the execution of the Stock Purchase Agreement but prior to the
issuance of the Management Stock thereunder to the Management Investors, R. Judd
Jessup ("Jessup"), a party to the Stock Purchase Agreement as a Management
Investor, ceased to be in the employ of FHP, and, accordingly, no shares of
Management Stock were issued and sold to either Bracciodieta or Jessup pursuant
to the Stock Purchase Agreement; and
WHEREAS, in light of the execution of the Reorganization Agreement and the
termination of the employment of Bracciodieta and Jessup with the Company and
FHP, FHP, THSC, the Company and the Management Investors desire to amend the
Stock Purchase Agreement in certain respects as set forth below.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto agree
as follows:
1
<PAGE>
1. AMENDMENTS TO STOCK PURCHASE AGREEMENT.
(a) ADJUSTMENT OF NUMBERS AND PERCENTAGES. The second sentence of
Section 2.1 of the Stock Purchase Agreement is hereby amended to read as
follows:
"The aggregate number of shares of TMMC Stock issued to the Management
Investors shall be 812,500 (the "TMMC Management Stock"), and the TMMC
Stock issued to the Management Investors, collectively, initially shall
comprise 8.125% of the total outstanding common stock of the Company (the
"TMMC Management Stock"); and the aggregate number of shares of THSC Stock
issued to the Management Investors shall be 45, and the THSC Stock issued
to the Management Investors, collectively, initially shall comprise
approximately 8.125% of the total outstanding common stock of THSC (the
"THSC Management Stock", with the TMMC Management Stock and the THSC
Management Stock collectively referred to herein as the "Management
Stock")."
(b) EXPIRATION OF CERTAIN OPTIONS. At the Effective Time (as that
term is defined in the Reorganization Agreement), the Stock Purchase Agreement
shall be amended to add the following as Section 12:
"12. EXPIRATION OF CERTAIN OPTIONS. Notwithstanding anything to the
contrary contained in this Agreement (including, without limitation, the
provisions of Sections 3.2 and 5.4, above):
12.1 TERMINATION OF FHP MANAGEMENT INVESTORS WITHOUT CAUSE. In
the event that the employment with FHP of any of the Management Investors
who are officers of FHP (the "FHP Management Investors") is terminated
without cause, any Restrictions remaining applicable to the Management
Stock owned by such FHP Management Investor shall terminate, and all
unvested Management Stock owned by such FHP Management Investor shall vest.
Such Restrictions shall be deemed to terminate, and such Management Stock
shall be deemed to vest, prior to the time FHP's repurchase option provided
for in Section 5.1, above, arises; PROVIDED, HOWEVER, that in such event,
the Management Stock owned by such FHP Management Investor shall remain
subject to the options provided by Sections 5.2 and 5.3, above, until the
first to occur of the expiration of such options pursuant to the terms of
Section 5, above, or the expiration of such options pursuant to the terms
of Section 12.2, below.
12.2 CHANGE IN CONTROL OF THE COMPANY. Both the option granted
under Section 5.1 and the Performance Purchase Option granted under Section
5.3 shall expire as to all Management Investors upon a Change in Control
(as herein defined) of TMMC which occurs at any time after the date of the
expiration of the subscription period during which the Rights are
exercisable under the Rights Offering (the "Expiration Date"). For
purposes of this Agreement, "Change in Control" means:
(a) The acquisition by any individual entity or group
(within the meaning of Section 13(d) or 14(d)(2) of the Exchange Act) (a
"Person") of
2
<PAGE>
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of over 50% of either (i) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock") or
(ii) the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); PROVIDED, HOWEVER, that for
purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the
Company, (ii) any acquisition by FHP or PacifiCare, or (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or PacifiCare, or any corporation controlled by
the Company or PacifiCare; or
(b) Individuals who, as of the Expiration Date, constitute
the Board of Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors of the
Company; PROVIDED, HOWEVER, that any individual becoming a director
subsequent to the Expiration Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board of Directors of the Company."
2. FHP PURCHASE OF STOCK. The parties hereto consent to the purchase by
FHP from, and the issuance, sale and transfer to FHP by, (i) the Company of
87,500 shares of TMMC Common Stock, for consideration in the amount of $.01 per
share, and (ii) THSC of 5 shares of THSC Common Stock, for consideration in the
amount of $2.00 per share. Such purchases by FHP shall occur as soon as
practicable after the execution of this Amendment, and pursuant to a resolution
of the Board of Directors of each of the Company and THSC adopted as of
September 17, 1996.
3. FHP CAPITALIZATION OF THE COMPANY. The parties hereto consent to any
capital contributions which have been or will be made to the Company by FHP
pursuant to Section 4.15(b) of the Reorganization Agreement.
4. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
5. NO OTHER AMENDMENTS. The Stock Purchase Agreement, as amended by this
Amendment, is and shall continue to be in full force and effect and is hereby in
all respects ratified and confirmed. Except as provided herein, nothing in this
Amendment shall waive or be deemed to waive or modify (except as expressly set
forth herein) any rights or obligations of any of the parties under the Stock
Purchase Agreement.
3
<PAGE>
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one instrument.
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
date first above mentioned.
FHP International Corporation, Talbert Health Services Corporation,
a Delaware corporation a Delaware corporation
By: /s/ Burke F. Gumbiner By: /s/ Michael A. Montevideo
--------------------------- --------------------------------
Name: Burke F. Gumbiner Name: Michael A. Montevideo
------------------------- ------------------------------
Title: Senior Vice President Title: Assistant Treasurer
------------------------ -----------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
---------------------------
Name: Michael A. Montevideo /s/ Kathryn M. Adair
------------------------- -----------------------------------
Title: Assistant Treasurer Kathryn M. Adair
------------------------
/s/ Gloria L. Austin /s/ Larry L. Georgopolous
------------------------------ -----------------------------------
Gloria L. Austin Larry L. Georgopolous
/s/ Richard D. Jacobs /s/ Jack D. Massimino
------------------------------ -----------------------------------
Richard D. Jacobs Jack D. Massimino
/s/ Barbara C. McNutt /s/ Kenneth S. Ord
------------------------------ -----------------------------------
Barbara C. McNutt Kenneth S. Ord
/s/ Westcott W. Price III /s/ Walter R. Stone
------------------------------ -----------------------------------
Westcott W. Price III Walter R. Stone
/s/ Margaret Van Meter /s/ Michael J. Weinstock
------------------------------ -----------------------------------
Margaret Van Meter Michael J. Weinstock
4
<PAGE>
MANAGEMENT STOCK EXCHANGE AGREEMENT
[AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT]
This Amendment No. 3 to Stock Purchase Agreement ("Amendment") is made
and entered into as of December 11, 1996, by and among FHP International
Corporation, a Delaware corporation ("FHP"), Talbert Medical Management Holdings
Corporation, a Delaware corporation ("Holdings"), Talbert Medical Management
Corporation, a Delaware corporation (the "Company"), Talbert Health Services
Corporation, a Delaware corporation ("THSC"), Kathryn M. Adair, Gloria L.
Austin, Larry L. Georgopolous, Gary E. Goldstein, M.D., Richard D. Jacobs, Jack
D. Massimino, Barbara C. McNutt, Kenneth S. Ord, Westcott W. Price III, Walter
R. Stone, Margaret Van Meter, and Michael J. Weinstock. Defined terms not
defined herein shall have the meanings assigned to them in the Stock Purchase
Agreement (as defined below).
WHEREAS, FHP, the Company, THSC and the Management Investors are
parties to that certain Stock Purchase Agreement dated as of March 15, 1996, as
amended on May 31, 1996 and September 17, 1996 (the "Stock Purchase Agreement").
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc., FHP intends to sell its holdings of common
stock of the Company and THSC to Holdings, which has been formed by FHP for the
purpose of acquiring all of the capital stock of the Company and THSC.
WHEREAS, concurrently with the FHP Merger, Holdings will distribute
rights to purchase common stock of Holdings (the "Holdings Stock") to the common
and preferred stockholders of FHP pursuant to a registration statement on Form
S-1 (the "Offering").
WHEREAS, the Management Investors collectively own 232,500 shares of
TMMC Stock and 42.75 shares of THSC Stock.
WHEREAS, the Management Investors desire to sell their TMMC Stock and
THSC Stock for the consideration described herein, including the Holdings Stock.
WHEREAS, the FHP, the Company, THSC and the Management Investors
desire to amend the Stock Purchase Agreement in these and certain other respects
as set forth below.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the parties hereby agree
as follows:
<PAGE>
1. EXCHANGE OF TMMC STOCK AND THSC STOCK FOR HOLDINGS STOCK.
The Management Investors hereby exchange, assign, transfer and convey
to FHP all of their right, title and interest in and to, and their ownership of,
the TMMC Stock and THSC Stock in exchange for 232,500 shares of Holdings Stock,
distributed as to each Management Investor in a ratio of one (1) share of
Holdings Stock for one (1) share of TMMC Stock plus 42.75/232,500 share of THSC
Stock owned by each such Management Investor as set forth in the Management
Investor Schedules (as such Management Investor Schedules have been adjusted to
reflect the reverse stock-split of the Company effected on September 17, 1996).
The Holdings Stock received by each such Management Investor will be referred to
as "Holdings Management Stock."
2. CLOSING.
The exchange of TMMC Stock and THSC Stock for Holdings Stock as
contemplated by this Amendment (the "Closing") will take place at the same place
and on the same day as the closing of the FHP Merger.
3. CLOSING DELIVERIES.
(a) BY THE MANAGEMENT INVESTORS. At the Closing, the Management
Investors will deliver to Holdings certificates evidencing the TMMC Stock and
THSC Stock. Each certificate will be properly endorsed for transfer to or
accompanied by a duly executed stock power in favor of Holdings and will be in a
form acceptable for transfer on the books of TMMC and THSC.
(b) BY HOLDINGS. At the Closing, the Holdings will deliver to the
Management Investors certificates evidencing the Holdings Stock. Each
certificate will be properly endorsed for transfer to or accompanied by a duly
executed stock power in favor of each Management Investor and will be in a form
acceptable for transfer on the books of Holdings.
4. AMENDMENTS TO STOCK PURCHASE AGREEMENT.
a. Section 2 of the Stock Purchase Agreement is hereby amended as
follows:
i. The second sentence of Section 2.1 of the Stock Purchase
Agreement is hereby amended by deleting the phrase "(the "THSC Management
Stock", with the TMMC Management Stock and the THSC Management Stock
collectively referred to herein as the "Management Stock")" and replacing
it with the phrase "(the "THSC Management Stock", with the TMMC Management
Stock exchanged for 232,500 shares of the common stock ("Holdings Common
Stock") of Talbert Medical Management Holdings Corporation ("Holdings")
(the "Holdings Management Stock"))."
2
<PAGE>
ii. The third sentence of Section 2.1 of the Stock Purchase
Agreement is hereby amended to read as follows:
"Stock certificates evidencing the Holdings Management Stock, in
addition to blank stock powers executed by each Management Investor, shall
be held by the Assistant Secretary of Holdings (the "Escrow Holder"), and
shall continue to be held by the Escrow Holder for the periods set forth in
Section 3 below, subject to the rights and limitations set forth in this
Agreement."
b. All references to "Management Stock" in the Stock Purchase
Agreement are hereby amended to read "Holdings Management Stock."
c. Section 5 of the Stock Purchase Agreement is amended as follows:
i. All references to "the Company" in section 5.1 are hereby
amended to also be references to Holdings.
ii. Section 5.3(a) of the Stock Purchase Agreement is hereby
amended to read as follows:
"If Holdings fails to meet the Financial Goal, as adjusted, for
the fiscal year 1996, as approved by the Audit Committee of the FHP
Board of Directors in accordance with the procedures outlined in
Section 5.3(d) below, FHP shall have the option to purchase from each
Management Investor that portion of the Management Stock with respect
to which the Restrictions lapsed on July 1, 1996 comprising 20% of the
total amount of such Management Stock."
iii. Section 5.3(b) of the Stock Purchase Agreement is hereby
amended to read as follows:
"If Holdings fails to meet the Financial Goal, as adjusted, for
the fiscal year 1997, as approved by the Audit Committee of FHP's
Board of Directors (the "Audit Committee") in accordance with the
procedures outlined in Section 5.3(d) below, FHP shall have the option
to purchase from each Management Investor that portion of the
Management Stock with respect to which the Restrictions lapsed on
July 1, 1997 comprising 20% of the total amount of such Management
Stock."
iv. All references to "the Company" in Section 5.3 are hereby
amended to be read "Holdings."
d. All references to "TMMC Common Stock or THSC Common Stock" in
Sections 6 and 7 of the Stock Purchase Agreement are hereby amended to read
"Holdings Common Stock."
3
<PAGE>
e. Section 8 of the Stock Purchase Agreement is hereby amended to
read as follows:
"8. WITHHOLDING. The Management Investors acknowledge that
Holdings, the Company, FHP or THSC, as appropriate, may withhold
compensation (in cash, or, at the option of Holdings, the Company, FHP
or THSC, as appropriate, in stock) to satisfy all applicable federal,
state and local income, employment and other tax withholding
requirements."
f. All references to "the Company" in section 12 are hereby amended
to be references to Holdings. All references to "Outstanding Company Common
Stock" are hereby amended to be references to "Outstanding Holdings Common
Stock" and all references to "Outstanding Company Voting Securities" are hereby
amended to be references to "Outstanding Holdings Voting Securities."
5. OTHER AGREEMENTS REGARDING THE STOCK PURCHASE AGREEMENT.
a. The parties to this agreement hereby agree that the Holdings Stock
acquired herein by the Management Investors falls within the definition of
"Additional Securities" as such term is defined in the Stock Purchase Agreement,
and is subject to the same conditions as the TMMC Stock and THSC Stock with
respect to which they were exchanged.
b. The parties hereby agree that the Offering is a distribution to
the public which triggers the expiration of the "Drag-Along Rights" and "Tag-
Along Rights" contained in Section 6 of the Stock Purchase Agreement and the
"Right of First Refusal" contained in Section 10.1 of the Stock Purchase
Agreement.
c. The parties hereby agree that the Registration Rights in Section 7
of the Stock Purchase Agreement will not be exercisable in connection with the
Offering or in connection with an offering by FHP pursuant to its shelf
registration rights.
d. The parties hereby agree that the restrictions on transfer of the
Management Stock contained in Section 10 of the Stock Purchase Agreement will
not prevent any transactions contemplated by this Amendment.
6. NOTICES. Notices and other communications provided for herein or in the
Stock Purchase Agreement shall be in writing (including wire, telex, telecopy or
similar writing) and shall be sent, delivered, telexed or telecopied, if to
Holdings, to:
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, CA 92626-1417
Attn: President
Telecopier: (714) 436-4860
4
<PAGE>
with copies to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: C. James Levin, Esq.
Telecopier: (213) 669-6407
7. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
8. NO OTHER AMENDMENTS. The Stock Purchase Agreement, as amended previously
and by this Amendment, is and shall continue to be in full force and effect and
is hereby in all respects ratified and confirmed. Except as provided herein,
nothing in this Amendment shall waive or be deemed to waive or modify (except as
expressly set forth herein) any rights or obligations of any of the parties
under the Stock Purchase Agreement.
9. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one instrument.
[remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment as
of the date first written above.
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
------------------------------
Burke F. Gumbiner
Senior Vice President
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
Talbert Medical Management Holdings Corporation
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
S-1
<PAGE>
/s/ Kathryn M. Adair /s/ Jack D. Massimino
- ----------------------------- ----------------------------
Kathryn M. Adair Jack D. Massimino
/s/ Gloria L. Austin /s/ Barbara C. McNutt
- ----------------------------- ----------------------------
Gloria L. Austin Barbara C. McNutt
/s/ Larry L. Georgopolous /s/ Westcott W. Price III
- ----------------------------- ----------------------------
Larry L. Georgopolous Westcott W. Price III
/s/ Gary E. Goldstein, M.D. /s/ Walter R. Stone
- ----------------------------- ----------------------------
Gary E. Goldstein, M.D. Walter R. Stone
/s/ Richard D. Jacobs /s/ Margaret Van Meter
- ----------------------------- ----------------------------
Richard D. Jacobs Margaret Van Meter
/s/ Kenneth S. Ord /s/ Michael J. Weinstock
- ----------------------------- ----------------------------
Kenneth S. Ord Michael J. Weinstock
S-2
<PAGE>
FHP, INC. (CALIFORNIA)
MEDICAL GROUP SERVICES AGREEMENT
(TALBERT)
THIS MEDICAL GROUP SERVICES AGREEMENT (this "Agreement") is made and entered
into this 6th day of November, 1996, by and between FHP, INC. (California)
("Health Plan"), and TALBERT MEDICAL GROUP, INC. ("Medical Group") with
reference to the following facts:
WHEREAS, Health Plan operates various prepaid health plans for the provision of
Covered Services to persons enrolled as Members in such plans in a manner
consistent with the laws of the State of California and the United States; and
WHEREAS, Health Plan's ultimate parent, FHP International Corporation, has
recently entered into an agreement to be acquired by PacifiCare Health Systems,
Inc., which acquisition, when completed, will result in various legal and
operational changes to Health Plan, including, among other things, a change of
Health Plan's name to PacifiCare and a change of certain operating procedures
and compensation programs upon the Conversion Date, as defined below; and
WHEREAS, Medical Group and its Participating Providers desire to participate in
Health Plan's prepaid health service delivery system by providing or arranging
for Covered Services to Medical Group Members on a prepaid basis in coordination
with Health Plan and its Participating Providers under the terms specified in
this Agreement; and
NOW, THEREFORE, it is agreed as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following terms shall have the definitions
contained in this Article 1
1.1 ACCREDITATION ORGANIZATION is any organization, including, without
limitation, the National Committee for Quality Assurance (NCQA), engaged
in accrediting or certifying Health Plan, any Managed Care Plans, or any
Participating Providers.
1.2 AGREEMENT is this Medical Group Services Agreement between Health Plan and
Medical Group, and any amendments, exhibits and attachments hereto,
including Product Attachments.
1.3 BASE AGREEMENT is this Medical Group Services Agreement between Health
Plan and Medical Group, and any amendments, exhibits and attachments
hereto, excluding Product Attachments.
<PAGE>
1.4 CAPITATION PAYMENTS are monthly payments made to Medical Group on a
prepaid basis for Covered Services provided or arranged by Medical Group
under this Agreement.
1.5 COMMENCEMENT DATE shall be the closing date of that certain Amended and
Restated Agreement and Plan of Reorganization involving PacifiCare Health
Systems, Inc. and FHP International Corporation (the "Reorganization
Agreement") or on the first day of the month following the closing of the
Reorganization Agreement if the Reorganization Agreement does not close
during the first five (5) days of the month.
1.6 CONVERSION DATE is the date specified in a written notice from Health Plan
to Medical Group indicating that Health Plan has revised its systems,
operations and programs and that the compensation and other programs which
become effective under this Agreement upon the Conversion Date will be
initiated. Health Plan's written notice shall precede the Conversion Date
by at least ninety (90) days and may be stated in term of the conversion
occurring no sooner than ninety (90) days after the date specified in such
written notice.
1.7 COPAYMENT is a fee that may be charged to Members for certain Medical
Group Services and collected by Medical Group or its Participating
Providers at the time Medical Group Services are provided, as set forth in
the applicable Managed Care Plan.
1.8 COST OF CARE is the valuation of Medical Group Services and other health
care services provided or arranged by Medical Group, as described in
Section 5.8 and EXHIBIT 1 TO THE BASE AGREEMENT.
1.9 COVERED SERVICES are those medically necessary health care services,
supplies and benefits which are required by a Member as determined by
Medical Group or Health Plan in accordance with the Member's Managed Care
Plan and Health Plan's Quality Improvement Program and Utilization
Management Program. For purposes of this Agreement, "medically necessary"
shall have the meaning set forth in the applicable Subscriber Agreement.
1.10 DIVISION OF FINANCIAL RESPONSIBILITY is the matrix for each Managed Care
Plan which specifies either: (i) the financial responsibility of Health
Plan, Medical Group and Hospital for Covered Services, where both Medical
Group and Hospital are capitated by Health Plan for providing or arranging
Covered Services for Medical Group Members; or (ii) the financial
responsibility of Health Plan and Medical Group for Covered Services and
Covered Services that are Hospital Services, where Medical Group is
capitated by Health Plan and Hospitals are paid on non-capitated basis by
Health Plan for providing or arranging Covered Services to Medical Group
Members. The Division of Financial Responsibility for each Managed Care
Plan is set forth in the applicable Product Attachment.
1.11 ELIGIBILITY LIST is the list of Members for whom Medical Group shall
provide or arrange
<PAGE>
Covered Services.
1.12 EMERGENCY is the sudden and unexpected onset or occurrence of a symptom,
illness, medical condition or injury which requires immediate diagnosis
and/or treatment in order to alleviate or attempt to prevent severe pain,
permanent disability, serious medical complications or loss of life. The
final determination of whether an Emergency existed shall be made by the
Health Plan Medical Director or designee, subject to appeal under the
applicable Member appeals procedure.
1.13 EMERGENCY SERVICES are Covered Services required by a Member for the
diagnosis and treatment of an Emergency.
1.14 GOVERNMENT AGENCY shall mean any local, state or federal government agency
or entity with regulatory or other authority over Health Plan, this
Agreement or any Managed Care Plan.
1.15 HOSPITAL(S) are the licensed acute care hospitals which have entered into
written agreements with Health Plan to provide Hospital Services to
Medical Group Members in the Medical Group Risk Area on either a capitated
basis or a per diem basis. Hospitals which are capitated by Health
Plan for Medical Group Members are identified on EXHIBIT 1 to the Base
Agreement.
1.16 HOSPITAL SERVICES are either: (i) Covered Services for Medical Group
Members assigned to Hospital which are the financial responsibility of
Hospital, as specified in the Division of Financial Responsibility for
each Managed Care Plan, where Hospital is capitated by Health Plan for
such Covered Services; or (ii) Covered Services for Medical Group Members
which are initially paid for by Health Plan and are the shared financial
responsibility of Health Plan and Medical Group, as specified in the
Hospital Incentive Programs set forth in the Product Attachments and
summarized in the Division of Financial Responsibility, where Hospitals
are paid on per diem basis for such Covered Services.
1.17 MANAGED CARE PLAN is any one of the various health benefit plans or
products sponsored or administered by Health Plan or its subsidiaries or
affiliates including, without limitation, a commercial prepaid plan
("Commercial Plan"), a commercial point-of-service plan ("Commercial POS
Plan"), a Medicare-risk plan ("Medicare Plan") and a Medicare-risk point-
of-service plan ("Medicare POS Plan"). Each Managed Care Plan is
described in the applicable Subscriber Agreement and Product Attachment.
Health Plan may make available some, and not all, of the Managed Care
Plans under this Agreement.
1.18 MEDICAL GROUP MEMBERS are the Members listed on the Eligibility List.
1.19 MEDICAL GROUP RISK AREA is the geographic area within a thirty (30) mile
radius of each Medical Group facility. Such radius commences with the
address of Medical Group
<PAGE>
facility and extends for thirty (30) miles over the shortest route using
public streets and highways.
1.20 MEDICAL GROUP SERVICES are Covered Services for Medical Group Members
which are the financial responsibility of Medical Group, as specified in
the Division of Financial Responsibility for each Managed Care Plan.
1.21 MEMBER is an individual who is enrolled in a Managed Care Plan and meets
all the eligibility requirements for membership in the Managed Care Plan
and for whom the applicable Premium has been received by Health Plan.
1.22 OUT-OF-AREA MEDICAL SERVICES are those Urgently Needed Services and
Emergency Services provided while a Medical Group Member is outside the
Medical Group Risk Area which would have been the financial responsibility
of Medical Group had such services been provided within the Medical Group
Risk Area.
1.23 PARTICIPATING PROVIDERS are (i) physicians and health care professionals
who are shareholders, partners or employees of Medical Group and (ii)
physicians, medical groups, individual practice associations ("IPA"),
health care professionals, hospitals, facilities and other providers of
health care services or supplies that have entered into written contracts
with Health Plan, Medical Group or Hospital to provide Covered Services to
Members pursuant to Managed Care Plans.
1.24 PREMIUM is the payment for Covered Services under each Managed Care Plan
as may be further defined in the applicable Product Attachment.
1.25 PRIMARY CARE PHYSICIAN is any of Medical Group's Participating Providers
who meet Health Plan's criteria for providing initial and primary care
Covered Services to Members, for maintaining the continuity of patient
care, and for initiating and coordinating referrals for Covered Services
to Members.
1.26 PRODUCT ATTACHMENTS are the attachments to the Base Agreement which set
forth the terms and conditions under which Medical Group shall provide or
arrange Covered Services to Medical Group Members pursuant to the Managed
Care Plans. The Product Attachments and additional provisions applicable
to the Product Attachments are described in EXHIBIT 2 to the Base
Agreement. All Product Attachments are a part of this Agreement and are
incorporated herein.
1.27 PROVIDER MANUAL is the Health Plan Provider Policies and Procedures Manual
and related written materials which shall be provided to Medical Group by
Health Plan prior to or concurrent with the execution of this Agreement.
The Provider Manual is incorporated into this Agreement, and may be
updated from time to time by Health Plan as provided in this Agreement.
<PAGE>
1.28 QUALITY MANAGEMENT AND IMPROVEMENT ("QI") PROGRAM are those standards,
protocols, policies and procedures adopted by Health Plan to monitor and
improve the quality of clinical care and quality of services provided to
Members. The QI Program is described in the Provider Manual, and may be
updated from time to time by Health Plan as provided in this Agreement.
1.29 STATE AND FEDERAL LAW shall mean any and all laws and regulations of the
State of California or of the United States which are applicable to Health
Plan, this Agreement, Managed Care Plans, and Medical Group and its
Participating Providers.
1.30 SUBSCRIBER AGREEMENT is the contract between Health Plan and a Subscriber
or Subscriber Group which describes the costs, benefits or services,
procedures, conditions, limitations, exclusions, and other obligations to
which Members are entitled and subject to under a Managed Care Plan. A
copy of the current standard form Subscriber Agreement for each Managed
Care Plan shall be provided to Medical Group by Health Plan concurrent
with the execution of each Product Attachment, and may be updated from
time to time by Health Plan.
1.31 SUBSCRIBER OR SUBSCRIBER GROUP is the individual or employer,
organization, firm or other entity which contracts with Health Plan under
a Subscriber Agreement to obtain the benefits of a Managed Care Plan.
1.32 URGENTLY NEEDED SERVICES are Covered Services under a Managed Care Plan
which are required without delay in order to prevent the serious
deterioration of a Member's health as a result of an unforeseen illness or
injury while the Member is temporarily outside the Health Plan Service
Area (that is, the geographic area in which Health Plan is licensed in the
State of California to offer each Managed Care Plan).
1.33 UTILIZATION MANAGEMENT ("UM") PROGRAM are those standards, protocols,
policies and procedures adopted by Health Plan regarding the management,
review and approval of the provision of Covered Services to Members. The
UM Program is described in the Provider Manual, and may be updated from
time to time by Health Plan as provided in this Agreement.
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 PROVIDE OR ARRANGE COVERED SERVICES. Medical Group, through its
Participating Providers, shall provide or arrange Covered Services in the
Medical Group Risk Area to Medical Group Members, in coordination with
Health Plan and Health Plan's Participating Providers and in accordance
with the terms and conditions set forth in this Agreement and the Managed
Care Plans. Medical Group shall be financially responsible for Medical
Group Services. The primary concern of Medical Group and its
Participating Providers under this Agreement shall be the quality of
Covered Services provided to or
<PAGE>
arranged for Members. Nothing stated in this Agreement shall be
interpreted to diminish this responsibility.
2.2 PROFESSIONAL STANDARDS. All Covered Services provided or arranged by
Medical Group shall be provided or arranged by duly licensed, certified or
otherwise authorized professional personnel and at physical facilities in
accordance with (i) the generally accepted medical and surgical practices
and standards prevailing in the applicable professional community at the
time of treatment, (ii) the provisions of Health Plan's QI Program and UM
Program, (iii) the requirements of State and Federal Law and (iv) the
standards of Accreditation Organizations.
2.2.1 LICENSURE OF MEDICAL GROUP. Medical Group is legally organized and
incorporated under the laws of the State of California. Medical Group
shall maintain in good standing at all times during the term of this
Agreement any and all licenses, certificates and/or approvals required
under State and Federal Law for the performance by Medical Group of the
duties required by this Agreement.
2.2.2 LICENSURE/CERTIFICATION OF MEDICAL GROUP'S PARTICIPATING PROVIDERS.
Each of Medical Group's Participating Providers shall maintain in good
standing at all times during the term of this Agreement the necessary
licenses or certifications required by State and Federal Law and by the
Managed Care Plans to provide or arrange Covered Services to Members.
2.2.3 HOSPITAL PRIVILEGES FOR MEDICAL GROUP'S PARTICIPATING PROVIDERS.
Unless otherwise specified by Medical Group and approved by Health Plan
for specific Participating Providers, each of Medical Group's
Participating Providers who is a physician shall maintain in good standing
at all times during the term of this Agreement medical staff membership
and clinical privileges at Hospital necessary to provide or arrange
Covered Services to Members.
2.3 MEDICAL GROUP'S PARTICIPATING PROVIDERS. Medical Group shall have a
sufficient number of Participating Providers throughout the Medical Group
Risk Area to provide or arrange Covered Services and meet the needs of
Health Plan and Medical Group Members as determined by Health Plan's QI
Program and in accordance with State and Federal Law. Medical Group's
Participating Providers shall provide or arrange Covered Services,
including Emergency Services, to Medical Group Members twenty four (24)
hours a day, three hundred sixty five (365) days per year. Medical Group's
Participating Providers must meet Health Plan's credentialing standards
and must be approved by Health Plan before providing or arranging Covered
Services to Members.
2.3.1 PARTICIPATING PROVIDER INFORMATION. Medical Group shall provide
Health Plan with a complete list of its Participating Providers, together
with the provider specific information required by Health Plan for
credentialing and for administration of the Managed Care Plans, at the
time this Agreement is signed.
<PAGE>
2.3.2 NOTICE OF PARTICIPATING PROVIDER ADDITIONS. Medical Group shall
use its best efforts to provide at least sixty (60) calendar days prior
written notice to Health Plan of the addition of any new Participating
Providers. Such notice shall include the provider specific information
required by Health Plan, as set forth in the Provider Manual. All new
Participating Providers must be approved by Health Plan before providing
or arranging Covered Services to Members. Health Plan shall use its best
efforts to approve new Participating Providers as quickly as possible
after receiving the written notice from Medical Group.
2.3.3 NOTICE OF PARTICIPATING PROVIDER TERMINATIONS. Medical Group shall
provide sixty (60) calendar days prior written notice to Health Plan of
the termination of any of its Participating Providers; provided, however,
that if any Participating Providers are terminated with less than sixty
(60) calendar days notice, then Medical Group shall provide written notice
to Health Plan as soon as Medical Group becomes aware of such termination.
2.3.4 RESTRICTION, SUSPENSION OR TERMINATION OF PARTICIPATING PROVIDERS.
Medical Group shall, as warranted, immediately restrict, suspend or
terminate its Participating Providers from providing or arranging Covered
Services to Members in the following circumstances: (i) the Participating
Provider ceases to meet the licensing/certification requirements or other
professional standards described in this Agreement; (ii) Health Plan or
Medical Group reasonably determines that there are serious deficiencies in
the professional competence, conduct or quality of care of the
Participating Provider which affects or could adversely affect the health
or safety of Members; or (iii) Health Plan reasonably demands that the
Participating Provider be restricted, suspended or terminated. Medical
Group shall immediately notify Health Plan of any of its Participating
Providers who cease to meet the licensing/certification requirements or
other professional standards described in this Agreement and Medical
Group's actions under this Section. If Medical Group fails to act as
required by this Section with respect to any of its Participating
Providers, Health Plan shall have the right to immediately prohibit such
Participating Providers from continuing to provide Covered Services to
Members.
2.3.5 CHANGES IN CAPACITY. Medical Group and its Participating Providers
will continue to accept Members enrolled by Health Plan for so long as
Medical Group and its Participating Providers have the capacity to provide
and arrange Covered Services under this Agreement and for so long as
Medical Group continues to accept new patients from any HMO or other
prepaid Health Plan. Medical Group shall provide at least one hundred
twenty (120) calendar days prior written notice to Health Plan of any
significant changes in the capacity of Medical Group to provide or arrange
Covered Services that would prevent Medical Group from accepting
additional Members. A significant change in capacity includes, without
limitation, the following: (i) inability of Medical Group to properly
serve additional Members due to a lack of Primary Care Physicians or other
Participating Providers; (ii) inability of any one of Medical Group's
Primary Care
<PAGE>
Physicians or other Participating Providers to serve additional Members;
or (iii) closure of any office or facility used by Medical Group or its
Primary Care Physicians or other Participating Providers. Health Plan may
continue to enroll Members with Medical Group until the expiration of the
notice period required under this Section, and in such event, Medical
Group and its Primary Care Physicians and other Participating Providers
shall continue to accept such Members. Health Plan shall discontinue the
enrollment of Members with Medical Group upon expiration of the notice
period required under this Section until such time, if any, that Medical
Group provides written notification to Health Plan that it has the
capacity to accept additional Members.
2.3.6 NOTICE OF CHANGES IN NETWORK. In the event of a closure of a
Medical Group clinic, a termination of one or more Primary Care Physicians
or a change in a Medical Group clinic location, Health Plan shall have the
sole authority and responsibility for providing notice of such changes to
the effected members. Members will be given a choice to stay with Medical
Group, stay with the same physician by moving to another group or select a
new group from the network.
2.4 MEDICAL GROUP'S SUBCONTRACTS WITH PARTICIPATING PROVIDERS. Medical Group
shall demonstrate and certify to Health Plan prior to the Commencement
Date and upon Health Plan's written request at any time during the term of
this Agreement (in the format specified by Health Plan) that its
subcontracts with Participating Providers comply with requirements of this
Agreement. Medical Group shall amend any and all of its existing
subcontracts with Participating Providers which do not comply with this
Agreement within thirty (30) days following the execution of this
Agreement and shall provide Health Plan with written certification
thereof.
2.4.1 COMPLIANCE WITH PROVISIONS OF AGREEMENT. Medical Group's
subcontracts with Participating Providers shall be in writing. All such
subcontracts shall be consistent with the terms and conditions of this
Agreement (including the Product Attachments) and shall meet Health Plan's
requirements for Participating Provider subcontracts as set forth in the
Provider Manual. If this Agreement is amended or modified, all such
subcontracts shall be amended or modified within thirty (30) calendar days
to be consistent with such amendments or modifications.
2.4.2 COMPLIANCE WITH STANDARDS OF ACCREDITATION ORGANIZATIONS AND
REQUIREMENTS OF STATE AND FEDERAL LAW. Medical Group's subcontracts with
Participating Providers shall comply with the standards of Accreditation
Organizations and requirements of State and Federal Law. If there are
changes in such standards and/or requirements, Medical Group shall amend
its subcontracts with Participating Providers to comply with such changes
within thirty (30) calendar days following notice thereof from Health
Plan.
2.4.3 ACCESS BY HEALTH PLAN, ACCREDITATION ORGANIZATIONS AND GOVERNMENT
AGENCIES. Medical Group and its Participating Providers shall be required
to make available at all reasonable times for inspection, examination and
copying by Health Plan, Accreditation
<PAGE>
Organizations and Government Agencies copies of all Participating Provider
subcontracts, and all books and records pertaining to Covered Services
provided to Members under this Agreement. Medical Group and its
Participating Providers shall retain such books and records for a term of
at least five (5) years from the close of the fiscal year in which the
Covered Services were provided.
2.4.4 MEDICAL GROUP'S RESPONSIBILITY FOR PROVIDING OR ARRANGING COVERED
SERVICES. Notwithstanding the existence of Medical Group's subcontracts
with its Participating Providers, Medical Group shall remain responsible
for satisfying the obligations of Medical Group set forth in this
Agreement. If any of Medical Group's subcontracts with Participating
Providers are terminated, Medical Group shall remain responsible for
providing or arranging Covered Services through its remaining
Participating Providers and shall remain financially responsible for
Medical Group Services provided to Medical Group Members under this
Agreement.
2.4.5 DISCLOSURE OF TERMS. Nothing in this Agreement shall be deemed to
require Medical Group to disclose the financial terms of its subcontracts
with Participating Providers, unless such disclosure is required by State
or Federal Law or unless Health Plan is responsible for paying or
administering claims under the terms of such subcontracts.
2.5 ACCEPTANCE AND TRANSFER OF MEMBERS. Medical Group and its Participating
Providers may not impose any limitations on the acceptance of Members for
care or treatment that are not imposed on other patients. Health Plan,
Medical Group and its Participating Providers shall not request, demand,
require or seek directly or indirectly the transfer, discharge or removal
of any Member for reasons of Member's need for, or utilization of, Covered
Services, except in accordance with the procedures established by Health
Plan for such action. Medical Group and its Participating Providers shall
not refuse or fail to provide or arrange Covered Services to any Member.
Health Plan and Medical Group shall exercise reasonable efforts in
following the procedures for transfer, discharge or removal of Members as
set forth in the Provider Manual. Nevertheless, Health Plan may require
transfer of Members for any reason, and Medical Group may request that
Health Plan transfer Medical Group Members to another of Health Plan's
Participating Providers if Medical Group is unable to provide the Covered
Services required by this Agreement for reasons related to capacity of
Medical Group and its Participating Providers. In addition, Medical Group
may request that Health Plan transfer a Medical Group Member to another of
Health Plan's Participating Providers in the event of a material breakdown
in the physician-patient relationship. Health Plan shall evaluate such
requests considering the best interests of the Member. In the event
Health Plan grants a request for transfer of a Member by Medical Group,
the transfer shall not be effective until the end of the month following
the month in which the Member receives notice of transfer, unless the
Member agrees to an earlier transfer and Health Plan has made arrangements
with another of Health Plan's Participating
<PAGE>
Providers to accept the Member.
2.6 MEDICAL RECORDS. Medical Group and its Participating Providers shall
maintain all patient medical records relating to Covered Services provided
to Members, in such form and containing such information as required by
the QI Program, Accreditation Organizations and State and Federal Law.
Medical records shall be maintained in a manner that is current, detailed,
organized and permits effective patient care and quality review by Medical
Group and Health Plan pursuant to the QI Program. Medical records shall
be maintained in a form and physical location which is accessible to
Medical Group's Participating Providers, Health Plan, Government Agencies
and Accreditation Organizations. Upon request, Medical Group and its
Participating Providers shall provide to Health Plan, at Medical Group's
expense, copies of Member medical records for purposes of conducting
quality assurance, case management and utilization reviews, credentialing
and peer review, claims processing, verification and payment, resolving
Member grievances and appeals and other activities reasonably necessary
for the proper administration of the Managed Care Plans consistent with
State and Federal Law. Medical Group and its Participating Providers
shall maintain the confidentiality of all Member medical records and
treatment information in accordance with State and Federal Law. Medical
records shall be retained by Medical Group and its Participating Providers
for at least five (5) years following the provision of Covered Services.
The provisions of this Section shall survive termination of this Agreement
for the period of time required by State and Federal Law.
2.7 INSURANCE. Medical Group, at its sole cost and expense, shall maintain
throughout the term of this Agreement and for a period of four years
following termination of this Agreement, professional liability insurance
(i.e., medical malpractice insurance) and managed care errors and
omissions insurance in the minimum amount of $1,000,000 per occurrence and
$3,000,000 annual aggregate, the annual aggregate to apply separately for
each physician and health care practitioner who is insured under the
policy (or policies) purchased by Medical Group. If the policy (or
policies) is canceled or not renewed and coverage is provided on a claims-
made basis, Medical Group agrees to exercise any option contained in the
policy (or policies) to extend the reporting period to the maximum period
permitted under the policy (or policies); provided, however, that Medical
Group need not exercise such option if the superseding insurer will accept
all prior claims.
Medical Group, at its sole cost and expense, shall also maintain
throughout the term of this Agreement, workers' compensation insurance as
required by the State of California and general liability insurance,
including but not limited to premises, personal injury and contractual
liability insurance, in a minimum amount of $1,000,000 per occurrence,
combined single limit, bodily injury and property damage, to insure
Medical Group and its employees, agents, and representatives against
claims for damages arising by reason of (i) personal injuries or death
occasioned in connection with the performance of any Covered Services
provided under this Agreement, (ii) the use of any property and
<PAGE>
facilities of the Medical Group, and (iii) activities performed in
connection with this Agreement.
Medical Group's Participating Providers who are not insured under the
Medical Group's policy (or policies) shall maintain the same insurance
coverage required of Medical Group under this Section, unless otherwise
specified in the Provider Manual.
All insurance required under this Agreement shall be provided by insurers
who meet Health Plan's standards as set forth in the Provider Manual.
A certificate of insurance shall be issued to Health Plan prior to the
Commencement Date and upon the renewal of the insurance coverage specified
in this Section. The certificate shall provide that Health Plan shall
receive thirty (30) days prior written notice of cancellation or material
reduction in the insurance coverage specified in this Section.
Notwithstanding any other provision of this Agreement, failure to provide
the certificate of insurance shall be grounds for immediate termination of
this Agreement.
2.8 FINANCIAL STATEMENTS. Medical Group shall provide to Health Plan
within forty five (45) calendar days of the end of each calendar quarter
copies of its quarterly financial statements, which shall include a
balance sheet, statement of income and statement of cash flow (the
"Financial Statements") prepared in accordance with generally-accepted
accounting principles. Such quarterly Financial Statements shall be
certified by the chief financial officer of Medical Group as accurately
reflecting the financial condition of Medical Group for the period
indicated. In addition, Medical Group shall provide to Health Plan,
within forty five (45) calendar days of the end of each fiscal year,
copies of its audited annual Financial Statements.
2.9 ADMINISTRATIVE REQUIREMENTS
2.9.1 ADMINISTRATIVE GUIDELINES. Medical Group agrees to perform its
duties under this Agreement in accordance with the administrative
guidelines, policies and procedures set forth in the Provider Manual and
State and Federal Law. Medical Group shall be responsible for distributing
copies of the Provider Manual, as necessary, to its Participating
Providers.
2.9.2 MEDICAL DIRECTOR, HEALTH PLAN COORDINATOR, QUALITY IMPROVEMENT
COMMITTEE AND UTILIZATION MANAGEMENT COMMITTEE. Medical Group shall
designate one of its Participating Providers who is a physician or
osteopath to act as Medical Group's Medical Director and shall designate
an individual to act as the Health Plan coordinator with Health Plan.
The duties of Medical Group's Medical Director and Health Plan
coordinator shall be set forth in the Provider Manual. In addition,
Medical Group shall establish and maintain a quality improvement committee
and a utilization management committee to assist Health Plan in
implementing the QI Program and UM Program with respect to Medical Group
Members.
<PAGE>
2.9.3 PARTICIPATION IN HEALTH PLAN ORIENTATION AND TRAINING PROGRAMS.
Medical Group shall require its administrative personnel and its
Participating Providers to participate in Health Plan's orientation and
training programs as described in the Provider Manual.
2.9.4 ENCOUNTER DATA. Medical Group shall maintain and provide to Health
Plan, no later than the fifteenth (15th) day of each month, the
utilization data pertaining to Covered Services provided or arranged by
Medical Group and its Participating Providers for Medical Group Members
during the preceding month as described in the Provider Manual (the
"Encounter Data"). Medical Group shall submit Encounter Data in
accordance with the procedures and standards set forth in the Provider
Manual.
2.9.5 OTHER DATA AND INFORMATION. Medical Group shall maintain and
provide to Health Plan, upon written request, any and all information
required by Health Plan, State and Federal Law, Government Agencies or
Accreditation Organizations for the administration of Managed Care Plans.
Medical Group shall submit such information and data to Health Plan in the
format and within the time periods specified by Health Plan.
2.10 MEDICAL GROUP'S FAILURE TO COMPLY WITH AGREEMENT, PROVIDER MANUAL
OR MANAGED CARE PLANS. If Medical Group fails to comply with any
provision(s) of this Agreement, the Provider Manual or the Managed Care
Plans, Health Plan may provide written notice of such failure to Medical
Group, specifying a date at least thirty (30) days following the date of
the notice by which Medical Group must be in compliance with such
provision(s), as reasonably determined by Health Plan. If Medical Group
fails to comply with such provision(s) by the date specified in the
notice, Health Plan shall have the right to cease marketing efforts on
behalf of Medical Group and/or discontinue enrollment of Members with
Medical Group until such time as Medical Group complies with such
provision(s), as reasonably determined by Health Plan. In addition,
Health Plan shall have the right to either (i) collect from Medical Group
or (ii) offset against amounts due Medical Group under this Agreement, any
penalties or other monetary amounts payable by Health Plan to Government
Agencies, Subscriber Groups, Participating Providers or any other health
care providers as a result of Medical Group's failure to comply with any
provision(s) of this Agreement, the Provider Manual or Managed Care Plans.
Health Plan's rights and remedies under this Section shall be in addition
to all other rights and remedies available to Health Plan to enforce this
Agreement, including the right of termination.
2.11 RECIPROCITY AGREEMENTS. Medical Group shall cooperate and develop
arrangements with Health Plan's Participating Providers and other Health
Plan-affiliated entities ("Health Plan Affiliates") to assure reciprocity
of health care services for Members who are not Medical Group Members.
2.11.1 SERVICES PROVIDED BY MEDICAL GROUP. Medical Group shall provide
Covered Services to Members who are not Medical Group Members, including
Members assigned
<PAGE>
to other Health Plan Participating Providers, and Members enrolled in the
managed care and health benefit plans of Health Plan Affiliates. Payment
for such services shall be at the Cost of Care. Such services shall
include Emergency Services, Urgently Needed Services and Covered Services
provided upon referral from Health Plan's Participating Providers or
Health Plan Affiliates. Medical Group shall also provide services to
members of reciprocal HMO affiliates through Health Plan's participation
in UltraLink, a nation-wide HMO network, in compliance with UltraLink
reciprocity procedures, incorporated herein by reference, and
reimbursement for such members shall be in compliance with UltraLink
reciprocity procedures.
2.11.2 SERVICES PROVIDED BY HEALTH PLAN PARTICIPATING PROVIDERS. Health
Plan shall, where contractually available, provide reciprocity to Medical
Group at Health Plan rates for Covered Services provided to Medical Group
Members. Health Plan shall adjudicate and pay such referred claims on
behalf of Medical Group (at available reciprocity rates or, if reciprocity
rates are unavailable, at rates negotiated in consultation with Medical
Group), shall deduct the costs of such claims from Medical Group's monthly
Capitation Payments and shall provide Medical Group an accounting thereof.
If both Medical Group and Health Plan have agreements with Participating
Providers, Medical Group's agreements shall be utilized for the provision
of Covered Services under this Agreement and the rates set forth in
Medical Group's agreements shall apply.
2.12 HOSPITAL ADMISSIONS. In recognition of the need for coordination,
continuity and quality of care of Covered Services provided to Medical
Group Members and to ensure continuity and quality of care, Medical Group
agrees to utilize Hospital(s) as the provider of Hospital Services for
Medical Group Members, subject to the following exceptions:
(i) Medical Group Members admitted for Emergency Services or
Urgently Needed Services; and
(ii) Medical Group Members requiring Hospital Services not available
at Hospital.; and
(iii) Medical Group Members directed to any other Health Plan
Participating Provider in accordance with Health Plan's Utilization
Management Program.
Notwithstanding the foregoing, Medical Group Member requests for
treatment at another Health Plan Participating Provider may be granted due
to limited Hospital(s) bed capacity or if such request is in the Member's
best interest, as determined by Health Plan.
2.13 ADDITION OF NEW CLINICS. Medical Group agrees that Health Plan,
in its sole discretion, may add into this Agreement, under the terms and
conditions of this Agreement and within a reasonable time as established
mutually by Health Plan and Medical Group, any future medical group
practices the Medical Group acquires or new site locations the Medical
Group establishes, but any final agreement shall be subject to
<PAGE>
the occurrence of the following conditions:
2.13.1 Health Plan has executed contracts with hospital and ancillary
service providers which collectively constitute a service delivery system;
2.13.2 Health Plan has not elected to delay or abandon the completion of
Managed Care Plans or networks that would provide additional Members to
be covered by this Agreement;
2.13.3 Health Plan has received approval from the appropriate local,
state and federal governmental or quasi-governmental agencies, which have
regulatory or quasi-regulatory powers over Health Plan or its programs,
including, but are not limited to, HCFA and the relevant state agencies;
2.13.4 The new Medical Group facility or location has obtained any and
all applicable licenses and permits and is approved by Health Plan
pursuant to Health Plan's credentialing program.
2.14 PARTICIPATION IN HEALTH PLAN PROGRAMS. Medical Group agrees to
participate in any and all Managed Care Plans, provided Health Plan has
requested Medical Group's participation. The addition of new Managed Care
Plans shall be subject to Section 7.9.1.
ARTICLE 3
ADMINISTRATIVE DUTIES OF HEALTH PLAN
3.1 ADMINISTRATION AND PROVISION OF DATA. Health Plan shall perform
administrative, accounting, enrollment, eligibility verification and other
functions necessary for the administration and operation of the Managed
Care Plans. Health Plan shall provide Medical Group with management
information and data reasonably necessary to carry out the terms and
conditions of this Agreement and for the operation of the Managed Care
Plans.
3.2 MARKETING. Health Plan shall make reasonable efforts to market the
Managed Care Plans. Medical Group agrees that Health Plan may, in its
discretion, use Medical Group's name, address and telephone number as well
as the names, addresses and telephone numbers and specialties of its
Participating Providers in Health Plan's marketing and informational
materials including, without limitation, Health Plan's directory of
Participating Providers. Nothing in this Agreement shall be deemed to
require Health Plan to conduct any specific marketing activities on behalf
of Medical Group and its Participating Providers or to identify Medical
Group or its Participating Providers in any specific Health Plan marketing
or informational materials.
3.3 ENROLLMENT AND ASSIGNMENT OF MEMBERS. Health Plan shall be responsible
for
<PAGE>
distributing the Health Plan Enrollment Packet to all Members upon
enrollment and at open enrollment periods. Health Plan shall provide
benefit information to Members concerning the type, scope and duration of
benefits to which Members are entitled under the Managed Care Plans.
Nothing in this Agreement shall be construed to require Health Plan to
assign any minimum or maximum number of Members to Medical Group or to
utilize Medical Group for any Members in the Medical Group Risk Area.
3.4 ELIGIBILITY INFORMATION. Health Plan shall provide the Eligibility List
to Medical Group on the fifteenth (15th) day of each month.
3.5 BENEFIT DESIGN AND INTERPRETATION; COVERAGE DECISIONS. Health Plan shall
be solely responsible for the benefit design of all Managed Care Plans,
including establishing benefits, Premiums and Copayments. Health Plan
shall be solely responsible for interpreting the terms of and making final
coverage determinations under the Managed Care Plans.
3.6 CASE MANAGEMENT. Health Plan shall manage and coordinate Covered Services
for Members with complex medical conditions to ensure that care is
provided in a manner which encourages quality, continuity of care and
cost-effectiveness ("Case Management"). Medical Group shall cooperate
fully with Health Plan in providing information that may be required in
determining the need for Case Management and in the transfer of Members to
designated Health Plan Participating Providers for cost effective care.
3.7 OUT-OF-AREA MEDICAL SERVICES. Health Plan shall manage and coordinate
Out-of-Area Medical Services. Medical Group shall cooperate fully with
Health Plan in providing information that may be required for transferring
Members back into the Medical Group Risk Area, including promptly
notifying Health Plan of known or suspected Out-of-Area Medical Services,
and shall accept the prompt transfer of Members to the care of Medical
Group and its Participating Providers following the receipt of Out-of-Area
Medical Services.
ARTICLE 4
MANAGED CARE PROGRAM SERVICES
4.1 MANAGED CARE PROGRAM SERVICES. Health Plan shall be accountable for the
performance of the following services for all Managed Care Plans: (I)
quality management and improvement, (ii) utilization management, (iii)
credentialing, (iv) member rights and responsibilities, (v) preventive
health services, (vi) medical record review and (vii) payment and
processing of claims (collectively, "Managed Care Program Services").
Medical Group and its Participating Providers shall participate, cooperate
and comply with Health Plan in the performance of all Managed Care
Program Services. Specific activities related to utilization management,
credentialing and claims processing may be
<PAGE>
delegated by Health Plan to Medical Group at such time as Medical Group
demonstrates to Health Plan's satisfaction the ability to perform these
functions in compliance with Health Plan's standards, as amended from time
to time. Before the performance of any activities is delegated to Medical
Group, Health Plan shall conduct a comprehensive audit of Medical Group's
ability and administrative capacity to perform such activities. Medical
Group shall provide all documentation requested by Health Plan and shall
provide Health Plan representatives with on-site access to Medical Group's
facilities and personnel for purposes of conducting such audit.
4.1.1 QUALITY MANAGEMENT AND IMPROVEMENT. Health Plan shall maintain an
ongoing Quality Management and Improvement Program ("QI Program") to
assess and improve the quality of clinical care and the quality of service
provided to Members under the Managed Care Plans. The QI Program shall be
maintained in accordance with the requirements of State and Federal Law
and the standards of Accreditation Organizations. Medical Group and its
Participating Providers shall participate, cooperate and comply with the
QI Program.
Medical Group shall, at the written request of Health Plan, make available
its Participating Providers who are physicians to serve on Health Plan's
QI Committee. Medical Group shall establish and maintain an independent
quality improvement committee which shall meet as frequently as necessary,
but at least monthly. A member of the Health Plan medical services staff
may participate in Medical Group's quality improvement committee meetings.
Medical Group shall keep minutes of its quality improvement committee
meetings, a copy of which shall be made available to Health Plan upon ten
(10) days written notice by Health Plan to Medical Group. If the
functions of the quality improvement committee are performed by the
Medical Group's utilization review committee, each committee must hold
separately convened meetings and the minutes of each meeting must be
separately maintained
Medical Group shall develop written procedures for focused review or
remedial action whenever it is determined by Health Plan's QI Committee
that inappropriate or substandard Covered Services have been furnished or
Covered Services that should have been furnished have not been furnished.
Upon request, Health Plan shall assist Medical Group in the formulation of
such focused review and remedial procedures.
4.1.2 UTILIZATION MANAGEMENT. Health Plan shall maintain an ongoing
Utilization Management Program ("UM Program") to address pre-
authorization, concurrent and retrospective review of the quality,
appropriateness, level of care and utilization of all Covered Services
provided or to be provided to Members under the Managed Care Plans. The
UM Program shall be maintained in accordance with the requirements of
State and Federal Law and the standards of Accreditation Organizations.
Medical Group and its Participating Providers shall participate, cooperate
and comply with the UM Program.
Medical Group shall establish and maintain a utilization review committee
which shall
<PAGE>
meet as frequently as necessary, but at least weekly. A member of the
Health Plan medical services staff may participate in Medical Group's
utilization review committee meetings. Medical Group shall keep minutes
of its utilization review committee meetings, a copy of which shall be
made available to Health Plan upon ten (10) days written notice by Health
Plan to Medical Group. Medical Group's utilization review committee shall
review elective referrals and hospital and skilled nursing facility
admissions on a prospective basis, and Emergency Services and Urgently
Needed Services requiring hospital admissions on a retrospective basis.
The committee shall also be responsible for monitoring patterns of care,
isolating inappropriate utilization and performing other management and
review duties as specified in the UM Program.
4.1.3 CREDENTIALING. Health Plan shall maintain standards, policies and
procedures for credentialing and recredentialing physicians, hospitals and
other health care professionals and facilities that provide Covered
Services to Members under the Managed Care Plans ("Credentialing
Program"). The Credentialing Program shall be maintained in accordance
with the requirements of State and Federal Law and the standards of
Accreditation Organizations. Medical Group and its Participating
Providers shall participate, cooperate and comply with Health Plan's
Credentialing Program.
4.1.4 MEMBER RIGHTS AND RESPONSIBILITIES. Health Plan shall inform
Members of their rights and responsibilities under each Managed Care Plan,
provide Members with membership cards and member handbooks, distribute
periodic communications to Members, process Member complaints and
grievances and respond to inquiries and requests from Members regarding
Managed Care Plans (collectively "Member Services"). Medical Group and
its Participating Providers shall participate, cooperate and comply with
Health Plan's Member Services activities.
4.1.5 PREVENTIVE HEALTH SERVICES. Health Plan shall develop preventive
health guidelines for the prevention and early detection of illness and
disease ("Preventive Health Guidelines") and shall encourage Members to
use preventive health services. The Preventive Health Guidelines shall be
maintained in accordance with the standards of Accreditation Organizations
and shall be distributed to Participating Providers. Medical Group and its
Participating Providers shall provide preventive health services to
Medical Group Members in accordance with the Preventive Health Guidelines.
4.1.6 MEDICAL RECORD REVIEW. Health Plan shall on an ongoing basis
review medical records maintained by Medical Group and its Participating
Providers to assess compliance with the requirements of State and Federal
Law and the standards of Accreditation Organizations. Medical Group and
its Participating Providers shall maintain medical records in accordance
with the provisions of this Agreement regarding medical records and in
accordance with guidelines regarding medical records set forth in the
Provider Manual.
4.1.7 CLAIMS PROCESSING. Health Plan shall establish and maintain
standards, policies
<PAGE>
and procedures for the timely and accurate processing and payment of
claims for Covered Services provided to Members ("Claims Processing
Guidelines"). The Claims Processing Guidelines shall be maintained in
accordance with the requirements of State and Federal Law and the Managed
Care Plans. Medical Group and its Participating Providers shall comply
with Health Plan's Claims Processing Guidelines.
4.2 PERFORMANCE OF DELEGATED ACTIVITIES. Health Plan may delegate to Medical
Group, and Medical Group shall perform, those activities which are
specified in EXHIBIT 3 to the Base Agreement relating to the following
Managed Care Program Services at such time as Medical Group demonstrates
to Health Plan's satisfaction the ability to perform these functions in
compliance with Health Plan's standards, as amended from time to time:
(I) Utilization Management; (ii) Credentialing; and (iii) Claims
Processing (collectively, the "Delegated Activities").
4.2.1 HEALTH PLAN POLICIES. For all Delegated Activities, Health Plan
shall provide Medical Group with Health Plan's standards and requirements
applicable to the Delegated Activities, as amended from time to time (the
"Health Plan Policies") and shall notify Medical Group of all substantive
changes to the Health Plan Policies. Medical Group may utilize its own
policies and procedures for the Delegated Activities, provided that such
policies and procedures are consistent with the Health Plan Policies. If
Medical Group's policies and procedures are inconsistent with the Health
Plan Policies, the Health Plan Policies shall apply.
4.2.2 SUB-DELEGATION. Medical Group shall not further delegate the
performance of Delegated Activities to any of its Participating Providers
or any other organization or entity without the prior written consent of
Health Plan. Medical Group acknowledges and agrees that Health Plan is
accountable for all Delegated Activities, and therefore, Medical Group and
its Participating Providers agree to participate, cooperate and comply
with Health Plan with respect to all Delegated Activities.
4.2.3 MAINTENANCE OF INFORMATION AND RECORDS. Medical Group shall
maintain all information and records reviewed or created in connection
with performing the Delegated Activities in a form acceptable to Health
Plan, provide Health Plan with access to such information and records, and
permit Health Plan to review and copy such information and records, in
accordance with the requirements of State and Federal Law and standards of
Accreditation Organizations.
4.2.4 REPORTING OBLIGATIONS. Medical Group shall provide Health Plan
with periodic written reports regarding all Delegated Activities in the
formats specified by Health Plan for each of the Delegated Activities.
4.2.5 MONITORING/AUDITS. Health Plan shall oversee Medical Group's
performance of Delegated Activities through review of periodic written
reports provided by Medical Group as described above and meetings with
appropriate Medical Group representatives and on-
<PAGE>
site audits and assessments of Medical Group. Medical Group shall
cooperate, participate and comply with Health Plan in such monitoring and
oversight activities. Such audits and assessments will be performed in
accordance with the requirements of State and Federal Law and the
standards of Accreditation Organizations. Without limiting the foregoing,
Medical Group agrees that arrangements with its Participating Providers
will permit Medical Group to disclose to Health Plan its Participating
Provider credentialing files.
4.3 PAYMENT FOR PERFORMANCE OF DELEGATED ACTIVITIES. Payment for performance
of the Delegated Activities by Medical Group is included in Capitation
Payments made to Medical Group under this Agreement. The following
percentages of Capitation Payments have been allocated to the performance
of Delegated Activities and are included in the Capitation Payments:
DELEGATED ACTIVITY PERCENTAGE OF CAPITATION PAYMENTS
Utilization Management 2.0%
Credentialing 0.5%
Claims Processing 2.0%
For each month in which the performance of any Delegated Activity is
revoked by Health Plan as provided in this Article 4, the Capitation
Payments to Medical Group shall be reduced by the percentage specified
above for such Delegated Activity. However, for a period of twelve (12)
months following the Commencement Date (the "Grace Period"), Health Plan
will provide Claims Processing on behalf of Medical Group with no
reduction in Medical Group's Capitation Payment. Following expiration of
the Grace Period, Health Plan shall deduct the amounts specified above
from the Medical Group's Capitation Payment rate unless and until Medical
Group has assumed responsibility for such services. Health Plan may
modify the payment for Delegated Activities effective at the beginning of
any calendar year by providing Medical Group with sixty (60) calendar days
prior written notice.
4.4 REVOCATION OF DELEGATED ACTIVITIES. Health Plan may revoke any or
all Delegated Activities if Health Plan determines that they are not being
performed in accordance with the standards and requirements established by
Health Plan or if Medical Group's performance of Delegated Activities is
inconsistent with, or in violation of, State and Federal Law or threatens
Health Plan's accreditation by any Accreditation Organization. Health
Plan shall provide Medical Group with thirty (30) calendar days prior
written notice specifying the Delegated Activities which Health Plan
intends to revoke, unless Health Plan determines that Medical Group's
continued performance of Delegated Activities presents a risk of harm to
Health Plan Members, in which case the Delegated Activities shall be
revoked immediately. If Medical Group does not conform to the applicable
standards and requirements within such thirty (30) calendar day notice
period, Health Plan shall send a second written notice to Medical Group
confirming the
<PAGE>
revocation of the Delegated Activities, the effective date of such
revocation and the period of time such revocation shall remain in effect.
During this period, Medical Group will take corrective action to conform
with applicable standards and requirements established by Health Plan. At
the end of such period, Health Plan shall evaluate Medical Group's
corrective action, determine whether Medical Group is able to resume
performance of the Delegated Activities, and provide written notice to
Medical Group of such determination.
The written notices from Health Plan to Medical Group under this Section
shall specify the adjustments to Capitation Payments as a result of the
revocation of any Delegated Activities in accordance with the allocations
set forth in this Article 4. If only a portion of a specific Delegated
Activity is revoked (e.g., Medical Group continues to perform some, but
not all, of a specific Delegated Activity), Health Plan shall have the
right to adjust the allocations set forth in this Article 4 to reflect the
portion of the specific Delegated Activity which continues to be performed
by Medical Group. Notwithstanding any other provision of the Agreement,
the written notices from Health Plan to Medical Group under this Section
shall be deemed valid and enforceable modifications to the Agreement,
whether or not signed by Medical Group.
Upon revocation of any of the Delegated Activities, Health Plan will
resume responsibility for performing such activities, and Medical Group
and its Participating Providers shall continue to cooperate, participate
and comply with Health Plan with respect to the performance of such
activities.
ARTICLE 5
COMPENSATION
5.1 CAPITATION PAYMENTS. Health Plan shall make monthly Capitation Payments
to Medical Group as payment for providing and arranging Covered Services
to Medical Group Members for each Managed Care Plan, as specified in this
Agreement and in the applicable Product Attachment.
5.1.1 DUE DATE. Except as provided in Exhibit B to Product Attachment B1
hereof, each Capitation Payment shall be due and payable on the fifteenth
(15th) day of the month for the current month's Covered Services.
5.1.2 DOCUMENTATION. Health Plan shall provide Medical Group appropriate
documentation in support of each Capitation Payment.
5.1.3 RETROACTIVE ADJUSTMENTS. Capitation Payments shall be subject to
retroactive adjustments either upward or downward due to retroactive
changes in the Premium for each Managed Care Plan as specified in the
applicable Product Attachment and retroactive changes in the number of
Medical Group Members for each Managed Care Plan. Retroactive adjustments
shall be made within thirty (30) days after the adjustment
<PAGE>
is determined.
5.2 ADJUSTMENT FOR CLAIMS PROCESSING; DEPOSIT. Health Plan shall deduct from
Medical Group's monthly Capitation Payment an amount reasonably estimated
by Health Plan to be necessary for Health Plan to process and pay claims
for Medical Group Services which are not provided directly by Medical
Group and its employed Participating Providers (the "Claims Processing
Withhold"). Initially, the Claims Processing Withhold shall be equal to
the current average claims cost for outside providers as of the
Commencement Date. The Claims Processing Withhold shall be increased or
decreased each month to more accurately reflect Medical Group's actual and
expected claims experience. For any period in which Medical Group has
been delegated full responsibility for processing claims for Medical Group
Services which are not provided directly by Medical Group and its employed
Participating Physicians, the Claims Processing Withhold will be zero.
5.3 ADJUSTMENT FOR OUT-OF-AREA MEDICAL SERVICES. Medical Group shall be
responsible for twenty percent (20%) of the actual costs incurred by
Health Plan in providing Out-of-Area Medical Services to Medical Group
Members; provided, however, Medical Group shall be responsible for one
hundred percent (100%) of the actual costs incurred by Health Plan in
providing Out-of-Area Medical Services when Medical Group fails to
cooperate with Health Plan in the management of Out-of-Area Medical
Services. This amount shall be deducted from Medical Group's Capitation
Payment based on the actual costs incurred by Health Plan in paying claims
for Out-of-Area Medical Services during the previous month.
5.4 ADJUSTMENT FOR REVOCATION OF DELEGATED ACTIVITIES. Health Plan shall
deduct the amounts specified in Article 4, above, for any Delegated
Activity which is revoked by Health Plan in accordance with the provisions
of Article 4.
5.5 INCENTIVE PROGRAMS. Incentive programs are designed to ensure that Health
Plan, Medical Group and, for some programs, Hospital work collaboratively
to deliver Covered Services in an effective and efficient manner by
ensuring appropriate utilization of Covered Services. Incentive programs
for each Managed Care Plan are set forth in the applicable Product
Attachment.
5.5.1 INCENTIVE PROGRAM WITHHOLD. Health Plan shall establish a single
withhold from Medical Group's monthly Capitation Payment for purposes of
offsetting potential deficits for the combined incentive programs,
excluding the Split Capitation Commercial Hospital Incentive Program and
the Split Capitation Secure Horizons Hospital Incentive Program for which
separate withholds may be established. The monthly incentive withhold
shall initially be 0 percent (0%) of the Premium for each Managed Care
Plan, as described in the applicable Product Attachment. Health Plan, in
its sole discretion, shall prospectively adjust the withhold based on
Medical Group's experience under the combined incentive programs at the
time of the program settlements described below. In no event shall the
withhold exceed 0 percent (0%) of the monthly Capitation Payment.
<PAGE>
5.5.2 INCENTIVE PROGRAM SETTLEMENTS. Health Plan shall conduct combined
settlements for all of the incentive programs for Managed Care Plans
applicable to Medical Group, excluding the Split Capitation Commercial
Hospital Incentive Program and the Split Capitation Secure Horizons
Hospital Incentive Program, for which separate settlements will be
conducted. Surpluses and deficits under each of the incentive programs
shall be aggregated and offset against one another. Health Plan will
conduct an estimated calculation after six (6) months (the "Interim
Calculation") and a final calculation annually (the "Final Calculation")
based on the calendar year. The incentive program withhold described
above shall be refunded to the Medical Group at the time of the incentive
program settlements, except that Medical Group's share of any incentive
program deficits shall be deducted from such refund. Except as otherwise
provided in the exhibits hereto, payments under the combined incentive
programs will be due from the owing party within one hundred and twenty
(120) days following the end of the six (6) months for the Interim
Calculation and within one hundred and eighty (180) days following the end
of the calendar year for the Final Calculation. Medical Group shall have
thirty (30) days from the date of written notice to audit and submit any
revisions to the incentive program settlement to Health Plan. Any
submitted revisions must be approved by Health Plan and such approval
shall not be unreasonably withheld. Health Plan shall then have thirty
(30) days to make any necessary adjustment to the calculation and return
the itemized calculation to Medical Group. Such calculation shall be
considered the final calculation unless Medical Group and Health Plan
agree to extend the calculation process. Any amounts owing shall be paid
to the appropriate party within thirty (30) days of the release of the
final itemized calculation. In the event that claims for non-
Participating Providers were incurred during the calendar year in question
but were not paid until after the final calculation, such costs shall be
carried forward and applied to the subsequent calendar year's Hospital
Incentive Program as an expense for that calendar year. Only claims to
non-contracted providers will be carried forward. For the Interim
Calculation, the payment due will be limited to seventy five percent (75%)
of the calculated amount due to account for incurred but not received
claims. To the extent a Medical Group deficit has been carried forward
from a prior settlement period, this deficit shall be offset against
amounts due to Medical Group hereunder.
Prior to the Commencement Date, the terms of Product Attachment C which
relate to the timing of incentive payments due Medical Group shall be
amended to reflect the terms of the applicable hospital agreement.
Notwithstanding any language to the contrary in the current Product
Attachment C, Health Plan shall not offset incentive payments among
capitated hospital funds.
5.5.3 INCENTIVE PROGRAM COMPLIANCE WITH STATE AND FEDERAL LAW. Health
Plan and Medical Group acknowledge and agree that the payments which may
be made directly or indirectly under the incentive programs described in
this Agreement are not made as an inducement to reduce or limit Covered
Services to any specific Member. Medical Group acknowledges and agrees
that any payments which may be made directly or indirectly
<PAGE>
under physician incentive programs Medical Group may utilize with respect
to its Participating Providers shall not be made as an inducement to
reduce or limit Covered Services to any specific Member. Medical Group
further acknowledges and agrees that the incentive programs described in
this Agreement shall be subject to modification by Health Plan during the
term of this Agreement in order to comply with changes in State and
Federal Law, and Medical Group further agrees to modify any physician
incentive programs utilized with respect to its Participating Providers to
comply with such changes.
5.5.4 LIMITATION ON MEDICAL GROUP'S RISK. In the event Medical Group
incurs an obligation under the overall incentive program settlement
described above, Medical Group shall not be responsible for reimbursing
Health Plan nor shall Health Plan offset the Medical Group's obligation
against Medical Group's Capitation Payments due under this Agreement.
Health Plan shall carry forward any Medical Group obligations as the
result of an incentive program obligation and the amount carried forward
shall be offset against amounts otherwise due to Medical Group under
future settlements for the combined incentive programs. Notwithstanding
the foregoing, Medical Group shall be responsible for reimbursing Health
Plan for its portion of any deficit under the Pharmacy Incentive Program.
5.6 STOP-LOSS AND REINSURANCE PROGRAMS
5.6.1 INDIVIDUAL STOP-LOSS. Medical Group shall comply with the
applicable individual stop loss provisions set forth in the Product
Attachments.
5.6.2 SUBMISSION OF ISL AND REINSURANCE CLAIMS. Medical Group shall
submit all claims under the ISL Program and Reinsurance Program in
accordance with the procedures set forth in the Provider Manual. Health
Plan shall pay claims under the ISL Program and Reinsurance Program only
if such claims are submitted within one (1) year following the date the
claim is incurred.
5.6.3 NOTIFICATION OF CLAIMS. Medical Group shall provide written
notification to Health Plan when Medical Group Services or Hospital
Services for any Medical Group Member(s) equal fifty percent (50%) of the
ISL Deductible or fifty percent (50%) of the Reinsurance Deductible,
respectively. Such written notification shall be provided to Health Plan
no later than the fifteenth (15th) day of the month following the month in
which such threshold is reached. Medical Group acknowledges and agrees
that if Medical Group fails to provide the written notice required by this
Section within the time frame specified in this Section, Medical Group
shall be financially responsible for ten percent (10%) of all Medical
Group Services or ten percent (10%) of all Hospital Services provided to
the Medical Group Member(s) in excess of the ISL Deductible or Reinsurance
Deductible, as applicable, which amount shall be in addition to the ISL
Coinsurance or Reinsurance Coinsurance, as applicable.
5.6.3 OPT-OUT FROM ISL PROGRAM. Subject to Health Plan's approval,
Medical Group
<PAGE>
may elect to opt out of the ISL Program effective upon the Commencement
Date or the beginning of any calendar year. In such event, Medical Group
shall be required to obtain stop-loss coverage from a third-party
insurance carrier acceptable to Health Plan and in the amounts required by
Health Plan and State and Federal Law. In order to opt-out of Health
Plan's ISL Program, Medical Group must provide written notice to Health
Plan at least thirty (30) days prior to the beginning of the calendar
year. Such notice shall specify the name of the third-party insurance
carrier, and proposed effective date, coverage levels and charges. If
Health Plan does not object to such coverage in writing within fifteen
(15) days of the date of the notice, Medical Group shall be required to
purchase such coverage as of the effective date specified in the notice.
5.7 PAYMENTS FOLLOWING TERMINATION OF AGREEMENT. Following termination of
this Agreement and continuing for each month in which the number of
Medical Group Members continues to be greater than or equal to two hundred
(200), Health Plan shall compensate Medical Group for providing and
arranging Covered Services to Medical Group Members under the same terms
and conditions which applied prior to termination of this Agreement. For
any month following termination of this Agreement in which the number of
Medical Group Members is less than two hundred (200), Health Plan shall
compensate Medical Group for providing Medical Group Services to Medical
Group Members at the Cost of Care.
5.8 COST OF CARE. Certain provisions of this Agreement require that Medical
Group provide health care services which are not covered by Capitation
Payments at Cost of Care and certain provisions of this Agreement require
that Medical Group Services be valued at Cost of Care. For purposes of
this Agreement, "Cost of Care" shall mean the amount determined under
Health Plan's fee schedule, attached as EXHIBIT 1 to the Base Agreement
for such services. Health Plan may revise its fee-schedule from time to
time by providing thirty (30) days prior written notice to Medical Group;
provided, however, that the fee schedule utilized under this Agreement
shall be no less favorable to Medical Group than the fee schedule utilized
by Health Plan for other Participating Providers in the state.
5.9 COLLECTION OF COPAYMENTS. Medical Group and its Participating Providers
shall be responsible for the collection of Copayments upon rendering
Medical Group Services to Members in accordance with the applicable
Subscriber Agreement. Any Copayments which are stated as a percentage
shall be calculated using the Cost of Care for such Medical Group
Services.
5.10 COLLECTION OF CHARGES FROM THIRD PARTIES. Except as provided in Section
5.11, procedures for collection of charges from third parties shall be
governed by the terms of the Provider Manual.
5.11 COORDINATION OF BENEFITS. Medical Group shall cooperate with and support,
as mutually agreed upon by the parties, Health Plan's coordination of
benefits rights. Coordination
<PAGE>
of benefits procedures may be further defined in the Provider Manual.
5.11.1 PLAN IS PRIMARY. If a Member possesses health benefits coverage
through another policy which is secondary to Health Plan under applicable
coordination of benefits rules, including the Medicare secondary payor
program, Medical Group shall accept payment from Health Plan for Covered
Services as provided herein as full payment for such Covered Services,
except for applicable Copayments. Member shall have no obligation for any
fees, regardless of whether secondary insurance is available.
5.11.2 PLAN IS SECONDARY. If a Member possesses health benefits coverage
through another policy which is primary to Health Plan under applicable
coordination of benefits rules, including the Medicare secondary payor
program, or if Member is entitled to payment under a workers' compensation
policy or automobile insurance policy, Medical Group may pursue payment
from the primary payor or workers' compensation carrier consistent with
applicable law and regulations and Medical Group's contract, if any, with
the primary payor. In such event, Health Plan's responsibility shall
equal the amount of out-of-pocket expenses (i.e., Copayments and
deductibles) that Member would incur in the absence of Health Plan's
secondary coverage, minus the ISL Deductible and ISL Coinsurance.
5.12 OFFSETTING. Except as may otherwise be specifically provided in this
Agreement, Health Plan shall have the right to offset any and all amounts
owed by Medical Group to Health Plan against amounts, including Capitation
Payments, owed by Health Plan to Medical Group provided that Health Plan
provides ninety (90) days prior written notice of such amounts to Medical
Group and Medical Group does not pay such amounts within such ninety (90)
day period. This right to offset shall include, without limitation,
Health Plan's right to offset the following amounts owed to Health Plan by
Medical Group: (I) amounts owed by Medical Group under the incentive
programs described in this Agreement and in the Product Attachments, (ii)
amounts owed by Medical Group for Covered Services provided outside the
Medical Group Risk Area, and (iii) amounts owed by Medical Group due to
overpayments or payments made in error by Health Plan. Notwithstanding the
foregoing, Health Plan's right to offset shall not extend to Medical
Group's risk sharing arrangements with capitated hospitals.
5.13 ADEQUACY OF COMPENSATION. Medical Group agrees to accept payment as
provided herein as payment in full for providing and arranging the Covered
Services required under this Agreement, whether that amount is paid in
whole or in part by Member, Health Plan or any Subscriber, including other
health care plans that pay before Health Plan as required by applicable
state or federal coordination of benefits provisions. This Section does
not prohibit Medical Group from collecting applicable Copayments or
deductibles consistent with the Managed Care Plans.
5.14 SERVICES RENDERED TO INELIGIBLE SUBSCRIBERS - Health Plan agrees to
reimburse Medical Group for Covered Services provided to an ineligible
Member if the Member was listed as
<PAGE>
eligible on the most current eligibility list provided to Medical Group by
Health Plan. If Health Plan is in receipt of billings to such ineligible
Member from Medical Group which demonstrate proof of having sent the
Member or the Member's legal guardian three (3) bills no less than thirty
(30) days apart, Health Plan will reimburse Medical Group for services
provided which would have been Covered Services if the Member had been
eligible. Reimbursement shall be at Cost of Care, minus any amounts
collected by Medical Group from other sources. If subsequent to payment by
Health Plan, Medical Group receives any payment from another source for
the services, then Medical Group shall reimburse Health Plan up to the
amount previously received from Health Plan so that Medical Group's full
payment does not exceed the Cost of Care.
5.15 RENEGOTIATION OF RATES AT THE END OF ONE YEAR. Either party may initiate
renegotiation of rates under this Agreement on the twelve (12) month
anniversary of the Commencement Date or, subsequently, at the expiration
of the Initial Term, by providing the other party prior written notice of
intent to renegotiate. Such notice of intent to renegotiate must be
provided at least ninety (90) days prior to the end of the twelve (12)
month anniversary of the Commencement Date or, for renegotiation at the
end of the Initial Term, ninety (90) days prior to the expiration of the
Initial Term. If proper notice is provided, the parties shall meet to
discuss rates in good faith and shall diligently pursue a prompt
resolution of the renegotiation. The rates under this Agreement shall
remain in effect unless and until the parties each agree through a written
amendment signed by both parties to revise the rates.
ARTICLE 6
TERM AND TERMINATION
6.1 TERM. The term of this Agreement shall be for one hundred twenty (120)
months commencing on the Commencement Date. Thereafter, the term of this
Agreement shall be automatically extended for one (1) year on each
anniversary of the Commencement Date ("Anniversary Date"), unless either
party provides the other with written notice of such party's intention not
to extend the term at least one hundred twenty (120) calendar days prior
to the Anniversary Date or until this Agreement is appropriately
terminated by either party as provided herein.
6.2 TERMINATION OF AGREEMENT WITH CAUSE. Either Health Plan or Medical Group
may terminate this Agreement for cause as set forth below, subject to the
notice requirement and cure period set forth below.
6.2.1 CAUSE FOR TERMINATION OF AGREEMENT BY MEDICAL GROUP. The following
shall constitute cause for termination of this Agreement by Medical Group:
(i) NON-PAYMENT. Failure by Health Plan to pay Capitation Payments
due Medical Group hereunder within thirty (30) days of the Capitation
Payment due date or failure by Health Plan to make any other payments due
Medical Group hereunder within
<PAGE>
forty-five (45) days of any such payment's due date.
(ii) BREACH OF MATERIAL TERM AND FAILURE TO CURE. Health Plan's
breach of any material term, covenant, or condition and subsequent failure
to cure such breach as provided below.
6.2.2 CAUSE FOR TERMINATION OF AGREEMENT BY HEALTH PLAN. The following
shall constitute cause for termination of this Agreement by Health Plan:
(i) FINANCIAL FAILURE OF MEDICAL GROUP. Health Plan's reasonable
determination of Medical Group's anticipated inability to provide or
arrange for Covered Services as a result of the likelihood of Medical
Group's lack of financial resources, other than due to Health Plan's non-
payment of amounts due Medical Group hereunder. Medical Group shall have
the opportunity to dispute such determination by Health Plan by providing
reasonable evidence and assurances of financial stability and capacity to
perform under this Agreement.
(ii) FAILURE TO PROVIDE QUALITY SERVICES. Medical Group's failure to
arrange or provide Covered Services in accordance with the standards set
forth in this Agreement and Health Plan's QI Program and UM Program.
Notwithstanding the foregoing, Health Plan reserves the right to
immediately withdraw from Medical Group or any of its Participating
Providers any or all Members in the event the health or safety of Members
is endangered by the actions of Medical Group or any of its Participating
Providers or as a result of continuation of this Agreement.
(iii) BREACH OF MATERIAL TERM AND FAILURE TO CURE. Medical Group's
breach of any material term, covenant or condition of this Agreement and
subsequent failure to cure such breach as provided below.
6.2.3 NOTICE OF TERMINATION AND EFFECTIVE DATE OF TERMINATION. The party
asserting cause for termination of this Agreement (the "terminating
party") shall provide written notice of termination to the other party.
The notice of termination shall specify the breach or deficiency
underlying the cause for termination. The party receiving the written
notice of termination shall have thirty (30) calendar days from the
receipt of such notice to cure the breach or deficiency to the
satisfaction of the terminating party (the "Cure Period"). If such party
fails to cure the breach or deficiency to the satisfaction of the
terminating party within the Cure Period or if the breach or deficiency is
not curable, the terminating party shall provide written notice of failure
to cure the breach or deficiency to the other party following expiration
of the Cure Period. This Agreement shall terminate upon receipt of the
written notice of failure to cure or at such other date as may be
specified in such notice. During the Cure Period, Health Plan may cease
marketing efforts for Medical Group and discontinue enrollment of Members
with Medical Group.
6.3 AUTOMATIC TERMINATION UPON REVOCATION OF LICENSE OR CERTIFICATE. This
Agreement shall
<PAGE>
automatically terminate upon the revocation, suspension or restriction of
any license, certificate or other authority required to be maintained by
Medical Group or Health Plan in order to perform the services required
under this Agreement or upon the Medical Group's or Health Plan's failure
to obtain such license, certificate or authority.
6.4 TRANSFER OF MEDICAL RECORDS. Following termination of this Agreement, at
Health Plan's request, Medical Group and its Participating Providers shall
copy all requested Member patient medical files in the possession of
Medical Group or its Participating Providers and forward such files to
another provider of Covered Services designated by Health Plan, provided
such copying and forwarding is not otherwise objected to by such Members.
The copies of such medical files may be in summary form. The cost of
copying the patient medical files shall be borne equally by Medical Group
and Health Plan. Medical Group shall cooperate with Health Plan in
maintaining the confidentiality of such Member medical records at all
times.
6.5 REPAYMENT UPON TERMINATION. Within one hundred eighty (180) calendar days
of the effective date of termination of this Agreement, an accounting
shall be made by Health Plan of the monies due and owing either party and
payment shall be forthcoming by the appropriate party to settle such
balance within thirty (30) calendar days of such accounting. Either party
may request an independent audit of such Health Plan accounting by a
mutually acceptable independent certified public accountant and such audit
shall be equally paid for by both parties. The parties agree to abide by
the findings of such independent audit. Appropriate payment, if any, by
the appropriate party shall be made within thirty (30) calendar days of
such independent audit.
6.6 TERMINATION NOT AN EXCLUSIVE REMEDY. Any termination by either party
pursuant to this Article is not meant as an exclusive remedy and such
terminating party may seek whatever action in law or equity as may be
necessary to enforce its rights under this Agreement.
6.7 PARTICIPATING PHYSICIAN SUBSTITUTION INTO AGREEMENT. Medical Group shall
require that its Participating Physicians who are independent contractors
("Independent Physicians") agree to be bound, at Health Plan's option, to
the terms and conditions of this Agreement in the event of dissolution or
insolvency of Medical Group or in the event of a termination of the
Agreement by Health Plan for cause. The Independent Physicians'
obligations shall continue through the last day of the initial term of the
Agreement (the "Physician Continuation Period"). In case of such
dissolution, insolvency or termination, Health Plan may, at its option,
assume the Medical Group's administrative responsibilities described in
the Agreement. The purpose of this provision is to ensure continuity of
care to Members. Payment to the Independent Physicians during the
Physician Continuation Period shall be at the Cost of Care rates.
<PAGE>
ARTICLE 7
GENERAL PROVISIONS
7.1 INDEPENDENT CONTRACTOR RELATIONSHIP. The relationship between Health Plan
and Medical Group is an independent contractor relationship. Neither
Medical Group nor its Participating Providers, employees or agents are
employees or agents of Health Plan and neither Health Plan nor its
employees or agents are members, partners, employees or agents of Medical
Group. None of the provisions of this Agreement shall be construed to
create a relationship of agency, representation, joint venture, ownership,
control of employment between the parties other than that of independent
parties contracting solely for the purpose of effectuating this Agreement.
Nothing contained in this Agreement shall cause either party to be liable
or responsible for any debt, liability or obligation of the other party or
any third party unless such liability or responsibility is expressly
assumed by the party sought to be charged therewith.
7.2 INDEMNIFICATION. Medical Group shall defend, indemnify and hold harmless,
and shall cause each of its Participating Providers to defend, indemnify
and hold harmless Health Plan and its directors, officers, employees,
affiliates and agents against any claim, loss, damage, cost, expense or
liability arising out of or related to the performance or nonperformance
by Medical Provider, its Participating Providers, employees or agents of
any Medical Group Services and other services to be performed or arranged
by Medical Group and its Participating Providers under this Agreement.
Health Plan shall defend, indemnify and hold harmless Medical Group and
its directors, officers, employees, affiliates and agents against any
claim, loss, damage, cost, expense or liability arising out of or related
to the performance or nonperformance by Health Plan, its employees or
agents of any services to be performed by Health Plan under this
Agreement.
7.3 PHYSICIAN-PATIENT RELATIONSHIP. Health Plan and Medical Group
acknowledge and agree that Medical Group or each of Medical Group's
Participating Providers shall maintain the physician-patient relationship
with each Member. Nothing contained in this Agreement is intended to
interfere with such physician-patient relationship. Nothing in this
Agreement shall be interpreted to discourage or prohibit Medical Group and
its Participating Providers from discussing treatment options or providing
other medical advice or treatment deemed appropriate by Medical Group or
its Participating Providers. Medical Group or its Participating Providers
shall have the sole responsibility for the medical care and treatment of
Members.
7.4 MEMBER APPEALS AND GRIEVANCES. Health Plan shall be responsible for
resolving Member claims for benefits under the Managed Care Plans and all
other claims against Health Plan. Health Plan shall resolve such claims
utilizing the Member Appeals and Grievance Procedures set forth in the
Subscriber Agreement and the Provider Manual. Medical Group shall assist
Health Plan in the handling of Member complaints, grievances and appeals,
consistent with the Member Appeals and Grievance Procedures. In the event
an oral or written complaint, grievance or appeal is presented to Medical
Group or any of its Participating Providers relating to benefits or
coverage under a Managed Care Plan and
<PAGE>
is not resolved within two (2) calendar days, Medical Group or its
Participating Provider will immediately deliver such complaint, grievance
or appeal to Health Plan for handling pursuant to the Member Appeals and
Grievance Procedures. At the end of each month, Medical Group shall
submit a report to Health Plan of all Member complaints and grievances
which were received and resolved by Medical Group and its Participating
Providers within two (2) calendar days during the previous month. The
monthly report shall include the Member's name and Health Plan
identification number, date of complaint, nature of complaint, and the
resolution of complaint. Medical Group and its Participating Providers
shall comply with all final determinations made by Health Plan through the
Member Appeals and Grievance Procedures. Member claims against Medical
Group or its Participating Providers, other than claims for benefits under
the Managed Care Plans, are not subject to the Member Appeals and
Grievance Procedures and are not governed by this Agreement.
7.5 DISPUTES BETWEEN MEDICAL GROUP OR ITS PARTICIPATING PROVIDERS AND MEMBER.
Any controversies or claims between Medical Group or its Participating
Providers and a Member arising out of the performance of this Agreement by
Medical Group or the Medical Group's Participating Provider, other than
claims for benefits under Managed Care Plans, are not governed by this
Agreement. Medical Group or its Participating Provider and the Member may
seek any appropriate legal action to resolve such controversy or claim
deemed necessary.
7.6 DISPUTES BETWEEN HEALTH PLAN AND MEDICAL GROUP
7.6.1 DISPUTE RESOLUTION PROCEDURE. Health Plan has established a
Provider Dispute Resolution Procedure, set forth in the Provider Manual,
to provide a mechanism by which Health Plan's Participating Providers,
including Medical Group and any of its Participating Providers, may submit
to Health Plan certain disputes arising out of the performance of this
Agreement or relating to the decisions made by Health Plan under this
Agreement for resolution on an informal basis. Any dispute submitted
pursuant to the Provider Dispute Resolution Procedure should be addressed
to the appropriate Health Plan person(s) or department(s) at the address
and/or telephone number identified in the Provider Manual. Any provider
dispute which is not resolved informally through the Provider Dispute
Resolution Procedure may be submitted for arbitration as provided in
Section 7.6.2 below.
7.6.2 ARBITRATION. Any controversy, dispute or claim arising out of the
interpretation, performance or breach of this Agreement which is not
resolved pursuant to the Provider Dispute Resolution Procedure specified
above shall be resolved by binding arbitration at the request of either
party, in accordance with the commercial rules of the American Arbitration
Association. Such arbitration shall occur in Los Angeles, California,
unless the parties mutually agree to have such proceeding in some other
locale. The arbitrators shall apply California substantive law and
federal substantive law where state law is preempted. Civil discovery for
use in such arbitration may be conducted in accordance
<PAGE>
with the provisions of California law, and the arbitrator selected shall
have the power to enforce the rights, remedies, duties, liabilities and
obligations of discovery by the imposition of the same terms, conditions
and penalties as can be imposed in like circumstances in a civil action by
a court of competent jurisdiction of the State of California. The
provisions of California law concerning the right to discovery and the use
of depositions in arbitration are incorporated herein by reference and
made applicable to this Agreement.
The arbitrators shall have the power to grant all legal and equitable
remedies and award compensatory damages provided by California law, except
that punitive damages shall not be awarded. The arbitrators shall prepare
in writing and provide to the parties an award including factual findings
and the legal reasons on which the decision is based. The arbitrators
shall not have the power to commit errors of law or legal reasoning, and
the award may be vacated or corrected pursuant to the term of California
law for any such error.
Notwithstanding the above, in the event either Medical Group or Health
Plan wishes to obtain injunctive relief or a temporary restraining order,
such party may initiate an action for such relief in a court of law and
the decision of the court of law with respect to the injunctive relief or
temporary restraining order shall be subject to appeal only through the
courts of law. The courts of law shall not have the authority to review
or grant any request or demand for damages.
7.7 NOTICE. All notices required or permitted by this Agreement shall be in
writing and may be delivered in person or may be sent by registered or
certified mail or U.S. Postal Service Express Mail, with postage prepaid,
or by Federal Express or other overnight courier that guarantees next day
delivery, or by facsimile transmission, and shall be deemed sufficiently
given if served in the manner specified in this Section. The addresses
set forth on the signature page shall be the particular party's address
for delivery or mailing of notice purposes.
The parties may change the names and addresses through written notice in
compliance with this Section. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of
delivery shown on the receipt card, or if no delivery date is shown, the
postmark date. Notices delivered by U.S. Postal Service Express mail,
Federal Express or overnight courier that guarantees next day delivery
shall be deemed given twenty-four (24) hours after delivery of the notice
to the United States Postal Service, Federal Express or overnight courier.
If any notice is transmitted by facsimile transmission or similar means,
the notice shall be deemed served or delivered upon telephone confirmation
of receipt of the transmission, provided a copy is also delivered via
delivery or mail.
7.8 ASSIGNMENT. Except as specified in Section 7.12 below, this Agreement and
the rights, interests and benefits hereunder shall not be assigned,
transferred or pledged in any way
<PAGE>
by Medical Group or Health Plan and shall not be subject to execution,
attachment or similar process. However, Health Plan may assign this
Agreement and its rights, interests and benefits hereunder to any entity
which is a corporate affiliate of Health Plan.
7.9 AMENDMENTS
7.9.1 AMENDMENTS TO MANAGED CARE PLANS. Health Plan may amend or change
any or all provisions of the Managed Care Plans by providing thirty (30)
calendar days prior written notice to Medical Group. Such amendment shall
be binding upon Medical Group at the end of the thirty (30) calendar day
period. However, Health Plan shall obtain Medical Group's written consent
to the terms governing Medical Group's provision of Covered Services under
a Managed Care Plan, if the Managed Care Plan is not, at the time of its
addition to this Agreement, one of the Product Attachments to this
Agreement.
7.9.2 AMENDMENTS TO PROVIDER MANUAL. Health Plan may amend the Provider
Manual by providing thirty (30) calendar days prior written notice to
Medical Group. Such amendments shall be binding upon Medical Group at the
end of the thirty (30) calendar day period, except as provided in Section
7.9.4 of this Agreement.
7.9.3 AMENDMENTS TO AGREEMENT. Health Plan may amend this Agreement by
providing thirty (30) calendar days prior written notice to Medical Group
in order to maintain compliance with State and Federal Law or to comply
with any directive from a Government Agency. Such amendment shall be
binding upon Medical Group at the end of the thirty (30) calendar day
period, except as provided in Section 7.9.4 of this Agreement. All other
amendments to this Agreement shall be effective only upon mutual written
agreement of the parties or as provided in Section 7.9.4 of this
Agreement.
7.9.4 MATERIAL AMENDMENTS. In the event Health Plan provides notice of
amendment to the Agreement or the Provider Manual or provides notice of a
material change in benefits under any Managed Care Plan, Medical Group
shall be bound by such amendment unless (i) Medical Group provides Health
Plan with notice of objection within the thirty (30) calendar day notice
period, and (ii) such change affects a material duty or responsibility of
Medical Group, and (iii) the change has a material adverse economic effect
upon Medical Group as reasonably demonstrated by Medical Group to Health
Plan. In such event, Medical Group and Health Plan shall seek to agree to
an amendment to this Agreement which satisfactorily addresses the effect
on Medical Group's material duty or responsibility and reimburses the
material economic detriment caused to Medical Group. In such event, the
amendment shall not be effective until the parties amend the Agreement
through a written amendment signed by both parties.
Notwithstanding the above, in the event that Health Plan disagrees with
Medical Group's notice of objection an seeks to enforce any amendment
despite such notice, Health Plan agrees that it will meet with Medical
Group in an attempt to resolve the disagreement and
<PAGE>
if the disagreement cannot be resolved through meetings, Medical Group may
submit the disagreement to arbitration in accordance with the provisions
of this Agreement.
7.9.5 AMENDMENTS TO REFLECT SYSTEMS CHANGES. In the event Health Plan
undergoes systems changes which are not anticipated at the time of the
execution of the Agreement, the parties will negotiate in good faith to
revise the Agreement, to the extent amendments to the Agreement are
necessary, for the limited purpose of accommodating the necessary systems
changes.
7.10 CONFIDENTIAL AND PROPRIETARY INFORMATION
7.10.1 INFORMATION CONFIDENTIAL AND PROPRIETARY TO HEALTH PLAN. Medical
Group and its Participating Providers shall maintain confidential all
information designated in this Section. The information which Medical
Group and its Participating Providers shall maintain confidential (the
"Confidential Information") consists of: (i) the Eligibility List and any
other information containing the names, addresses and telephone numbers of
Members which has been compiled by Health Plan; (ii) lists or documents
compiled by Health Plan which include the names, addresses and telephone
numbers of employers, employees of such employers responsible for health
benefits and the officers and directors of such employers; (iii) Health
Plan's Provider Manual and any of Health Plan's member, employer and
administrative service manuals and all forms related thereto; (iv) the
financial arrangements between Health Plan and any of Health Plan's
Participating Providers; (v) Health Plan underwriting and rating
information and any other information utilized by Health Plan for
determining eligibility or rates for the Managed Care Plans; and (vi) any
other information compiled or created by Health Plan which is proprietary
to Health Plan and which Health Plan identifies in writing to Medical
Group.
7.10.2 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Medical Group and its
Participating Providers shall not disclose or use the Confidential
Information for their own benefit or gain either during the term of this
Agreement or after the date of termination of this Agreement. Medical
Group and its Participating Providers may use the Confidential Information
to the extent necessary to perform their duties under this Agreement or
upon express prior written permission of Health Plan. Upon the effective
date of termination of this Agreement, Medical Group and its Participating
Providers shall provide and return to Health Plan the Confidential
Information in their possession in the manner specified by Health Plan.
7.10.3 INFORMATION CONFIDENTIAL AND PROPRIETARY TO MEDICAL GROUP.
Medical Group shall provide Health Plan with a written description of all
information proprietary to Medical Group which is confidential and
contains trade secrets of Medical Group (the "Medical Group Information").
Health Plan shall maintain and shall cooperate with Medical Group to
maintain the confidentiality of Medical Group Information. Health Plan
shall not disclose or use any Medical Group Information for its own
benefit either during the term of this Agreement or after the effective
date of termination of this Agreement. Upon
<PAGE>
termination of this Agreement, Health Plan shall provide and return to
Medical Group all Medical Group Information in its possession in the
manner to be specified by Medical Group.
7.10.4 NAMES, LOGOS AND SERVICE MARKS. Medical Group shall obtain the
written consent of Health Plan prior to using Health Plan's name, product
names, logos and service marks in any of Medical Group's promotional,
marketing or advertising materials or for any other reason. Health Plan
shall obtain the written consent of Medical Group prior to using Medical
Group's name, product names, logos and service marks in any of Health
Plan's promotional, marketing or advertising materials or for any other
reason; provided, however, that Health Plan may utilize Medical Group's
name and address in any of Health Plan's publications which list the names
of Health Plan's contracting providers without Medical Group's specific
consent.
7.11 SOLICITATION OF HEALTH PLAN MEMBERS OR SUBSCRIBER GROUPS. Medical Group
and its Participating Providers shall not directly or indirectly engage in
the practice of solicitation of Members, Subscribers and Subscriber Groups
without Health Plan's prior written consent. Solicitation shall mean
conduct by an officer, agent, employee of Medical Group or its
Participating Providers or their respective assignees or successors during
the term of this Agreement, during any termination notice period and
during the continuing care period described in Section 8.3 which may be
reasonably interpreted as designed to persuade Members, Subscribers or
Subscriber Groups to disenroll from any Managed Care Plan or discontinue
their relationship with Health Plan for any reason. Notwithstanding any
other provision of this Agreement, Medical Group agrees that Health Plan
shall, in addition to any other remedies provided for under this
Agreement, have the right to seek a judicial temporary restraining order,
preliminary injunction, or other equitable relief against Medical Group
and its Participating Providers to enforce its rights under this Section.
7.12 APPROVAL BY HEALTH PLAN OF SALE OR CHANGE IN OWNERSHIP AND CONTROL OF
MEDICAL GROUP. For a period of two (2) years following the Commencement
Date of this Agreement, Health Plan shall have the right to consent to any
proposed sale or change in control of Medical Group or Talbert Medical
Management Corporation ("TMMC"), which consent shall not be unreasonably
withheld by Health Plan. A change in control of Medical Group or of TMMC
shall include any transfer of Medical Group management functions to a
successor entity which is a management company or any merger,
consolidation or sale of TMMC or Medical Group where any individual,
entity or group acquires beneficial ownership of fifty percent (50%) or
more of the voting common stock of TMMC or Medical Group or any
transaction in which TMMC or Medical Group sells its business or
substantially all of its material assets to a successor entity. The
parties acknowledge and agree that, during the two (2) year period
following the Commencement Date of this Agreement, Health Plan may
reasonably withhold its consent if the proposed sale or change of control
is to an individual, entity or group that operates HMOs or holds Medicare
risk contracts with HCFA.
<PAGE>
Medical Group warrants and assures that (i) this Agreement will be assumed
by all successor entities to Medical Group, (ii) all successor entities to
Medical Group will be bound by the terms and conditions of this Agreement,
and (iii) all successor entities to TMMC shall execute a guaranty
identical in form to, that certain Guaranty of Performance, of even date
with this Agreement, executed by TMMC in favor of Health Plan. In the
event that any successor entities to Medical Group assume this Agreement
and have one or more existing provider agreements with Health Plan ("the
existing provider agreement"), Health Plan shall have the right, in its
sole discretion, to require that the successor entities to Medical Group
be bound by the provisions of either: (i) this Agreement; or (ii) the
existing provider agreement; or (iii) a combination of this Agreement and
the existing provider agreement, with respect to any or all Health Plan
Members assigned to Medical Group or successor entities to Medical Group,
as shall be specified by Health Plan by written notice to the successor
entities or management companies. The agreement or agreements elected by
Health Plan for coverage of Health Plan Members under this Section shall
supersede any and all other agreements for such coverage.
As a condition to Health Plan's consent under this Section, Health Plan
may require successor entities to execute documentation furnished by
Health Plan evidencing their agreement to abide by accordance with the
provisions of this Section.
7.13 CONFIDENTIALITY OF THIS AGREEMENT. To the extent reasonably possible,
each party agrees to maintain this Agreement as a confidential document
and not to disclose the Agreement or any of its terms without the approval
of the other party.
7.14 INVALIDITY OF SECTIONS OF AGREEMENT. The unenforceability or invalidity
of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the balance
of this Agreement.
7.15 CAPTIONS. Captions in this Agreement are descriptive only and do not
affect the intent or interpretation of the Agreement.
7.16 WAIVER OF BREACH. The waiver by either party to this Agreement of a
breach or violation of any provision of this Agreement shall not operate
as or be construed to be a waiver of any subsequent breach or violation
thereof.
7.17 ATTORNEYS' FEES AND COSTS. If any action at law or suit in equity is
brought to enforce or interpret the provisions of this Agreement or to
collect any monies due hereunder, the prevailing party shall be entitled
to reasonable attorneys' fees and reasonable costs, together with interest
thereon at the highest rate provided by law, in addition to any and all
other relief to which it may otherwise be entitled.
7.18 MEDICAL GROUP'S AUTHORIZED REPRESENTATIVE. Unless otherwise indicated in
writing to
<PAGE>
Health Plan, Medical Group warrants and authorizes Talbert Medical
Management Corporation to act as its fully authorized representative to
represent Medical Group in this Agreement and to receive any and all
communications and notices hereunder.
7.19 NO THIRD PARTY BENEFICIARIES. This Agreement shall not create any rights
in any third parties who have not entered into this Agreement, nor shall
this Agreement entitle any such third party to enforce any rights or
obligations that may be possessed by such third party.
7.20 ENTIRE AGREEMENT. This Agreement, including all exhibits, attachments and
amendments hereto, contains all the terms and conditions agreed upon by
the parties regarding the subject matter of this Agreement. Any prior
agreements, promises, negotiations or representations of or between the
parties, either oral or written, relating to the subject matter of this
Agreement, which are not expressly set forth in this Agreement are null
and void and of no further force or effect.
7.21 INCORPORATION OF EXHIBITS, ATTACHMENTS AND PROVIDER MANUAL. The exhibits
and attachments to this Agreement and the Provider Manual are an integral
part of this Agreement and are incorporated in full herein by this
reference.
7.22 MEDICAL GROUP COVENANT NOT TO COMPETE - During the term of this Agreement,
including any renewal term, Medical Group and its Participating Providers
agree not to, directly or indirectly, seek or obtain a contract with the
Health Care Finance Administration for the purpose of offering a Medicare-
risk program or benefit plan. This section shall not be interpreted to
prevent Medical Group and its Participating Providers from providing or
arranging for Covered Services to Medical Group Members in coordination
with Health Plan under the terms specified in this Agreement or from
providing or arranging health care services pursuant to a contract between
Medical Group and any other licensed health maintenance organization or
competitive medical plan.
7.22.1 INDIRECTLY DEFINED. For purposes of this section, the use of the
term "indirectly" shall mean activity of , or conducted by, or through,
any subsidiary or affiliate of Medical Group.
7.22.2 EQUITABLE RELIEF. Medical Group acknowledges and agrees that it
would be difficult to measure the damage to Health Plan from any breach of
Medical Group's obligations under Section 7.22, that injury to Health Plan
from any such breach would be impossible to calculate and that money
damages would therefore be an inadequate remedy for any such breach.
Therefore, Medical Group acknowledges and agrees that Health Plan, in
addition to any of its other rights or remedies, shall be entitled to seek
injunctive and other equitable relief in the event of an actual or
threatened breach of Section 7.22.
7.23 LITIGATION TRACKING PROGRAM
<PAGE>
7.23.1 Medical Group and TMMC currently have access to and utilize some
or all of a software program developed and owned by Health Plan's
affiliate, FHP, International Corporation ("FHP") to track claims and
litigation filed by and against Medical Group and FHP, to produce certain
reports and to collect and maintain related historical and other
information (the "Litigation Tracking Program"). The Litigation Tracking
Program is divided into a non-professional liability tracking module and a
professional liability tracking Medical Group and TMMC only have access to
and use of the professional liability tracking module. The non-
professional liability tracking module is used to monitor claims, suits
and proceedings including, but not limited to employment litigation,
contract disputes and slip and fall claims. The professional liability
tracking module is used to monitor matters generally arising from medical
treatment, including without limitation, medical malpractice, bad faith
claims and benefit denials. Certain of the information which is
maintained by the Litigation Tracking Program is confidential information
or is subject to protection from disclosure under the attorney-client and
attorney work product privileges.
7.23.2 For so long as TMMC remains a wholly owned or majority owned
subsidiary of FHP or a corporation controlled by or under common control
with FHP, TMMC and Medical Group shall continue to have access to and the
right to use the professional liability tracking module.
7.23.3 On or before the date TMMC ceases to be a wholly-owned or majority
owned subsidiary of FHP or a corporation controlled by or under common
control with FHP, TMMC and Medical Group shall discontinue all use of the
Litigation Tracking System, delete the Litigation Tracking System from all
computer systems and equipment owned, controlled, possessed or used by or
for TMMC or Medical Group and surrender to FHP or its successor all copies
(whether on disks or in hard copy or other form) of the Litigation
Tracking Program, all information contained in the Litigation Tracking
Program and all notes and summaries thereof. On the same date, TMMC and
Medical Group shall certify to FHP in a writing signed on behalf of
Medical Group and TMMC by Medical Group's and TMMC's highest ranking
corporate officer that TMMC and Medical Group have fully complied with the
provisions of this Section 7.23.3.
7.23.4 TMMC and Medical Group are advised, and hereby acknowledge and
agree that any breach of the provisions of Section 7.23.3 above shall
constitute a material breach of this Agreement, and that upon the
occurrence of such breach, Health Plan shall have the right to terminate
this Agreement and the right to pursue any and all relief available at law
or in equity, including the commencement of legal proceedings to enjoin,
or to recover damages, resulting from such breach.
7.23.5 Notwithstanding Section 7.23.3 above, TMMC and Medical Group shall
have the right to make and retain and to request and receive from FHP hard
copies of all information pertaining to professional and non-professional
liability matters which were asserted or filed against Medical Group on or
after February 15, 1996. In addition,
<PAGE>
TMMC and Medical Group shall have the right from time to time to request
selected historical information from FHP to the extent such information is
required to meet specific regulatory or insurance requirements and FHP
shall provide such information in the form and to the extent it can do so
without violating any right or obligation of confidentiality or
jeopardizing its rights under the attorney-client and work product
privileges.
7.23.6 If requested by TMMC or Medical Group, FHP will grant to TMMC or
Medical Group a non-exclusive, non-transferable five (5) year license
subject to execution of a mutually agreeable license agreement, to use the
Litigation Tracking Program (without data installed) to track professional
and non-professional matters asserted or filed against Medical Group from
and after February 15, 1996. The license fee to be paid by TMMC or
Medical Group for such use shall be $100,000, said amount to be paid in
four (4) quarterly installments of $25,000 each, with the first
installment to be paid at the beginning of the third calendar quarter
following the beginning of the term of such license and the remaining
installments to be paid at the beginning of each calendar quarter
thereafter.
7.24 JOINT OPERATIONS COMMITTEE ("JOC"). Health Plan, Medical Group and
Hospital shall maintain a joint operations committee, consistent with
Health Plan's contracts with capitated Hospitals, if any. The committee
shall meet at regularly scheduled intervals and meetings may be called by
any committee member on at least three (3) days prior written notice. The
committee shall act by consensus.
7.25 CONVERSION. Medical Group recognizes that Health Plan intends to
substantially revise its systems, operations and programs on the
Conversion Date and that this will result in changes to the compensation
and other terms of this Agreement, primarily as defined in the Product
Attachments. Therefore, this Agreement includes one set of Product
Attachments (A1 through D1) which applies prior to the Conversion Date and
a second set of Product Attachments (A2 through D2) which applies
beginning on the Conversation Date.
Within ninety (90) days following the Conversion Date, Health Plan shall review
the percentage of Net Medical Premium specified in Section 3.1 of Product
Attachment A2 for Commercial Plan Members (the "Specified Percentage") and
shall make a one-time adjustment to the Specified Percentage, if
necessary, based upon the following guidelines, the intent being that
Medical Group's compensation for Commercial Plan Members should remain
economically equivalent as a result of the conversion to the Post-
Conversion Product Attachments:
1. Health Plan shall determine the per member per month ("PMPM") amount paid
to Medical Group for Commercial Plan Members for the calendar month
immediately prior to the Conversion Date (the "Target PMPM").
<PAGE>
2. Health Plan shall determine the PMPM amount paid to Medical Group for
Commercial Plan Members for the calendar month in which the Conversion
Date falls (the "Post-Conversion Date PMPM").
3. Health Plan shall compare the Post-Conversion Date PMPM and the Target
PMPM and, if there is a difference between the two amounts, shall adjust
the Specified Percentage (the "Adjusted Percentage") such that when the
Adjusted Percentage is multiplied by Net Commercial Premium PMPM, the
resulting PMPM amount shall be equal to the Target PMPM.
4. The adjustment to the Specified Percentage (the "Adjusted Percentage")
shall be effective as of the Conversion Date and shall continue
throughout the remainder of the term of the Agreement.
7.26 MEMORIAL AGREEMENT. The parties acknowledge and agree that Health Plan
has entered into a long-term agreement with Memorial Health Services
("MHS") on December 19, 1995 (the "MHS Agreement") which requires, among
other things, Health Plan to assign certain Members to MHS hospitals. The
parties agree that should any provision or requirement in this Agreement
be inconsistent with any requirements in the MHS Agreement, the parties to
this Agreement shall perform their duties and responsibilities under this
Agreement in a manner that is consistent with, and will enable Health Plan
to fulfill its obligations under the MHS Agreement. If Medical Group
breaches this Agreement and thereby places Health Plan in default of the
MHS Agreement, Medical Group shall be responsible for any damages Health
Plan incurs and Medical Group agrees to indemnify, defend and hold
harmless Health Plan from any and all such damages and Health Plan may
elect to offset is damages from Health Plan's payments to Medical Group.
Medical Group further agrees for those Medical Group facilities in the zip
code areas in which Health Plan, is required to send Members to MHS
hospitals, as provided in the MHS Agreement, Medical Group will use its
best efforts to send all Medical Group patients requiring services in a
hospital to MHS hospitals, consistent with the patient's medical needs and
the MHS hospitals' capabilities.
7.27 CHANGES IN DESIGNATED HOSPITAL.
(a) USE OF SADDLEBACK. Effective 7/1/98, Members assigned to the Laguna
Hills Talbert facility will be reassigned to Saddleback Hospital, and the
terms of Exhibit A-1 and C-1 for Memorial facilities shall apply.
(b) CHARTER HOSPITAL. Effective 2/1/97, Members assigned to the Plaza, Long
Beach, Charter, and Anaheim Talbert facilities using Charter Hospital will
reassigned to hospitals affiliated with the Memorial Health System, and
the terms of Exhibit A-1 and C-1 for Memorial facilities shall apply.
(c) MEMBERS ASSIGNED TO DOWNEY TALBERT FACILITY. Effective 2/1/97, Members
assigned to the
<PAGE>
Downey Talbert facility will be reassigned and the terms of Exhibit A-3
and C-3 will apply.
(d) MEMBERS ASSIGNED TO COMPTON FACILITY. Effective 1/1/98, Members assigned
to Compton Talbert facility will be reassigned to a hospital affiliated
with the Memorial Health System, and the terms of Exhibit A-1 and C-1
shall apply.
7.28 GUARANTY OF PERFORMANCE BY TMMC. Notwithstanding anything to the contrary
herein, this Agreement shall not become effective unless and until Talbert
Medical Management Corporation executes a Guaranty of Performance in favor
of Health Plan, in a form acceptable to Health Plan, which unconditionally
guarantees all of the obligations of Medical Group under this Agreement.
7.29 AUDIT. Health Plan agrees that Medical Group shall, upon request and
provision of reasonable notice, have the right to audit claims processed
by the Health Plan on behalf of Medical Group under this Agreement.
7.30 BOARD APPROVAL. This Agreement shall be subject to the prior approval of
the Boards of Directors for TMMC and FHP International Corporation, the
ultimate parent of Health Plan, which approval shall be considered at
board meetings of each corporation.
ARTICLE 8
GOVERNING LAW AND REGULATORY REQUIREMENTS
8.1 GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be construed, interpreted, and enforced in
accordance with, and governed by, the laws of the State of California and
the United States of America, including, without limitation, the Knox-
Keene Health Care Service Plan Act of 1975, as amended, and the
regulations adopted thereunder by the California Department of
Corporations, the federal Health Maintenance Organization Act of 1973, as
amended, and the regulations adopted thereunder by the United States
Department of Health and Human Services. Any provisions required to be in
this Agreement by State and Federal Law or by Government Agencies shall
bind Health Plan and Medical Group whether or not expressly provided in
this Agreement.
8.2 NO BILLING OF MEMBERS (MEMBER HOLD HARMLESS PROVISION. With the exception
of Copayments and charges for non-covered services delivered on a fee-for-
service basis to Members, Medical Group shall in no event, including,
without limitation, non-payment by Health Plan, insolvency of Health Plan,
or breach of the Agreement, bill, charge, collect a deposit from, or
attempt to bill, charge, collect or receive any form of payment from any
Member for Covered Services provided or arranged pursuant to this
Agreement.
Medical Group and its Participating Providers shall not maintain any
action at law or equity against a Member to collect sums owed by Health
Plan to Medical Group. Upon
<PAGE>
notice of any such action, Health Plan may terminate this Agreement as
provided above and take all other appropriate action consistent with the
terms of this Agreement to eliminate such charges, including, without
limitation, requiring Medical Group and its Participating Providers to
return all sums collected as Surcharges from Members or their
representatives. For purposes of this Agreement, "Surcharges" are
additional fees for Covered Services which are not disclosed to Members in
the Subscriber Agreement, are not allowable Copayments and are not
authorized by this Agreement. Nothing in this Agreement shall be
construed to prevent Medical Group from providing non-Covered Services on
a usual and customary fee-for-service basis to Members.
Medical Group's obligations under this Section shall survive the
termination of this Agreement with respect to Covered Services provided or
arranged during or after the term of this Agreement, regardless of the
cause giving rise to such termination.
8.3 CONTINUING CARE OBLIGATIONS OF MEDICAL. In the event of termination of
this Agreement for any reason, Medical Group and its Participating
Providers shall continue to provide or arrange Covered Services to
Members, including any Members who become eligible during the termination
notice period, beginning on the effective date of termination and
continuing until the termination or next renewal date of the Member's
Subscriber Agreement, unless Health Plan arranges for the transfer of the
Member to another Health Plan Participating Provider and provides written
notice to Medical Group of such transfer prior to the termination or next
renewal date of the Subscriber Agreement. Notwithstanding the foregoing,
Medical Group and its Participating Providers will continue to provide or
arrange Covered Services to any Members who cannot be transferred within
the time period specified above in accordance with Health Plan's legal and
contractual obligations to (I) provide Covered Services under the Managed
Care Plans and Subscriber Agreements, (ii) provide notice of termination
to Members and (iii) ensure continuity of care for its Members.
Notwithstanding the above or any other provisions to the contrary, Medical
Group agrees that in the event Health Plan ceases operations for any
reason, including insolvency, Medical Group shall provide or arrange
Covered Services and shall not bill, charge, collect or receive any form
of payment from any Member for Covered Services provided after Health Plan
ceases operations. This continuation of Covered Services obligation shall
be for the period for which Premium has been paid, but shall not exceed a
period of thirty (30) calendar days, except for those Members who are
hospitalized on an inpatient basis as provided below.
In the event Health Plan ceases operations or Medical Group terminates
this Agreement on the basis of Health Plan's failure to make timely
Capitation Payments, Medical Group shall continue to arrange for Covered
Services to those Members who are hospitalized on an inpatient basis at
the time Health Plan ceases operations or Medical Group terminates this
Agreement until such Members are discharged from the hospital. Medical
Group may file a claim with Health Plan for such services as previously
specified in this Section.
<PAGE>
Medical Group agrees that the provisions of this Section and the
obligations of Medical Group and its Participating Providers herein shall
survive termination of this Agreement regardless of the cause giving rise
to such termination, and shall be construed to be for the benefit of
Members.
8.4 INSPECTION AND AUDIT OF RECORDS AND FACILITIES. Medical Group and its
Participating Providers shall provide access at reasonable times upon
demand by Health Plan, Accreditation Organizations and Governmental
Agencies to periodically audit or inspect the facilities, offices,
equipment, books, documents and records of Medical Group and its
Participating Providers relating to the performance of this Agreement and
the Covered Services provided to Members, including, without limitation,
all phases of professional and ancillary medical care provided or arranged
for Members by Medical Group and its Participating Providers, Member
medical records and financial records pertaining to the cost of operations
and income received by Medical Group for Covered Services rendered to
Members. Medical Group and its Participating Providers shall comply with
any requirements or directives issued by Health Plan, Accreditation
Organizations and Government Agencies as a result of such evaluation,
inspection or audit of Medical Group and its Participating Providers. The
provisions of this Section shall survive termination of this Agreement for
the period of time required by State and Federal Law.
8.5 NONDISCRIMINATION. Medical Group assures that Covered Services shall be
provided to Members in the same manner as such services are provided to
other patients of Medical Group and its Participating Providers, except as
required pursuant to this Agreement. Medical Group and its Participating
Providers shall not unlawfully discriminate against any Member on the
basis of source of payment or in any manner in regards to access to, and
the provision of, Covered Services. Medical Group and its Participating
Providers shall not unlawfully discriminate against any Member, employee
or applicant for employment on the basis of race, religion, color,
national origin, ancestry, physical handicap, medical condition, marital
status, age or sex.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
, on , 199 .
- ------------------------------- ------------------ --
FHP, INC.
By:
--------------------------
Title:
----------------------
Address (for purposes of receiving notice)
18000 Studebaker Road
<PAGE>
Cerritos, California 90703
Attention: President
For and on Behalf of MEDICAL GROUP
By:
--------------------------
Title:
----------------------
Address (for purposes of receiving notice)
3540 Howard Way
Costa Mesa, California 92626
Attn: Business Development
<PAGE>
PACIFICARE OF CALIFORNIA
MEDICAL GROUP SERVICES AGREEMENT
(TALBERT)
THIS MEDICAL GROUP SERVICES AGREEMENT (this "Agreement") is made and
entered into this 6th day of November, 1996, by and between PACIFICARE OF
CALIFORNIA ("Health Plan"), and TALBERT MEDICAL GROUP, INC. ("Medical Group")
with reference to the following facts:
WHEREAS, Health Plan operates various prepaid health plans for the
provision of Covered Services to persons enrolled as Members in such plans in a
manner consistent with the laws of the State of California and the United
States; and
WHEREAS, Medical Group and its Participating Providers desire to
participate in Health Plan's prepaid health service delivery system by providing
or arranging for Covered Services to Medical Group Members on a prepaid basis in
coordination with Health Plan and its Participating Providers under the terms
specified in this Agreement; and
NOW, THEREFORE, it is agreed as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following terms shall have the definitions
contained in this Article 1:
1.1 ACCREDITATION ORGANIZATION is any organization, including, without
limitation, the National Committee for Quality Assurance (NCQA), engaged in
accrediting or certifying Health Plan, any Managed Care Plans, or any
Participating Providers.
1.2 AGREEMENT is this Medical Group Services Agreement between Health Plan
and Medical Group, and any amendments, exhibits and attachments hereto,
including Product Attachments.
1.3 BASE AGREEMENT is this Medical Group Services Agreement between Health
Plan and Medical Group, and any amendments, exhibits and attachments
hereto, excluding Product Attachments.
1.4 CAPITATION PAYMENTS are monthly payments made to Medical Group on a
prepaid basis for Covered Services provided or arranged by Medical Group
under this Agreement.
1.5 COMMENCEMENT DATE shall be the first day of the month following the date
set forth in the first paragraph of this Agreement.
<PAGE>
1.6 COPAYMENT is a fee that may be charged to Members for certain Medical
Group Services and collected by Medical Group or its Participating
Providers at the time Medical Group Services are provided, as set forth in
the applicable Managed Care Plan.
1.7 COST OF CARE is the valuation of Medical Group Services and other
health care services provided or arranged by Medical Group, as described in
Section 5.8 and EXHIBIT 1 to the Base Agreement.
1.8 COVERED SERVICES are those medically necessary health care services,
supplies and benefits which are required by a Member as determined by
Medical Group or Health Plan in accordance with the Member's Managed Care
Plan and Health Plan's Quality Improvement Program and Utilization
Management Program. For purposes of this Agreement, "medically necessary"
shall have the meaning set forth in the applicable Subscriber Agreement.
1.9 DIVISION OF FINANCIAL RESPONSIBILITY is the matrix for each Managed
Care Plan which specifies either: (i) the financial responsibility of
Health Plan, Medical Group and Hospital for Covered Services, where both
Medical Group and Hospital are capitated by Health Plan for providing or
arranging Covered Services for Medical Group Members; or (ii) the financial
responsibility of Health Plan and Medical Group for Covered Services and
Covered Services that are Hospital Services, where Medical Group is
capitated by Health Plan and Hospitals are paid on non-capitated basis by
Health Plan for providing or arranging Covered Services to Medical Group
Members. The Division of Financial Responsibility for each Managed Care
Plan is set forth in the applicable Product Attachment.
1.10 ELIGIBILITY LIST is the list of Members for whom Medical Group shall
provide or arrange Covered Services.
1.11 EMERGENCY is the sudden and unexpected onset or occurrence of a
symptom, illness, medical condition or injury which requires immediate
diagnosis and/or treatment in order to alleviate or attempt to prevent
severe pain, permanent disability, serious medical complications or loss of
life. The final determination of whether an Emergency existed shall be
made by the Health Plan Medical Director or designee, subject to appeal
under the applicable Member appeals procedure.
1.12 EMERGENCY SERVICES are Covered Services required by a Member for the
diagnosis and treatment of an Emergency.
1.13 GOVERNMENT AGENCY shall mean any local, state or federal government
agency or entity with regulatory or other authority over Health Plan, this
Agreement or any Managed Care Plan.
<PAGE>
1.14 HOSPITAL(S) are the licensed acute care hospitals which have entered
into written agreements with Health Plan to provide Hospital Services to
Medical Group Members in the Medical Group Risk Area on either a capitated
basis or a non-capitated basis. Hospitals which are capitated by Health
Plan for Medical Group Members are identified on EXHIBIT 1 to the Base
Agreement.
1.15 HOSPITAL SERVICES are either: (i) Covered Services for Medical Group
Members assigned to Hospital which are the financial responsibility of
Hospital, as specified in the Division of Financial Responsibility for each
Managed Care Plan, where Hospital is capitated by Health Plan for such
Covered Services; or (ii) Covered Services for Medical Group Members which
are initially paid for by Health Plan and are the shared financial
responsibility of Health Plan and Medical Group, as specified in the
Hospital Incentive Programs set forth in the Product Attachments and
summarized in the Division of Financial Responsibility, where Hospitals are
paid on per diem basis for such Covered Services.
1.16 MANAGED CARE PLAN is any one of the various health benefit plans or
products sponsored or administered by Health Plan or its subsidiaries or
affiliates including, without limitation, a commercial prepaid plan
("Commercial Plan"), a commercial point-of-service plan ("Commercial POS
Plan"), a Medicare-risk plan ("Medicare Plan") and a Medicare-risk point-
of-service plan ("Medicare POS Plan"). Each Managed Care Plan is described
in the applicable Subscriber Agreement and Product Attachment. Health Plan
may make available some, and not all, of the Managed Care Plans under this
Agreement.
1.17 MEDICAL GROUP MEMBERS are the Members listed on the Eligibility List.
1.18 MEDICAL GROUP RISK AREA is the geographic area within a thirty (30)
mile radius of each Medical Group facility. Such radius commences with the
address of Medical Group facility and extends for thirty (30) miles over
the shortest route using public streets and highways.
1.19 MEDICAL GROUP SERVICES are Covered Services for Medical Group Members
which are the financial responsibility of Medical Group, as specified in
the Division of Financial Responsibility for each Managed Care Plan.
1.20 MEMBER is an individual who is enrolled in a Managed Care Plan and
meets all the eligibility requirements for membership in the Managed Care
Plan and for whom the applicable Premium has been received by Health Plan.
1.21 OUT-OF-AREA MEDICAL SERVICES are those Urgently Needed Services and
Emergency Services provided while a Medical Group Member is outside the
Medical Group Risk Area which would have been the financial responsibility
of Medical Group had such services been provided within the Medical Group
Risk Area.
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1.22 PARTICIPATING PROVIDERS are (i) physicians and health care
professionals who are shareholders, partners or employees of Medical Group
and (ii) physicians, medical groups, individual practice associations
("IPA"), health care professionals, hospitals, facilities and other
providers of health care services or supplies that have entered into
written contracts with Health Plan, Medical Group or Hospital to provide
Covered Services to Members pursuant to Managed Care Plans.
1.23 PREMIUM is the payment for Covered Services under each Managed Care
Plan as may be further defined in the applicable Product Attachment.
1.24 PRIMARY CARE PHYSICIAN is any of Medical Group's Participating
Providers who meet Health Plan's criteria for providing initial and primary
care Covered Services to Members, for maintaining the continuity of patient
care, and for initiating and coordinating referrals for Covered Services to
Members.
1.25 PRODUCT ATTACHMENTS are the attachments to the Base Agreement which
set forth the terms and conditions under which Medical Group shall provide
or arrange Covered Services to Medical Group Members pursuant to the
Managed Care Plans. The Product Attachments are described in EXHIBIT 2 to
the Base Agreement. All Product Attachments are a part of this Agreement
and are incorporated herein.
1.26 PROVIDER MANUAL is the Health Plan Provider Policies and Procedures
Manual and related written materials which shall be provided to Medical
Group by Health Plan prior to or concurrent with the execution of this
Agreement. The Provider Manual is incorporated into this Agreement, and
may be updated from time to time by Health Plan as provided in this
Agreement.
1.27 QUALITY MANAGEMENT AND IMPROVEMENT ("QI") PROGRAM are those standards,
protocols, policies and procedures adopted by Health Plan to monitor and
improve the quality of clinical care and quality of services provided to
Members. The QI Program is described in the Provider Manual, and may be
updated from time to time by Health Plan as provided in this Agreement.
1.28 STATE AND FEDERAL LAW shall mean any and all laws and regulations of
the State of California or of the United States which are applicable to
Health Plan, this Agreement, Managed Care Plans, and Medical Group and its
Participating Providers.
1.29 SUBSCRIBER AGREEMENT is the contract between Health Plan and a
Subscriber or Subscriber Group which describes the costs, benefits or
services, procedures, conditions, limitations, exclusions, and other
obligations to which Members are entitled and subject to under a Managed
Care Plan. A copy of the current standard form Subscriber Agreement for
each Managed Care Plan shall be provided to Medical Group by Health Plan
concurrent with the execution of each Product Attachment, and may be
updated from time to time by Health Plan.
<PAGE>
1.30 SUBSCRIBER OR SUBSCRIBER GROUP is the individual or employer,
organization, firm or other entity which contracts with Health Plan under
a Subscriber Agreement to obtain the benefits of a Managed Care Plan.
1.31 URGENTLY NEEDED SERVICES are Covered Services under a Managed Care
Plan which are required without delay in order to prevent the serious
deterioration of a Member's health as a result of an unforeseen illness
or injury while the Member is temporarily outside the Health Plan Service
Area (that is, the geographic area in which Health Plan is licensed in
the State of California to offer each Managed Care Plan).
1.32 UTILIZATION MANAGEMENT ("UM") PROGRAM are those standards,
protocols, policies and procedures adopted by Health Plan regarding the
management, review and approval of the provision of Covered Services to
Members. The UM Program is described in the Provider Manual, and may be
updated from time to time by Health Plan as provided in this Agreement.
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 PROVIDE OR ARRANGE COVERED SERVICES. Medical Group, through its
Participating Providers, shall provide or arrange Covered Services in the
Medical Group Risk Area to Medical Group Members, in coordination with
Health Plan and Health Plan's Participating Providers and in accordance
with the terms and conditions set forth in this Agreement and the Managed
Care Plans. Medical Group shall be financially responsible for Medical
Group Services. The primary concern of Medical Group and its
Participating Providers under this Agreement shall be the quality of
Covered Services provided to or arranged for Members. Nothing stated in
this Agreement shall be interpreted to diminish this responsibility.
2.2 PROFESSIONAL STANDARDS. All Covered Services provided or arranged by
Medical Group shall be provided or arranged by duly licensed, certified
or otherwise authorized professional personnel and at physical facilities
in accordance with (i) the generally accepted medical and surgical
practices and standards prevailing in the applicable professional
community at the time of treatment, (ii) the provisions of Health Plan's
QI Program and UM Program, (iii) the requirements of State and Federal
Law and (iv) the standards of Accreditation Organizations.
2.2.1 LICENSURE OF MEDICAL GROUP. Medical Group is legally organized
and incorporated under the laws of the State of California. Medical
Group shall maintain in good standing at all times during the term of
this Agreement any and all licenses, certificates and/or approvals
required under State and Federal Law for the performance by Medical
Group of the duties required by this Agreement.
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2.2.2 LICENSURE/CERTIFICATION OF MEDICAL GROUP'S PARTICIPATING
PROVIDERS. ach of Medical Group's Participating Providers shall
maintain in good standing at all times during the term of this
Agreement the necessary licenses or certifications required by State
and Federal Law and by the Managed Care Plans to provide or arrange
Covered Services to Members.
2.2.3 HOSPITAL PRIVILEGES FOR MEDICAL GROUP'S PARTICIPATING PROVIDERS.
Unless otherwise specified by Medical Group and approved by Health
Plan for specific Participating Providers, each of Medical Group's
Participating Providers who is a physician shall maintain in good
standing at all times during the term of this Agreement medical staff
membership and clinical privileges at Hospital necessary to provide or
arrange Covered Services to Members.
2.3 MEDICAL GROUP'S PARTICIPATING PROVIDERS. Medical Group shall have a
sufficient number of Participating Providers throughout the Medical Group
Risk Area to provide or arrange Covered Services and meet the needs of
Health Plan and Medical Group Members as determined by Health Plan's QI
Program and in accordance with State and Federal Law. Medical Group's
Participating Providers shall provide or arrange Covered Services,
including Emergency Services, to Medical Group Members twenty four (24)
hours a day, three hundred sixty five (365) days per year. Medical
Group's Participating Providers must meet Health Plan's credentialing
standards and must be approved by Health Plan before providing or
arranging Covered Services to Members.
2.3.1 PARTICIPATING PROVIDER INFORMATION. Medical Group shall
provide Health Plan with a complete list of its Participating
Providers, together with the provider specific information required by
Health Plan for credentialing and for administration of the Managed
Care Plans, at the time this Agreement is signed.
2.3.2 NOTICE OF PARTICIPATING PROVIDER ADDITIONS. Medical Group
shall use its best efforts to provide at least sixty (60) calendar days
prior written notice to Health Plan of the addition of any new
Participating Providers. Such notice shall include the provider
specific information required by Health Plan, as set forth in the
Provider Manual. All new Participating Providers must be approved by
Health Plan before providing or arranging Covered Services to Members.
Health Plan shall use its best efforts to approve new Participating
Providers as quickly as possible after receiving the written notice
from Medical Group.
2.3.3 NOTICE OF PARTICIPATING PROVIDER TERMINATIONS. Medical Group
shall provide sixty (60) calendar days prior written notice to Health
Plan of the termination of any of its Participating Providers;
provided, however, that if any Participating Providers are terminated
with less than sixty (60) calendar days notice, then Medical Group
shall provide written notice to Health Plan as soon as Medical Group
becomes aware of such termination.
<PAGE>
2.3.4 RESTRICTION, SUSPENSION OR TERMINATION OF PARTICIPATING
PROVIDERS. Medical Group shall, as warranted, immediately restrict,
suspend or terminate its Participating Providers from providing or
arranging Covered Services to Members in the following circumstances:
(i) the Participating Provider ceases to meet the
licensing/certification requirements or other professional standards
described in this Agreement; (ii) Health Plan or Medical Group
reasonably determines that there are serious deficiencies in the
professional competence, conduct or quality of care of the
Participating Provider which affects or could adversely affect the
health or safety of Members; or (iii) Health Plan reasonably demands
that the Participating Provider be restricted, suspended or
terminated. Medical Group shall immediately notify Health Plan of any
of its Participating Providers who cease to meet the
licensing/certification requirements or other professional standards
described in this Agreement and Medical Group's actions under this
Section. If Medical Group fails to act as required by this Section
with respect to any of its Participating Providers, Health Plan shall
have the right to immediately prohibit such Participating Providers
from continuing to provide Covered Services to Members.
2.3.5 CHANGES IN CAPACITY. Medical Group and its Participating
Providers will continue to accept Members enrolled by Health Plan for
so long as Medical Group and its Participating Providers have the
capacity to provide and arrange Covered Services under this Agreement
and for so long as Medical Group continues to accept new patients from
any HMO or other prepaid Health Plan. Medical Group shall provide at
least one hundred twenty (120) calendar days prior written notice to
Health Plan of any significant changes in the capacity of Medical
Group to provide or arrange Covered Services that would prevent
Medical Group from accepting additional Members. A significant change
in capacity includes, without limitation, the following: (i)
inability of Medical Group to properly serve additional Members due to
a lack of Primary Care Physicians or other Participating Providers;
(ii) inability of any one of Medical Group's Primary Care Physicians
or other Participating Providers to serve additional Members; or (iii)
closure of any office or facility used by Medical Group or its Primary
Care Physicians or other Participating Providers. Health Plan may
continue to enroll Members with Medical Group until the expiration of
the notice period required under this Section, and in such event,
Medical Group and its Primary Care Physicians and other Participating
Providers shall continue to accept such Members. Health Plan shall
discontinue the enrollment of Members with Medical Group upon
expiration of the notice period required under this Section until such
time, if any, that Medical Group provides written notification to
Health Plan that it has the capacity to accept additional Members.
2.3.6 NOTICE OF CHANGES IN NETWORK. In the event of a closure of a
Medical Group clinic, a termination of one or more Primary Care
Physicians or a change in a Medical Group clinic location, Health Plan
shall have the sole authority and
<PAGE>
responsibility for providing notice of such changes to the
affected members. Members will be given a choice to stay with
Medical Group, stay with the same physician by moving to
another group or select a new group from the network.
2.4 MEDICAL GROUP'S SUBCONTRACTS WITH PARTICIPATING PROVIDERS. Medical Group
shall demonstrate and certify to Health Plan prior to the Commencement
Date and upon Health Plan's written request at any time during the term
of this Agreement (in the format specified by Health Plan) that its
subcontracts with Participating Providers comply with requirements of
this Agreement. Medical Group shall amend any and all of its existing
subcontracts with Participating Providers which do not comply with this
Agreement within thirty (30) days following the execution of this
Agreement and shall provide Health Plan with written certification
thereof.
2.4.1 COMPLIANCE WITH PROVISIONS OF AGREEMENT. Medical Group's
subcontracts with Participating Providers shall be in writing. All
such subcontracts shall be consistent with the terms and conditions of
this Agreement (including the Product Attachments) and shall meet
Health Plan's requirements for Participating Provider subcontracts as
set forth in the Provider Manual. If this Agreement is amended or
modified, all such subcontracts shall be amended or modified within
thirty (30) calendar days to be consistent with such amendments or
modifications.
2.4.2 COMPLIANCE WITH STANDARDS OF ACCREDITATION ORGANIZATIONS AND
REQUIREMENTS OF STATE AND FEDERAL LAW. Medical Group's subcontracts
with Participating Providers shall comply with the standards of
Accreditation Organizations and requirements of State and Federal Law.
If there are changes in such standards and/or requirements, Medical
Group shall amend its subcontracts with Participating Providers to
comply with such changes within thirty (30) calendar days following
notice thereof from Health Plan.
2.4.3 ACCESS BY HEALTH PLAN, ACCREDITATION ORGANIZATIONS AND
GOVERNMENT AGENCIES. Medical Group and its Participating Providers
shall be required to make available at all reasonable times for
inspection, examination and copying by Health Plan, Accreditation
Organizations and Government Agencies copies of all Participating
Provider subcontracts, and all books and records pertaining to Covered
Services provided to Members under this Agreement. Medical Group and
its Participating Providers shall retain such books and records for a
term of at least five (5) years from the close of the fiscal year in
which the Covered Services were provided.
2.4.4 MEDICAL GROUP'S RESPONSIBILITY FOR PROVIDING OR ARRANGING
COVERED SERVICES. Notwithstanding the existence of Medical Group's
subcontracts with its Participating Providers, Medical Group shall
remain responsible for satisfying the obligations of Medical Group set
forth in this Agreement. If any of Medical Group's subcontracts with
Participating Providers are terminated, Medical Group shall remain
responsible for providing or arranging Covered Services through its
<PAGE>
remaining Participating Providers and shall remain financially
responsible for Medical Group Services provided to Medical Group
Members under this Agreement.
2.4.5 DISCLOSURE OF TERMS. Nothing in this Agreement shall be deemed
to require Medical Group to disclose the financial terms of its
subcontracts with Participating Providers, unless such disclosure is
required by State or Federal Law or unless Health Plan is responsible
for paying or administering claims under the terms of such
subcontracts.
2.5 ACCEPTANCE AND TRANSFER OF MEMBERS. Medical Group and its Participating
Providers may not impose any limitations on the acceptance of Members
for care or treatment that are not imposed on other patients. Health
Plan, Medical Group and its Participating Providers shall not request,
demand, require or seek directly or indirectly the transfer, discharge
or removal of any Member for reasons of Member's need for, or
utilization of, Covered Services, except in accordance with the
procedures established by Health Plan for such action. Medical Group
and its Participating Providers shall not refuse or fail to provide or
arrange Covered Services to any Member.
Health Plan and Medical Group shall exercise reasonable efforts in
following the procedures for transfer, discharge or removal of Members
as set forth in the Provider Manual. Nevertheless, Health Plan may
require transfer of Members for any reason, and Medical Group may
request that Health Plan transfer Medical Group Members to another of
Health Plan's Participating Providers if Medical Group is unable to
provide the Covered Services required by this Agreement for reasons
related to capacity of Medical Group and its Participating Providers.
In addition, Medical Group may request that Health Plan transfer a
Medical Group Member to another of Health Plan's Participating
Providers in the event of a material breakdown in the
physician-patient relationship. Health Plan shall evaluate such
requests considering the best interests of the Member. In the event
Health Plan grants a request for transfer of a Member by Medical
Group, the transfer shall not be effective until the end of the month
following the month in which the Member receives notice of transfer,
unless the Member agrees to an earlier transfer and Health Plan has
made arrangements with another of Health Plan's Participating
Providers to accept the Member.
2.6 MEDICAL RECORDS. Medical Group and its Participating Providers shall
maintain all patient medical records relating to Covered Services
provided to Members, in such form and containing such information as
required by the QI Program, Accreditation Organizations and State and
Federal Law. Medical records shall be maintained in a manner that is
current, detailed, organized and permits effective patient care and
quality review by Medical Group and Health Plan pursuant to the QI
Program. Medical records shall be maintained in a form and physical
location which is accessible to Medical Group's Participating Providers,
Health Plan, Government Agencies and Accreditation Organizations. Upon
request, Medical Group and its Participating Providers shall provide to
Health Plan, at Medical Group's expense, copies of Member
<PAGE>
medical records for purposes of conducting quality assurance, case
management and utilization reviews, credentialing and peer review, claims
processing, verification and payment, resolving Member grievances and
appeals and other activities reasonably necessary for the proper
administration of the Managed Care Plans consistent with State and
Federal Law. Medical Group and its Participating Providers shall
maintain the confidentiality of all Member medical records and treatment
information in accordance with State and Federal Law. Medical records
shall be retained by Medical Group and its Participating Providers for at
least five (5) years following the provision of Covered Services. The
provisions of this Section shall survive termination of this Agreement
for the period of time required by State and Federal Law.
2.7 INSURANCE. Medical Group, at its sole cost and expense, shall maintain
throughout the term of this Agreement and for a period of four years
following termination of this Agreement, professional liability insurance
(i.e., medical malpractice insurance) and managed care errors and
omissions insurance in the minimum amount of $1,000,000 per occurrence
and $3,000,000 annual aggregate, the annual aggregate to apply separately
for each physician and health care practitioner who is insured under the
policy (or policies) purchased by Medical Group. If the policy (or
policies) is canceled or not renewed and coverage is provided on a
claims-made basis, Medical Group agrees to exercise any option contained
in the policy (or policies) to extend the reporting period to the maximum
period permitted under the policy (or policies); provided, however, that
Medical Group need not exercise such option if the superseding insurer
will accept all prior claims.
Medical Group, at its sole cost and expense, shall also maintain
throughout the term of this Agreement, workers' compensation insurance
as required by the State of California and general liability
insurance, including but not limited to premises, personal injury and
contractual liability insurance, in a minimum amount of $1,000,000 per
occurrence, combined single limit, bodily injury and property damage,
to insure Medical Group and its employees, agents, and representatives
against claims for damages arising by reason of (i) personal injuries
or death occasioned in connection with the performance of any Covered
Services provided under this Agreement, (ii) the use of any property
and facilities of the Medical Group, and (iii) activities performed in
connection with this Agreement.
Medical Group's Participating Providers who are not insured under the
Medical Group's policy (or policies) shall maintain the same insurance
coverage required of Medical Group under this Section, unless
otherwise specified in the Provider Manual.
All insurance required under this Agreement shall be provided by
insurers who meet Health Plan's standards as set forth in the Provider
Manual. A certificate of insurance shall be issued to Health Plan
prior to the Commencement Date and upon the renewal of the insurance
coverage specified in this Section. The certificate shall provide
that Health Plan shall receive thirty (30) days prior written notice
of cancellation or material reduction in the insurance coverage
specified in this Section. Notwithstanding any other provision of
this Agreement,
<PAGE>
failure to provide the certificate of insurance shall be grounds for
immediate termination of this Agreement.
2.8 FINANCIAL STATEMENTS. Medical Group shall provide to Health Plan within
forty five (45) calendar days of the end of each calendar quarter copies
of its quarterly financial statements, which shall include a balance
sheet, statement of income and statement of cash flow (the "Financial
Statements") prepared in accordance with generally-accepted accounting
principles. Such quarterly Financial Statements shall be certified by
the chief financial officer of Medical Group as accurately reflecting the
financial condition of Medical Group for the period indicated. In
addition, Medical Group shall provide to Health Plan, within forty five
(45) calendar days of the end of each fiscal year, copies of its audited
annual Financial Statements.
2.9 ADMINISTRATIVE REQUIREMENTS.
2.9.1 ADMINISTRATIVE GUIDELINES. Medical Group agrees to perform its
duties under this Agreement in accordance with the administrative
guidelines, policies and procedures set forth in the Provider Manual
and State and Federal Law. Medical Group shall be responsible for
distributing copies of the Provider Manual, as necessary, to its
Participating Providers.
2.9.2 MEDICAL DIRECTOR, HEALTH PLAN COORDINATOR, QUALITY IMPROVEMENT
COMMITTEE AND UTILIZATION MANAGEMENT COMMITTEE. Medical Group shall
designate one of its Participating Providers who is a physician or
osteopath to act as Medical Group's Medical Director and shall
designate an individual to act as the Health Plan coordinator with
Health Plan. The duties of Medical Group's Medical Director and
Health Plan coordinator shall be set forth in the Provider Manual. In
addition, Medical Group shall establish and maintain a quality
improvement committee and a utilization management committee to assist
Health Plan in implementing the QI Program and UM Program with respect
to Medical Group Members.
2.9.3 PARTICIPATION IN HEALTH PLAN ORIENTATION AND TRAINING PROGRAMS.
Medical Group shall require its administrative personnel and its
Participating Providers to participate in Health Plan's orientation
and training programs as described in the Provider Manual.
2.9.4 ENCOUNTER DATA. Medical Group shall maintain and provide to
Health Plan, no later than the fifteenth (15th) day of each month, the
utilization data pertaining to Covered Services provided or arranged
by Medical Group and its Participating Providers for Medical Group
Members during the preceding month as described in the Provider Manual
(the "Encounter Data"). Medical Group shall submit Encounter Data in
accordance with the procedures and standards set forth in the Provider
Manual.
<PAGE>
2.9.5 OTHER DATA AND INFORMATION. Medical Group shall maintain and
provide to Health Plan, upon written request, any and all information
required by Health Plan, State and Federal Law, Government Agencies or
Accreditation Organizations for the administration of Managed Care
Plans. Medical Group shall submit such information and data to Health
Plan in the format and within the time periods specified by Health
Plan.
2.10 MEDICAL GROUP'S FAILURE TO COMPLY WITH AGREEMENT, PROVIDER MANUAL OR
MANAGED CARE PLANS. If Medical Group fails to comply with any
provision(s) of this Agreement, the Provider Manual or the Managed Care
Plans, Health Plan may provide written notice of such failure to Medical
Group, specifying a date at least thirty (30) days following the date of
the notice by which Medical Group must be in compliance with such
provision(s), as reasonably determined by Health Plan. If Medical Group
fails to comply with such provision(s) by the date specified in the
notice, Health Plan shall have the right to cease marketing efforts on
behalf of Medical Group and/or discontinue enrollment of Members with
Medical Group until such time as Medical Group complies with such
provision(s), as reasonably determined by Health Plan. In addition,
Health Plan shall have the right to either (i) collect from Medical Group
or (ii) offset against amounts due Medical Group under this Agreement,
any penalties or other monetary amounts payable by Health Plan to
Government Agencies, Subscriber Groups, Participating Providers or any
other health care providers as a result of Medical Group's failure to
comply with any provision(s) of this Agreement, the Provider Manual or
Managed Care Plans. Health Plan's rights and remedies under this Section
shall be in addition to all other rights and remedies available to Health
Plan to enforce this Agreement, including the right of termination.
2.11 RECIPROCITY AGREEMENTS. Medical Group shall cooperate and develop
arrangements with Health Plan's Participating Providers and other Health
Plan-affiliated entities ("Health Plan Affiliates") to assure reciprocity
of health care services for Members who are not Medical Group Members.
2.11.1 SERVICES PROVIDED BY MEDICAL GROUP. Medical Group shall
provide Covered Services to Members who are not Medical Group Members,
including Members assigned to other Health Plan Participating
Providers, and Members enrolled in the managed care and health benefit
plans of Health Plan Affiliates. Payment for such services shall be at
the Cost of Care. Such services shall include Emergency Services,
Urgently Needed Services and Covered Services provided upon referral
from Health Plan's Participating Providers or Health Plan Affiliates.
2.11.2 SERVICES PROVIDED BY HEALTH PLAN PARTICIPATING PROVIDERS.
Health Plan shall, where contractually available, provide reciprocity
to Medical Group at Health Plan rates for Covered Services provided to
Medical Group Members. Health Plan shall adjudicate and pay such
referred claims on behalf of Medical Group (at
<PAGE>
available reciprocity rates or, if reciprocity rates are unavailable,
at rates negotiated in consultation with Medical Group), shall deduct
the costs of such claims from Medical Group's monthly Capitation
Payments and shall provide Medical Group an accounting thereof. If
both Medical Group and Health Plan have agreements with Participating
Providers, Medical Group's agreements shall be utilized for the
provision of Covered Services under this Agreement and the rates set
forth in Medical Group's agreements shall apply.
2.12 HOSPITAL ADMISSIONS. In recognition of the need for coordination,
continuity and quality of care of Covered Services provided to Medical
Group Members and to ensure continuity and quality of care, Medical Group
agrees to utilize Hospital(s) as the provider of Hospital Services for
Medical Group Members, subject to the following exceptions:
(i) Medical Group Members admitted for Emergency Services or Urgently
Needed Services; and
(ii) Medical Group Members requiring Hospital Services not available at
Hospital.; and
(iii) Medical Group Members directed to any other Health Plan
Participating Provider in accordance with Health Plan's
Utilization Management Program.
Notwithstanding the foregoing, Medical Group Member requests for
treatment at another Health Plan Participating Provider may be granted
due to limited Hospital(s) bed capacity or if such request is in the
Member's best interest, as determined by Health Plan.
2.13 ADDITION OF NEW CLINICS. Medical Group agrees that Health Plan, in its
sole discretion, may add into this Agreement, under the terms and
conditions of this Agreement and within a reasonable time as established
mutually by Health Plan and Medical Group, any future medical group
practices the Medical Group acquires or new site locations the Medical
Group establishes, but any final agreement shall be subject to the
occurrence of the following conditions:
2.13.1 Health Plan has executed contracts with hospital and ancillary
service providers which collectively constitute a service delivery
system;
2.13.2 Health Plan has not elected to delay or abandon the completion
of Managed Care Plans or networks that would provide additional
Members to be covered by this Agreement;
2.13.3 Health Plan has received approval from the appropriate local,
state and federal governmental or quasi-governmental agencies, which
have regulatory or quasi- regulatory powers over Health Plan or its
programs, including, but are not limited to, HCFA and the relevant
state agencies;
<PAGE>
2.13.4 The new Medical Group facility or location has obtained any and
all applicable licenses and permits and is approved by Health Plan
pursuant to Health Plan's credentialing program.
2.14 PARTICIPATION IN HEALTH PLAN PROGRAMS. Medical Group agrees to
participate in any and all Managed Care Plans, provided Health Plan has
requested Medical Group's participation. The addition of new Managed Care
Plans shall be subject to Section 7.9.1.
ARTICLE 3
ADMINISTRATIVE DUTIES OF HEALTH PLAN
3.1 ADMINISTRATION AND PROVISION OF DATA. Health Plan shall perform
administrative, accounting, enrollment, eligibility verification and
other functions necessary for the administration and operation of the
Managed Care Plans. Health Plan shall provide Medical Group with
management information and data reasonably necessary to carry out the
terms and conditions of this Agreement and for the operation of the
Managed Care Plans.
3.2 MARKETING. Health Plan shall make reasonable efforts to market the
Managed Care Plans. Medical Group agrees that Health Plan may, in its
discretion, use Medical Group's name, address and telephone number as
well as the names, addresses and telephone numbers and specialties of its
Participating Providers in Health Plan's marketing and informational
materials including, without limitation, Health Plan's directory of
Participating Providers. Nothing in this Agreement shall be deemed to
require Health Plan to conduct any specific marketing activities on
behalf of Medical Group and its Participating Providers or to identify
Medical Group or its Participating Providers in any specific Health Plan
marketing or informational materials.
3.3 ENROLLMENT AND ASSIGNMENT OF MEMBERS. Health Plan shall be responsible
for distributing the Health Plan Enrollment Packet to all Members upon
enrollment and at open enrollment periods. Health Plan shall provide
benefit information to Members concerning the type, scope and duration of
benefits to which Members are entitled under the Managed Care Plans.
Nothing in this Agreement shall be construed to require Health Plan to
assign any minimum or maximum number of Members to Medical Group or to
utilize Medical Group for any Members in the Medical Group Risk Area.
3.4 ELIGIBILITY INFORMATION. Health Plan shall provide the Eligibility List
to Medical Group on the fifteenth (15th) day of each month.
3.5 BENEFIT DESIGN AND INTERPRETATION; COVERAGE DECISIONS. Health Plan shall
be solely responsible for the benefit design of all Managed Care Plans,
including establishing
<PAGE>
benefits, Premiums and Copayments. Health Plan shall be solely
responsible for interpreting the terms of and making final coverage
determinations under the Managed Care Plans.
3.6 CASE MANAGEMENT. Health Plan shall manage and coordinate Covered
Services for Members with complex medical conditions to ensure that care
is provided in a manner which encourages quality, continuity of care and
cost-effectiveness ("Case Management"). Medical Group shall cooperate
fully with Health Plan in providing information that may be required in
determining the need for Case Management and in the transfer of Members
to designated Health Plan Participating Providers for cost effective
care.
3.7 OUT-OF-AREA MEDICAL SERVICES. Health Plan shall manage and coordinate
Out-of-Area Medical Services. Medical Group shall cooperate fully with
Health Plan in providing information that may be required for
transferring Members back into the Medical Group Risk Area, including
promptly notifying Health Plan of known or suspected Out-of-Area Medical
Services, and shall accept the prompt transfer of Members to the care of
Medical Group and its Participating Providers following the receipt of
Out-of-Area Medical Services.
ARTICLE 4
MANAGED CARE PROGRAM SERVICES
4.1 MANAGED CARE PROGRAM SERVICES. Health Plan shall be accountable for the
performance of the following services for all Managed Care Plans: (I)
quality management and improvement, (ii) utilization management, (iii)
credentialing, (iv) member rights and responsibilities, (v) preventive
health services, (vi) medical record review and (vii) payment and
processing of claims (collectively, "Managed Care Program Services").
Medical Group and its Participating Providers shall participate,
cooperate and comply with Health Plan in the performance of all Managed
Care Program Services. Specific activities related to utilization
management, credentialing and claims processing may be delegated by
Health Plan to Medical Group at such time as Medical Group demonstrates
to Health Plan's satisfaction the ability to perform these functions in
compliance with Health Plan's standards, as amended from time to time.
Before the performance of any activities is delegated to Medical Group,
Health Plan shall conduct a comprehensive audit of Medical Group's
ability and administrative capacity to perform such activities. Medical
Group shall provide all documentation requested by Health Plan and shall
provide Health Plan representatives with on-site access to Medical
Group's facilities and personnel for purposes of conducting such audit.
4.1.1 QUALITY MANAGEMENT AND IMPROVEMENT. Health Plan shall maintain
an ongoing Quality Management and Improvement Program ("QI Program") to
assess and improve
<PAGE>
the quality of clinical care and the quality of service provided to
Members under the Managed Care Plans. The QI Program shall be
maintained in accordance with the requirements of State and Federal
Law and the standards of Accreditation Organizations. Medical Group
and its Participating Providers shall participate, cooperate and
comply with the QI Program.
Medical Group shall, at the written request of Health Plan, make
available its Participating Providers who are physicians to serve on
Health Plan's QI Committee. Medical Group shall establish and maintain
an independent quality improvement committee which shall meet as
frequently as necessary, but at least monthly. A member of the Health
Plan medical services staff may participate in Medical Group's quality
improvement committee meetings. Medical Group shall keep minutes of its
quality improvement committee meetings, a copy of which shall be made
available to Health Plan upon ten (10) days written notice by Health Plan
to Medical Group. If the functions of the quality improvement committee
are performed by the Medical Group's utilization review committee, each
committee must hold separately convened meetings and the minutes of each
meeting must be separately maintained.
Medical Group shall develop written procedures for focused review or
remedial action whenever it is determined by Health Plan's QI Committee
that inappropriate or substandard Covered Services have been furnished or
Covered Services that should have been furnished have not been furnished.
Upon request, Health Plan shall assist Medical Group in the formulation
of such focused review and remedial procedures.
4.1.2 UTILIZATION MANAGEMENT. Health Plan shall maintain an ongoing
Utilization Management Program ("UM Program") to address
pre-authorization, concurrent and retrospective review of the quality,
appropriateness, level of care and utilization of all Covered Services
provided or to be provided to Members under the Managed Care Plans.
The UM Program shall be maintained in accordance with the requirements
of State and Federal Law and the standards of Accreditation
Organizations. Medical Group and its Participating Providers shall
participate, cooperate and comply with the UM Program.
Medical Group shall establish and maintain a utilization review committee
which shall meet as frequently as necessary, but at least weekly. A
member of the Health Plan medical services staff may participate in
Medical Group's utilization review committee meetings. Medical Group
shall keep minutes of its utilization review committee meetings, a copy
of which shall be made available to Health Plan upon ten (10) days
written notice by Health Plan to Medical Group. Medical Group's
utilization review committee shall review elective referrals and hospital
and skilled nursing facility admissions on a prospective basis, and
Emergency Services and Urgently Needed Services requiring hospital
admissions on a retrospective basis. The committee shall also be
responsible for monitoring patterns of care, isolating inappropriate
utilization and performing other management and review duties as
specified in the UM Program.
<PAGE>
4.1.3 CREDENTIALING. Health Plan shall maintain standards, policies
and procedures for credentialing and recredentialing physicians,
hospitals and other health care professionals and facilities that
provide Covered Services to Members under the Managed Care Plans
("Credentialing Program"). The Credentialing Program shall be
maintained in accordance with the requirements of State and Federal
Law and the standards of Accreditation Organizations. Medical Group
and its Participating Providers shall participate, cooperate and
comply with Health Plan's Credentialing Program.
4.1.4 MEMBER RIGHTS AND RESPONSIBILITIES. Health Plan shall inform
Members of their rights and responsibilities under each Managed Care
Plan, provide Members with membership cards and member handbooks,
distribute periodic communications to Members, process Member
complaints and grievances and respond to inquiries and requests from
Members regarding Managed Care Plans (collectively "Member Services").
Medical Group and its Participating Providers shall participate,
cooperate and comply with Health Plan's Member Services activities.
4.1.5 PREVENTIVE HEALTH SERVICES. Health Plan shall develop
preventive health guidelines for the prevention and early detection of
illness and disease ("Preventive Health Guidelines') and shall
encourage Members to use preventive health services. The Preventive
Health Guidelines shall be maintained in accordance with the standards
of Accreditation Organizations and shall be distributed to
Participating Providers. Medical Group and its Participating Providers
shall provide preventive health services to Medical Group Members in
accordance with the Preventive Health Guidelines.
4.1.6 MEDICAL RECORD REVIEW. Health Plan shall on an ongoing basis
review medical records maintained by Medical Group and its
Participating Providers to assess compliance with the requirements of
State and Federal Law and the standards of Accreditation
Organizations. Medical Group and its Participating Providers shall
maintain medical records in accordance with the provisions of this
Agreement regarding medical records and in accordance with guidelines
regarding medical records set forth in the Provider Manual.
4.1.7 CLAIMS PROCESSING. Health Plan shall establish and maintain
standards, policies and procedures for the timely and accurate
processing and payment of claims for Covered Services provided to
Members ("Claims Processing Guidelines"). The Claims Processing
Guidelines shall be maintained in accordance with the requirements of
State and Federal Law and the Managed Care Plans. Medical Group and
its Participating Providers shall comply with Health Plan's Claims
Processing Guidelines.
4.2 PERFORMANCE OF DELEGATED ACTIVITIES. Health Plan may delegate to Medical
Group, and
<PAGE>
Medical Group shall perform, those activities which are specified in
EXHIBIT 3 to the Base Agreement relating to the following Managed Care
Program Services at such time as Medical Group demonstrates to Health
Plan's satisfaction the ability to perform these functions in compliance
with Health Plan's standards, as amended from time to time: (i)
Utilization Management; (ii) Credentialing; and (iii) Claims Processing
(collectively, the "Delegated Activities").
4.2.1 HEALTH PLAN POLICIES. For all Delegated Activities, Health
Plan shall provide Medical Group with Health Plan's standards and
requirements applicable to the Delegated Activities, as amended from
time to time (the "Health Plan Policies") and shall notify Medical
Group of all substantive changes to the Health Plan Policies. Medical
Group may utilize its own policies and procedures for the Delegated
Activities, provided that such policies and procedures are consistent
with the Health Plan Policies. If Medical Group's policies and
procedures are inconsistent with the Health Plan Policies, the Health
Plan Policies shall apply.
4.2.2 SUB-DELEGATION. Medical Group shall not further delegate the
performance of Delegated Activities to any of its Participating
Providers or any other organization or entity without the prior
written consent of Health Plan. Medical Group acknowledges and agrees
that Health Plan is accountable for all Delegated Activities, and
therefore, Medical Group and its Participating Providers agree to
participate, cooperate and comply with Health Plan with respect to all
Delegated Activities.
4.2.3 MAINTENANCE OF INFORMATION AND RECORDS. Medical Group shall
maintain all information and records reviewed or created in connection
with performing the Delegated Activities in a form acceptable to
Health Plan, provide Health Plan with access to such information and
records, and permit Health Plan to review and copy such information
and records, in accordance with the requirements of State and Federal
Law and standards of Accreditation Organizations.
4.2.4 REPORTING OBLIGATIONS. Medical Group shall provide Health Plan
with periodic written reports regarding all Delegated Activities in
the formats specified by Health Plan for each of the Delegated
Activities.
4.2.5 MONITORING/AUDITS. Health Plan shall oversee Medical Group's
performance of Delegated Activities through review of periodic written
reports provided by Medical Group as described above and meetings with
appropriate Medical Group representatives and on-site audits and
assessments of Medical Group. Medical Group shall cooperate,
participate and comply with Health Plan in such monitoring and
oversight activities. Such audits and assessments will be performed
in accordance with the requirements of State and Federal Law and the
standards of Accreditation Organizations. Without limiting the
foregoing, Medical Group agrees that arrangements with its
Participating Providers will permit Medical Group to disclose to
Health Plan its Participating Provider
<PAGE>
credentialing files.
4.3 PAYMENT FOR PERFORMANCE OF DELEGATED ACTIVITIES. Payment for performance
of the Delegated Activities by Medical Group is included in Capitation
Payments made to Medical Group under this Agreement. The following
percentages of Capitation Payments have been allocated to the performance
of Delegated Activities and are included in the Capitation Payments:
DELEGATED ACTIVITY PERCENTAGE OF CAPITATION PAYMENTS
Utilization Management 2.0%
Credentialing 0.5%
Claims Processing 2.0%
For each month in which the performance of any Delegated Activity is revoked by
Health Plan as provided in this Article 4, the Capitation Payments to Medical
Group shall be reduced by the percentage specified above for such Delegated
Activity. However, for a period of twelve (12) months following the Commencement
Date (the "Grace Period"), Health Plan will provide Claims Processing on behalf
of Medical Group with no reduction in Medical Group's Capitation Payment.
Following expiration of the Grace Period, Health Plan shall deduct the amounts
specified above from the Medical Group's Capitation Payment rate unless and
until Medical Group has assumed responsibility for such services. Health Plan
may modify the payment for Delegated Activities effective at the beginning of
any calendar year by providing Medical Group with sixty (60) calendar days prior
written notice.
4.4 REVOCATION OF DELEGATED ACTIVITIES. Health Plan may revoke any or all
Delegated Activities if Health Plan determines that they are not being
performed in accordance with the standards and requirements established
by Health Plan or if Medical Group's performance of Delegated Activities
is inconsistent with, or in violation of, State and Federal Law or
threatens Health Plan's accreditation by any Accreditation Organization.
Health Plan shall provide Medical Group with thirty (30) calendar days
prior written notice specifying the Delegated Activities which Health
Plan intends to revoke, unless Health Plan determines that Medical
Group's continued performance of Delegated Activities presents a risk of
harm to Health Plan Members, in which case the Delegated Activities shall
be revoked immediately. If Medical Group does not conform to the
applicable standards and requirements within such thirty (30) calendar
day notice period, Health Plan shall send a second written notice to
Medical Group confirming the revocation of the Delegated Activities, the
effective date of such revocation and the period of time such revocation
shall remain in effect. During this period, Medical Group will take
corrective action to conform with applicable standards and requirements
established by Health Plan. At the end of such period, Health Plan shall
evaluate Medical Group's corrective action, determine whether Medical
Group is able to resume performance of the Delegated Activities, and
provide written notice to Medical Group of such determination.
<PAGE>
The written notices from Health Plan to Medical Group under this
Section shall specify the adjustments to Capitation Payments as a
result of the revocation of any Delegated Activities in accordance
with the allocations set forth in this Article 4. If only a portion
of a specific Delegated Activity is revoked (e.g., Medical Group
continues to perform some, but not all, of a specific Delegated
Activity), Health Plan shall have the right to adjust the allocations
set forth in this Article 4 to reflect the portion of the specific
Delegated Activity which continues to be performed by Medical Group.
Notwithstanding any other provision of the Agreement, the written
notices from Health Plan to Medical Group under this Section shall be
deemed valid and enforceable modifications to the Agreement, whether
or not signed by Medical Group.
Upon revocation of any of the Delegated Activities, Health Plan will
resume responsibility for performing such activities, and Medical
Group and its Participating Providers shall continue to cooperate,
participate and comply with Health Plan with respect to the
performance of such activities.
ARTICLE 5
COMPENSATION
5.1 CAPITATION PAYMENTS. Health Plan shall make monthly Capitation Payments
to Medical Group as payment for providing and arranging Covered Services
to Medical Group Members for each Managed Care Plan, as specified in this
Agreement and in the applicable Product Attachment.
5.1.1 DUE DATE. Except as provided in Exhibit B to Product Attachment
B1 hereof, each Capitation Payment shall be due and payable on the
fifteenth (15th) day of the month for the current month's Covered
Services.
5.1.2 DOCUMENTATION. Health Plan shall provide Medical Group
appropriate documentation in support of each Capitation Payment.
5.1.3 RETROACTIVE ADJUSTMENTS. Capitation Payments shall be subject
to retroactive adjustments either upward or downward due to
retroactive changes in the Premium for each Managed Care Plan as
specified in the applicable Product Attachment and retroactive changes
in the number of Medical Group Members for each Managed Care Plan.
Retroactive adjustments shall be made within thirty (30) days after
the adjustment is determined.
5.2 ADJUSTMENT FOR CLAIMS PROCESSING; DEPOSIT. Health Plan shall deduct from
Medical Group's monthly Capitation Payment an amount reasonably estimated
by Health Plan to be necessary for Health Plan to process and pay claims
for Medical Group Services which are not provided directly by Medical
Group and its employed Participating Providers (the "Claims Processing
Withhold"). Initially, the Claims Processing
<PAGE>
Withhold shall be equal to the current average claims cost for outside
providers as of the Commencement Date. The Claims Processing Withhold
shall be increased or decreased each month to more accurately reflect
Medical Group's actual and expected claims experience. For any period in
which Medical Group has been delegated full responsibility for processing
claims for Medical Group Services which are not provided directly by
Medical Group and its employed Participating Physicians, the Claims
Processing Withhold will be zero.
5.3 ADJUSTMENT FOR OUT-OF-AREA MEDICAL SERVICES. Medical Group shall be
responsible for twenty percent (20%) of the actual costs incurred by
Health Plan in providing Out-of-Area Medical Services to Medical Group
Members. This amount shall be deducted from Medical Group's Capitation
Payment based on the actual costs incurred by Health Plan in paying
claims for Out-of-Area Medical Services during the previous month.
5.4 ADJUSTMENT FOR REVOCATION OF DELEGATED ACTIVITIES. Health Plan shall
deduct the amounts specified in Article 4, above, for any Delegated
Activity which is revoked by Health Plan in accordance with the
provisions of Article 4.
5.5 INCENTIVE PROGRAMS. Incentive programs are designed to ensure that
Health Plan, Medical Group and, for some programs, Hospital work
collaboratively to deliver Covered Services in an effective and efficient
manner by ensuring appropriate utilization of Covered Services. Incentive
programs for each Managed Care Plan are set forth in the applicable
Product Attachment.
5.5.1 INCENTIVE PROGRAM WITHHOLD. Health Plan shall establish a
single withhold from Medical Group's monthly Capitation Payment for
purposes of offsetting potential deficits for the combined incentive
programs, excluding the Split Capitation Commercial Hospital Incentive
Program and the Split Capitation Secure Horizons Hospital Incentive
Program for which separate withholds may be established. The monthly
incentive withhold shall initially be 0 percent (0%) of the Premium
for each Managed Care Plan, as described in the applicable Product
Attachment. Health Plan, in its sole discretion, shall prospectively
adjust the withhold based on Medical Group's experience under the
combined incentive programs at the time of the program settlements
described below. In no event shall the withhold exceed 0 percent (0%)
of the monthly Capitation Payment.
5.5.2 INCENTIVE PROGRAM SETTLEMENTS. Health Plan shall conduct
combined settlements for all of the incentive programs for Managed
Care Plans applicable to Medical Group, excluding the Split Capitation
Commercial Hospital Incentive Program and the Split Capitation Secure
Horizons Hospital Incentive Program, for which separate settlements
will be conducted. Surpluses and deficits under each of the incentive
programs shall be aggregated and offset against one another. Health
Plan will conduct an estimated calculation after six (6) months (the
"Interim Calculation") and a final calculation annually (the "Final
Calculation") based on the calendar
<PAGE>
year. The incentive program withhold described above shall be refunded
to the Medical Group at the time of the incentive program settlements,
except that Medical Group's share of any incentive program deficits
shall be deducted from such refund. Except as otherwise provided in
the exhibits hereto, payments under the combined incentive programs
will be due from the owing party within one hundred and twenty (120)
days following the end of the six (6) months for the Interim
Calculation and within one hundred and eighty (180) days following the
end of the calendar year for the Final Calculation. Medical Group
shall have thirty (30) days from the date of written notice to audit
and submit any revisions to the incentive program settlement to Health
Plan. Any submitted revisions must be approved by Health Plan and such
approval shall not be unreasonably withheld. Health Plan shall then
have thirty (30) days to make any necessary adjustment to the
calculation and return the itemized calculation to Medical Group.
Such calculation shall be considered the final calculation unless
Medical Group and Health Plan agree to extend the calculation process.
Any amounts owing shall be paid to the appropriate party within
thirty (30) days of the release of the final itemized calculation. In
the event that claims for non-Participating Providers were incurred
during the calendar year in question but were not paid until after the
final calculation, such costs shall be carried forward and applied to
the subsequent calendar year's Hospital Incentive Program as an
expense for that calendar year. Only claims to non-contracted
providers will be carried forward. For the Interim Calculation, the
payment due will be limited to seventy five percent (75%) of the
calculated amount due to account for incurred but not received claims.
To the extent a Medical Group deficit has been carried forward from a
prior settlement period, this deficit shall be offset against amounts
due to Medical Group hereunder.
Prior to the Commencement Date, the terms of Product Attachment C
which relate to the timing of incentive payments due Medical Group
shall be amended to reflect the terms of the applicable hospital
agreement. Notwithstanding any language to the contrary in the
current Product Attachment C, Health Plan shall not offset incentive
payments among capitated hospital funds.
5.5.3 INCENTIVE PROGRAM COMPLIANCE WITH STATE AND FEDERAL LAW.
Health Plan and Medical Group acknowledge and agree that the payments
which may be made directly or indirectly under the incentive programs
described in this Agreement are not made as an inducement to reduce or
limit Covered Services to any specific Member. Medical Group
acknowledges and agrees that any payments which may be made directly
or indirectly under physician incentive programs Medical Group may
utilize with respect to its Participating Providers shall not be made
as an inducement to reduce or limit Covered Services to any specific
Member. Medical Group further acknowledges and agrees that the
incentive programs described in this Agreement shall be subject to
modification by Health Plan during the term of this Agreement in order
to comply with changes in State and Federal Law, and
<PAGE>
Medical Group further agrees to modify any physician incentive
programs utilized with respect to its Participating Providers to
comply with such changes.
5.5.4 LIMITATION ON MEDICAL GROUP'S RISK. In the event Medical Group
incurs an obligation under the overall incentive program settlement
described above, Medical Group shall not be responsible for
reimbursing Health Plan nor shall Health Plan offset the Medical
Group's obligation against Medical Group's Capitation Payments due
under this Agreement. Health Plan shall carry forward any Medical
Group obligations as the result of an incentive program obligation and
the amount carried forward shall be offset against amounts otherwise
due to Medical Group under future settlements for the combined
incentive programs. Notwithstanding the foregoing, Medical Group
shall be responsible for reimbursing Health Plan for its portion of
any deficit under the Pharmacy Incentive Program.
5.6 STOP-LOSS AND REINSURANCE PROGRAMS
5.6.1 INDIVIDUAL STOP-LOSS. Medical Group shall comply with the
applicable individual stop loss provisions set forth in the Product
Attachments.
5.6.2 REINSURANCE PROGRAM. Where Hospitals are paid on a per diem
basis, Health Plan shall provide Reinsurance protection in order to
limit Medical Group's financial risk for Hospital Services under the
Professional Capitation Commercial Hospital Incentive Program and
Professional Capitation Secure Horizons Hospital Incentive Program
(the "Hospital Incentive Programs") to a specified dollar amount per
Medical Group Member per calendar year (the "Reinsurance Deductible"),
while encouraging Medical Group's continuing involvement with Medical
Group Member's care by sharing a portion of the financial
responsibility for Hospital Services which exceed the Reinsurance
Deductible ("Reinsurance Coinsurance"). The Reinsurance Deductible and
Reinsurance Coinsurance for Medical Group are specified in each
applicable Product Attachment. Notwithstanding any other provision of
this Agreement, Health Plan may amend the Reinsurance Deductible and
Reinsurance Coinsurance on an annual basis effective at the beginning
of any calendar year by providing sixty (60) calendar days prior
written notice to Medical Group. For Hospital Services which exceed
the Reinsurance Deductible, the Reinsurance Coinsurance shall be based
on actual amounts paid by Health Plan, subject to the Medical Group's
compliance with the procedures set forth in the Provider Manual and
the provisions of this Section set forth below.
5.6.3 SUBMISSION OF ISL AND REINSURANCE CLAIMS. Medical Group shall
submit all claims under the ISL Program and Reinsurance Program in
accordance with the procedures set forth in the Provider Manual.
Health Plan shall pay claims under the ISL Program and Reinsurance
Program only if such claims are submitted within one (1) year
following the date the claim is incurred.
<PAGE>
5.6.4 NOTIFICATION OF CLAIMS. Medical Group shall provide written
notification to Health Plan when Medical Group Services or Hospital
Services for any Medical Group Member(s) equal fifty percent (50%) of
the ISL Deductible or fifty percent (50%) of the Reinsurance
Deductible, respectively. Such written notification shall be provided
to Health Plan no later than the fifteenth (15th) day of the month
following the month in which such threshold is reached. Medical Group
acknowledges and agrees that if Medical Group fails to provide the
written notice required by this Section within the time frame
specified in this Section, Medical Group shall be financially
responsible for ten percent (10%) of all Medical Group Services or ten
percent (10%) of all Hospital Services provided to the Medical Group
Member(s) in excess of the ISL Deductible or Reinsurance Deductible,
as applicable, which amount shall be in addition to the ISL
Coinsurance or Reinsurance Coinsurance, as applicable.
5.6.5 OPT-OUT FROM ISL AND/OR REINSURANCE PROGRAMS. Subject to
Health Plan's approval, Medical Group may elect to opt out of the ISL
Program or Reinsurance Program, effective upon the Commencement Date
or the beginning of any calendar year. In such event, Medical Group
shall be required to obtain stop-loss coverage from a third-party
insurance carrier acceptable to Health Plan and in the amounts
required by Health Plan and State and Federal Law. In order to
opt-out of Health Plan's ISL Program or Reinsurance Program, Medical
Group must provide written notice to Health Plan at least thirty (30)
days prior to the beginning of the calendar year. Such notice shall
specify the name of the third-party insurance carrier, and proposed
effective date, coverage levels and charges. If Health Plan does not
object to such coverage in writing within fifteen (15) days of the
date of the notice, Medical Group shall be required to purchase such
coverage as of the effective date specified in the notice.
5.7 PAYMENTS FOLLOWING TERMINATION OF AGREEMENT. Following termination of
this Agreement and continuing for each month in which the number of
Medical Group Members continues to be greater than or equal to two
hundred (200), Health Plan shall compensate Medical Group for providing
and arranging Covered Services to Medical Group Members under the same
terms and conditions which applied prior to termination of this
Agreement. For any month following termination of this Agreement in
which the number of Medical Group Members is less than two hundred (200),
Health Plan shall compensate Medical Group for providing Medical Group
Services to Medical Group Members at the Cost of Care.
5.8 COST OF CARE. Certain provisions of this Agreement require that Medical
Group provide health care services which are not covered by Capitation
Payments at Cost of Care and certain provisions of this Agreement require
that Medical Group Services be valued at
<PAGE>
Cost of Care. For purposes of this Agreement, "Cost of Care" shall mean
the amount determined under Health Plan's fee schedule, attached as
EXHIBIT 1 to the Base Agreement for such services. Health Plan may
revise its fee-schedule from time to time by providing thirty (30) days
prior written notice to Medical Group; provided, however, that the fee
schedule utilized under this Agreement shall be no less favorable to
Medical Group than the fee schedule utilized by Health Plan for other
Participating Providers in the state.
5.9 COLLECTION OF COPAYMENTS. Medical Group and its Participating Providers
shall be responsible for the collection of Copayments upon rendering
Medical Group Services to Members in accordance with the applicable
Subscriber Agreement. Any Copayments which are stated as a percentage
shall be calculated using the Cost of Care for such Medical Group
Services.
5.10 COLLECTION OF CHARGES FROM THIRD PARTIES. Except as provided in Section
5.11, procedures for collection of charges from third parties shall be
governed by the terms of the Provider Manual.
5.11 COORDINATION OF BENEFITS. Medical Group shall cooperate with and
support, as mutually agreed upon by the parties, Health Plan's
coordination of benefits rights. Coordination of benefits procedures may
be further defined in the Provider Manual.
5.11.1 PLAN IS PRIMARY. If a Member possesses health benefits
coverage through another policy which is secondary to Health Plan
under applicable coordination of benefits rules, including the
Medicare secondary payor program, Medical Group shall accept payment
from Health Plan for Covered Services as provided herein as full
payment for such Covered Services, except for applicable Copayments.
Member shall have no obligation for any fees, regardless of whether
secondary insurance is available.
5.11.2 PLAN IS SECONDARY. If a Member possesses health benefits
coverage through another policy which is primary to Health Plan under
applicable coordination of benefits rules, including the Medicare
secondary payor program, or if Member is entitled to payment under a
workers' compensation policy or automobile insurance policy, Medical
Group may pursue payment from the primary payor or workers'
compensation carrier consistent with applicable law and regulations
and Medical Group's contract, if any, with the primary payor. In such
event, Health Plan's responsibility shall equal the amount of
out-of-pocket expenses (i.e., Copayments and deductibles) that Member
would incur in the absence of Health Plan's secondary coverage, minus
the ISL Deductible and ISL Coinsurance.
5.12 OFFSETTING. Except as may otherwise be specifically provided in this
Agreement, Health Plan shall have the right to offset any and all amounts
owed by Medical Group to Health Plan against amounts, including
Capitation Payments, owed by Health Plan to
<PAGE>
Medical Group provided that Health Plan provides ninety (90) days prior
written notice of such amounts to Medical Group and Medical Group does
not pay such amounts within such ninety (90) day period. This right to
offset shall include, without limitation, Health Plan's right to offset
the following amounts owed to Health Plan by Medical Group: (I) amounts
owed by Medical Group under the incentive programs described in this
Agreement and in the Product Attachments, (ii) amounts owed by Medical
Group for Covered Services provided outside the Medical Group Risk Area,
and (iii) amounts owed by Medical Group due to overpayments or payments
made in error by Health Plan. Notwithstanding the foregoing, Health
Plan's right to offset shall not extend to Medical Group's risk sharing
arrangements with capitated hospitals.
5.13 ADEQUACY OF COMPENSATION. Medical Group agrees to accept payment as
provided herein as payment in full for providing and arranging the
Covered Services required under this Agreement, whether that amount is
paid in whole or in part by Member, Health Plan or any Subscriber,
including other health care plans that pay before Health Plan as required
by applicable state or federal coordination of benefits provisions. This
Section does not prohibit Medical Group from collecting applicable
Copayments or deductibles consistent with the Managed Care Plans.
5.14 SERVICES RENDERED TO INELIGIBLE SUBSCRIBERS - Health Plan agrees to
reimburse Medical Group for Covered Services provided to an ineligible
Member if the Member was listed as eligible on the most current
eligibility list provided to Medical Group by Health Plan. If Health
Plan is in receipt of billings to such ineligible Member from Medical
Group which demonstrate proof of having sent the Member or the Member's
legal guardian three (3) bills no less than thirty (30) days apart,
Health Plan will reimburse Medical Group for services provided which
would have been Covered Services if the Member had been eligible.
Reimbursement shall be at Cost of Care, minus any amounts collected by
Medical Group from other sources. If subsequent to payment by Health
Plan, Medical Group receives any payment from another source for the
services, then Medical Group shall reimburse Health Plan up to the amount
previously received from Health Plan so that Medical Group's full payment
does not exceed the Cost of Care.
5.15 RENEGOTIATION OF RATES AT THE END OF ONE YEAR. Either party may initiate
renegotiation of rates under this Agreement on the twelve (12) month
anniversary of the Commencement Date or, subsequently, at the expiration
of the Initial Term, by providing the other party prior written notice of
intent to renegotiate. Such notice of intent to renegotiate must be
provided at least ninety (90) days prior to the end of the twelve (12)
month anniversary of the Commencement Date or, for renegotiation at the
end of the Initial Term, ninety (90) days prior to the expiration of the
Initial Term. If proper notice is provided, the parties shall meet to
discuss rates in good faith and shall diligently pursue a prompt
resolution of the renegotiation. The rates under this Agreement shall
remain in effect unless and until the parties each agree through a
written amendment signed by both parties to revise the rates.
<PAGE>
ARTICLE 6
TERM AND TERMINATION
6.1 TERM. The term of this Agreement shall be for thirteen (13) months
commencing on November 6 1996 (the "Commencement Date") and ending on
December 31, 1997. Thereafter, the term of this Agreement shall be
automatically extended for one (1) year on each January 1 ("Anniversary
Date"), unless either party provides the other with written notice of
such party's intention not to extend the term at least one hundred twenty
(120) calendar days prior to the Anniversary Date or until this Agreement
is appropriately terminated by either party as provided herein.
6.2 TERMINATION OF AGREEMENT WITH CAUSE. Either Health Plan or Medical Group
may terminate this Agreement for cause as set forth below, subject to the
notice requirement and cure period set forth below.
6.2.1 CAUSE FOR TERMINATION OF AGREEMENT BY MEDICAL GROUP. The
following shall constitute cause for termination of this Agreement by
Medical Group:
(i) NON-PAYMENT. Failure by Health Plan to pay Capitation Payments
due Medical Group hereunder within thirty (30) days of the
Capitation Payment due date or failure by Health Plan to make any
other payments due Medical Group hereunder within forty-five (45)
days of any such payment's due date.
(ii) BREACH OF MATERIAL TERM AND FAILURE TO CURE. Health Plan's
breach of any material term, covenant, or condition and
subsequent failure to cure such breach as provided below.
6.2.2 CAUSE FOR TERMINATION OF AGREEMENT BY HEALTH PLAN. The
following shall constitute cause for termination of this Agreement by
Health Plan:
(i) FINANCIAL FAILURE OF MEDICAL GROUP. Health Plan's reasonable
determination of Medical Group's anticipated inability to provide
or arrange for Covered Services as a result of the likelihood of
Medical Group's lack of financial resources, other than due to
Health Plan's non- payment of amounts due Medical Group
hereunder. Medical Group shall have the opportunity to dispute
such determination by Health Plan by providing reasonable
evidence and assurances of financial stability and capacity to
perform under this Agreement.
(ii) FAILURE TO PROVIDE QUALITY SERVICES. Medical Group's failure to
arrange or provide Covered Services in accordance with the
standards set forth in this Agreement and Health Plan's QI
Program and UM Program. Notwithstanding the foregoing, Health
Plan reserves the right to immediately withdraw from Medical
Group or any of its Participating Providers any or all Members in
the event the health or safety of Members is endangered by the
actions of Medical
<PAGE>
Group or any of its Participating Providers or as a result of
continuation of this Agreement.
(iii) BREACH OF MATERIAL TERM AND FAILURE TO CURE. Medical
Group's breach of any material term, covenant or condition of
this Agreement and subsequent failure to cure such breach as
provided below.
6.2.3 NOTICE OF TERMINATION AND EFFECTIVE DATE OF TERMINATION. The
party asserting cause for termination of this Agreement (the
"terminating party") shall provide written notice of termination to
the other party. The notice of termination shall specify the breach
or deficiency underlying the cause for termination. The party
receiving the written notice of termination shall have thirty (30)
calendar days from the receipt of such notice to cure the breach or
deficiency to the satisfaction of the terminating party (the "Cure
Period"). If such party fails to cure the breach or deficiency to the
satisfaction of the terminating party within the Cure Period or if the
breach or deficiency is not curable, the terminating party shall
provide written notice of failure to cure the breach or deficiency to
the other party following expiration of the Cure Period. This
Agreement shall terminate upon receipt of the written notice of
failure to cure or at such other date as may be specified in such
notice. During the Cure Period, Health Plan may cease marketing
efforts for Medical Group and discontinue enrollment of Members with
Medical Group.
6.2.4 TERMINATION OF AGREEMENT UPON CONSOLIDATION OF HEALTH CARE
SERVICE PLAN LICENSES. Notwithstanding any other provision of this
Agreement, in the event that the health care service plan licenses of
Health Plan and FHP, Inc. are consolidated, Health Plan may, at its
option, terminate this Agreement at any time on or after the effective
date of such consolidation by providing Medical Group with sixty (60)
days prior written notice. In the event that Health Plan terminates
this Agreement under this Section, (i) all Medical Group Members who
are then covered under this Agreement shall be immediately covered
under the provisions of the Medical Services Agreement then in effect
between FHP, Inc. and Medical Group, and (ii) any and all settlements
under the incentive programs described in this Agreement which have
not been performed and remain outstanding shall be carried forward and
applied to the incentive programs described in the Medical Services
Agreement then in effect between FHP, Inc. and Medical Group.
6.3 AUTOMATIC TERMINATION UPON REVOCATION OF LICENSE OR CERTIFICATE. This
Agreement shall automatically terminate upon the revocation, suspension
or restriction of any license, certificate or other authority required
to be maintained by Medical Group or Health Plan in order to perform the
services required under this Agreement or upon the Medical Group's or
Health Plan's failure to obtain such license, certificate or authority.
6.4 TRANSFER OF MEDICAL RECORDS. Following termination of this Agreement, at
Health
<PAGE>
Plan's request, Medical Group and its Participating Providers shall copy
all requested Member patient medical files in the possession of Medical
Group or its Participating Providers and forward such files to another
provider of Covered Services designated by Health Plan, provided such
copying and forwarding is not otherwise objected to by such Members. The
copies of such medical files may be in summary form. The cost of copying
the patient medical files shall be borne equally by Medical Group and
Health Plan. Medical Group shall cooperate with Health Plan in
maintaining the confidentiality of such Member medical records at all
times.
6.5 REPAYMENT UPON TERMINATION. Within one hundred eighty (180) calendar
days of the effective date of termination of this Agreement, an
accounting shall be made by Health Plan of the monies due and owing
either party and payment shall be forthcoming by the appropriate party to
settle such balance within thirty (30) calendar days of such accounting.
Either party may request an independent audit of such Health Plan
accounting by a mutually acceptable independent certified public
accountant and such audit shall be equally paid for by both parties. The
parties agree to abide by the findings of such independent audit.
Appropriate payment, if any, by the appropriate party shall be made
within thirty (30) calendar days of such independent audit.
6.6 TERMINATION NOT AN EXCLUSIVE REMEDY. Any termination by either party
pursuant to this Article is not meant as an exclusive remedy and such
terminating party may seek whatever action in law or equity as may be
necessary to enforce its rights under this Agreement.
6.7 PARTICIPATING PHYSICIAN SUBSTITUTION INTO AGREEMENT. Medical Group shall
require that its Participating Physicians who are independent contractors
("Independent Physicians") agree to be bound, at Health Plan's option, to
the terms and conditions of this Agreement in the event of dissolution or
insolvency of Medical Group or in the event of a termination of the
Agreement by Health Plan for cause. The Independent Physicians'
obligations shall continue through the last day of the initial term of
the Agreement (the "Physician Continuation Period"). In case of such
dissolution, insolvency or termination, Health Plan may, at its option,
assume the Medical Group's administrative responsibilities described in
the Agreement. The purpose of this provision is to ensure continuity of
care to Members. Payment to the Independent Physicians during the
Physician Continuation Period shall be at the Cost of Care rates.
ARTICLE 7
GENERAL PROVISIONS
7.1 INDEPENDENT CONTRACTOR RELATIONSHIP. The relationship between Health
Plan and Medical Group is an independent contractor relationship.
Neither Medical Group nor its Participating Providers, employees or
agents are employees or agents of Health Plan and neither Health Plan nor
its employees or agents are members, partners, employees
<PAGE>
or agents of Medical Group. None of the provisions of this Agreement
shall be construed to create a relationship of agency, representation,
joint venture, ownership, control of employment between the parties other
than that of independent parties contracting solely for the purpose of
effectuating this Agreement. Nothing contained in this Agreement shall
cause either party to be liable or responsible for any debt, liability or
obligation of the other party or any third party unless such liability or
responsibility is expressly assumed by the party sought to be charged
therewith.
7.2 INDEMNIFICATION. Medical Group shall defend, indemnify and hold harmless,
and shall cause each of its Participating Providers to defend, indemnify
and hold harmless Health Plan and its directors, officers, employees,
affiliates and agents against any claim, loss, damage, cost, expense or
liability arising out of or related to the performance or nonperformance
by Medical Provider, its Participating Providers, employees or agents of
any Medical Group Services and other services to be performed or arranged
by Medical Group and its Participating Providers under this Agreement.
Health Plan shall defend, indemnify and hold harmless Medical Group
and its directors, officers, employees, affiliates and agents against
any claim, loss, damage, cost, expense or liability arising out of or
related to the performance or nonperformance by Health Plan, its
employees or agents of any services to be performed by Health Plan
under this Agreement.
7.3 PHYSICIAN-PATIENT RELATIONSHIP. Health Plan and Medical Group
acknowledge and agree that Medical Group or each of Medical Group's
Participating Providers shall maintain the physician-patient relationship
with each Member. Nothing contained in this Agreement is intended to
interfere with such physician-patient relationship. Nothing in this
Agreement shall be interpreted to discourage or prohibit Medical Group
and its Participating Providers from discussing treatment options or
providing other medical advice or treatment deemed appropriate by Medical
Group or its Participating Providers. Medical Group or its Participating
Providers shall have the sole responsibility for the medical care and
treatment of Members.
7.4 MEMBER APPEALS AND GRIEVANCES. Health Plan shall be responsible for
resolving Member claims for benefits under the Managed Care Plans and all
other claims against Health Plan. Health Plan shall resolve such claims
utilizing the Member Appeals and Grievance Procedures set forth in the
Subscriber Agreement and the Provider Manual. Medical Group shall assist
Health Plan in the handling of Member complaints, grievances and appeals,
consistent with the Member Appeals and Grievance Procedures. In the
event an oral or written complaint, grievance or appeal is presented to
Medical Group or any of its Participating Providers relating to benefits
or coverage under a Managed Care Plan and is not resolved within two (2)
calendar days, Medical Group or its Participating Provider will
immediately deliver such complaint, grievance or appeal to Health Plan
for handling pursuant to the Member Appeals and Grievance Procedures. At
the end of each month, Medical Group shall submit a report to Health Plan
of all Member complaints and grievances which were received and resolved
by Medical Group
<PAGE>
and its Participating Providers within two (2) calendar days during the
previous month. The monthly report shall include the Member's name and
Health Plan identification number, date of complaint, nature of
complaint, and the resolution of complaint. Medical Group and its
Participating Providers shall comply with all final determinations made
by Health Plan through the Member Appeals and Grievance Procedures.
Member claims against Medical Group or its Participating Providers, other
than claims for benefits under the Managed Care Plans, are not subject to
the Member Appeals and Grievance Procedures and are not governed by this
Agreement.
7.5 DISPUTES BETWEEN MEDICAL GROUP OR ITS PARTICIPATING PROVIDERS AND MEMBER.
Any controversies or claims between Medical Group or its Participating
Providers and a Member arising out of the performance of this Agreement
by Medical Group or the Medical Group's Participating Provider, other
than claims for benefits under Managed Care Plans, are not governed by
this Agreement. Medical Group or its Participating Provider and the
Member may seek any appropriate legal action to resolve such controversy
or claim deemed necessary.
7.6 DISPUTES BETWEEN HEALTH PLAN AND MEDICAL GROUP
7.6.1 DISPUTE RESOLUTION PROCEDURE. Health Plan has established a
Provider Dispute Resolution Procedure, set forth in the Provider
Manual, to provide a mechanism by which Health Plan's Participating
Providers, including Medical Group and any of its Participating
Providers, may submit to Health Plan certain disputes arising out of
the performance of this Agreement or relating to the decisions made by
Health Plan under this Agreement for resolution on an informal basis.
Any dispute submitted pursuant to the Provider Dispute Resolution
Procedure should be addressed to the appropriate Health Plan person(s)
or department(s) at the address and/or telephone number identified in
the Provider Manual. Any provider dispute which is not resolved
informally through the Provider Dispute Resolution Procedure may be
submitted for arbitration as provided in Section 7.6.2 below.
7.6.2 ARBITRATION. Any controversy, dispute or claim arising out of
the interpretation, performance or breach of this Agreement which is
not resolved pursuant to the Provider Dispute Resolution Procedure
specified above shall be resolved by binding arbitration at the
request of either party, in accordance with the commercial rules of
the American Arbitration Association. Such arbitration shall occur in
Los Angeles, California, unless the parties mutually agree to have
such proceeding in some other locale. The arbitrators shall apply
California substantive law and federal substantive law where state law
is preempted. Civil discovery for use in such arbitration may be
conducted in accordance with the provisions of California law, and the
arbitrator selected shall have the power to enforce the rights,
remedies, duties, liabilities and obligations of discovery by the
imposition of the same terms, conditions and penalties as can be
imposed in like
<PAGE>
circumstances in a civil action by a court of competent jurisdiction
of the State of California. The provisions of California law
concerning the right to discovery and the use of depositions in
arbitration are incorporated herein by reference and made applicable
to this Agreement.
The arbitrators shall have the power to grant all legal and equitable
remedies and award compensatory damages provided by California law,
except that punitive damages shall not be awarded. The arbitrators shall
prepare in writing and provide to the parties an award including factual
findings and the legal reasons on which the decision is based. The
arbitrators shall not have the power to commit errors of law or legal
reasoning, and the award may be vacated or corrected pursuant to the term
of California law for any such error.
Notwithstanding the above, in the event either Medical Group or Health
Plan wishes to obtain injunctive relief or a temporary restraining order,
such party may initiate an action for such relief in a court of law and
the decision of the court of law with respect to the injunctive relief or
temporary restraining order shall be subject to appeal only through the
courts of law. The courts of law shall not have the authority to review
or grant any request or demand for damages.
7.7 NOTICE. All notices required or permitted by this Agreement shall be in
writing and may be delivered in person or may be sent by registered or
certified mail or U.S. Postal Service Express Mail, with postage prepaid,
or by Federal Express or other overnight courier that guarantees next day
delivery, or by facsimile transmission, and shall be deemed sufficiently
given if served in the manner specified in this Section. The addresses
set forth on the signature page shall be the particular party's address
for delivery or mailing of notice purposes.
The parties may change the names and addresses through written notice
in compliance with this Section. Any notice sent by registered or
certified mail, return receipt requested, shall be deemed given on the
date of delivery shown on the receipt card, or if no delivery date is
shown, the postmark date. Notices delivered by U.S. Postal Service
Express mail, Federal Express or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after
delivery of the notice to the United States Postal Service, Federal
Express or overnight courier. If any notice is transmitted by
facsimile transmission or similar means, the notice shall be deemed
served or delivered upon telephone confirmation of receipt of the
transmission, provided a copy is also delivered via delivery or mail.
7.8 ASSIGNMENT. Except as specified in Section 7.12 below, this Agreement
and the rights, interests and benefits hereunder shall not be assigned,
transferred or pledged in any way by Medical Group or Health Plan and
shall not be subject to execution, attachment or similar process.
However, Health Plan may assign this Agreement and its rights, interests
and benefits hereunder to any entity which is a corporate affiliate of
Health Plan.
<PAGE>
7.9 AMENDMENTS
7.9.1 AMENDMENTS TO MANAGED CARE PLANS. Health Plan may amend or
change any or all provisions of the Managed Care Plans by providing
thirty (30) calendar days prior written notice to Medical Group. Such
amendment shall be binding upon Medical Group at the end of the thirty
(30) calendar day period. However, Health Plan shall obtain Medical
Group's written consent to the terms governing Medical Group's
provision of Covered Services under a Managed Care Plan, if the
Managed Care Plan is not, at the time of its addition to this
Agreement, one of the Product Attachments to this Agreement.
7.9.2 AMENDMENTS TO PROVIDER MANUAL. Health Plan may amend the
Provider Manual by providing thirty (30) calendar days prior written
notice to Medical Group. Such amendments shall be binding upon Medical
Group at the end of the thirty (30) calendar day period, except as
provided in Section 7.9.4 of this Agreement.
7.9.3 AMENDMENTS TO AGREEMENT. Health Plan may amend this Agreement
by providing thirty (30) calendar days prior written notice to Medical
Group in order to maintain compliance with State and Federal Law or to
comply with any directive from a Government Agency. Such amendment
shall be binding upon Medical Group at the end of the thirty (30)
calendar day period, except as provided in Section 7.9.4 of this
Agreement. All other amendments to this Agreement shall be effective
only upon mutual written agreement of the parties or as provided in
Section 7.9.4 of this Agreement.
7.9.4 MATERIAL AMENDMENTS. In the event Health Plan provides notice of
amendment to the Agreement or the Provider Manual or provides notice
of a material change in benefits under any Managed Care Plan, Medical
Group shall be bound by such amendment unless (i) Medical Group
provides Health Plan with notice of objection within the thirty (30)
calendar day notice period, and (ii) such change affects a material
duty or responsibility of Medical Group, and (iii) the change has a
material adverse economic effect upon Medical Group as reasonably
demonstrated by Medical Group to Health Plan. In such event, Medical
Group and Health Plan shall seek to agree to an amendment to this
Agreement which satisfactorily addresses the effect on Medical
Group's material duty or responsibility and reimburses the material
economic detriment caused to Medical Group. In such event, the
amendment shall not be effective until the parties amend the
Agreement through a written amendment signed by both parties.
Notwithstanding the above, in the event that Health Plan disagrees
with Medical Group's notice of objection and seeks to enforce any
amendment despite such notice, Health Plan agrees that it will meet
with Medical Group in an attempt to resolve the disagreement and if
the disagreement cannot be resolved through meetings, Medical Group
may submit the disagreement to arbitration in accordance with the
provisions of this Agreement.
<PAGE>
7.9.5 AMENDMENTS TO REFLECT SYSTEMS CHANGES. In the event Health
Plan undergoes systems changes which are not anticipated at the time
of the execution of the Agreement, the parties will negotiate in good
faith to revise the Agreement, to the extent amendments to the
Agreement are necessary, for the limited purpose of accommodating the
necessary systems changes.
7.10 CONFIDENTIAL AND PROPRIETARY INFORMATION
7.10.1 INFORMATION CONFIDENTIAL AND PROPRIETARY TO HEALTH PLAN.
Medical Group and its Participating Providers shall maintain
confidential all information designated in this Section. The
information which Medical Group and its Participating Providers shall
maintain confidential (the "Confidential Information") consists of:
(i) the Eligibility List and any other information containing the
names, addresses and telephone numbers of Members which has been
compiled by Health Plan; (ii) lists or documents compiled by Health
Plan which include the names, addresses and telephone numbers of
employers, employees of such employers responsible for health benefits
and the officers and directors of such employers; (iii) Health Plan's
Provider Manual and any of Health Plan's member, employer and
administrative service manuals and all forms related thereto; (iv) the
financial arrangements between Health Plan and any of Health Plan's
Participating Providers; (v) Health Plan underwriting and rating
information and any other information utilized by Health Plan for
determining eligibility or rates for the Managed Care Plans; and (vi)
any other information compiled or created by Health Plan which is
proprietary to Health Plan and which Health Plan identifies in writing
to Medical Group.
7.10.2 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Medical Group and
its Participating Providers shall not disclose or use the Confidential
Information for their own benefit or gain either during the term of
this Agreement or after the date of termination of this Agreement.
Medical Group and its Participating Providers may use the Confidential
Information to the extent necessary to perform their duties under this
Agreement or upon express prior written permission of Health Plan.
Upon the effective date of termination of this Agreement, Medical
Group and its Participating Providers shall provide and return to
Health Plan the Confidential Information in their possession in the
manner specified by Health Plan.
7.10.3 INFORMATION CONFIDENTIAL AND PROPRIETARY TO MEDICAL GROUP.
Medical Group shall provide Health Plan with a written description of
all information proprietary to Medical Group which is confidential and
contains trade secrets of Medical Group (the "Medical Group
Information"). Health Plan shall maintain and shall cooperate with
Medical Group to maintain the confidentiality of Medical Group
Information. Health Plan shall not disclose or use any Medical Group
<PAGE>
Information for its own benefit either during the term of this
Agreement or after the effective date of termination of this
Agreement. Upon termination of this Agreement, Health Plan shall
provide and return to Medical Group all Medical Group Information in
its possession in the manner to be specified by Medical Group.
7.10.4 NAMES, LOGOS AND SERVICE MARKS. Medical Group shall obtain the
written consent of Health Plan prior to using Health Plan's name,
product names, logos and service marks in any of Medical Group's
promotional, marketing or advertising materials or for any other
reason. Health Plan shall obtain the written consent of Medical Group
prior to using Medical Group's name, product names, logos and service
marks in any of Health Plan's promotional, marketing or advertising
materials or for any other reason; provided, however, that Health Plan
may utilize Medical Group's name and address in any of Health Plan's
publications which list the names of Health Plan's contracting
providers without Medical Group's specific consent.
7.11 SOLICITATION OF HEALTH PLAN MEMBERS OR SUBSCRIBER GROUPS. Medical Group
and its Participating Providers shall not directly or indirectly engage
in the practice of solicitation of Members, Subscribers and Subscriber
Groups without Health Plan's prior written consent. Solicitation shall
mean conduct by an officer, agent, employee of Medical Group or its
Participating Providers or their respective assignees or successors
during the term of this Agreement, during any termination notice period
and during the continuing care period described in Section 8.3 which may
be reasonably interpreted as designed to persuade Members, Subscribers or
Subscriber Groups to disenroll from any Managed Care Plan or discontinue
their relationship with Health Plan for any reason. Notwithstanding any
other provision of this Agreement, Medical Group agrees that Health Plan
shall, in addition to any other remedies provided for under this
Agreement, have the right to seek a judicial temporary restraining order,
preliminary injunction, or other equitable relief against Medical Group
and its Participating Providers to enforce its rights under this Section.
7.12 APPROVAL BY HEALTH PLAN OF SALE OR CHANGE IN OWNERSHIP AND CONTROL OF
MEDICAL GROUP. For a period of two (2) years following the Commencement
Date of this Agreement, Health Plan shall have the right to consent to
any proposed sale or change in control of Medical Group or Talbert
Medical Management Corporation ("TMMC"), which consent shall not be
unreasonably withheld by Health Plan. A change in control of Medical
Group or of TMMC shall include any transfer of Medical Group management
functions to a successor entity which is a management company or any
merger, consolidation or sale of TMMC or Medical Group where any
individual, entity or group acquires beneficial ownership of fifty
percent (50%) or more of the voting common stock of TMMC or Medical Group
or any transaction in which TMMC or Medical Group sells its business or
substantially all of its material assets to a successor entity. The
parties acknowledge and agree that, during the two (2) year period
following the Commencement
<PAGE>
Date of this Agreement, Health Plan may reasonably withhold its consent
if the proposed sale or change of control is to an individual, entity or
group that operates HMOs or holds Medicare risk contracts with HCFA.
Medical Group warrants and assures that (i) this Agreement will be
assumed by all successor entities to Medical Group, (ii) all successor
entities to Medical Group will be bound by the terms and conditions of
this Agreement, and (iii) all successor entities to TMMC shall execute a
guaranty identical in form to, that certain Guaranty of Performance, of
even date with this Agreement, executed by TMMC in favor of Health Plan.
In the event that any successor entities to Medical Group assume this
Agreement and have one or more existing provider agreements with Health
Plan ("the existing provider agreement"), Health Plan shall have the
right, in its sole discretion, to require that the successor entities to
Medical Group be bound by the provisions of either: (i) this Agreement;
or (ii) the existing provider agreement; or (iii) a combination of this
Agreement and the existing provider agreement, with respect to any or all
Health Plan Members assigned to Medical Group or successor entities to
Medical Group, as shall be specified by Health Plan by written notice to
the successor entities or management companies. The agreement or
agreements elected by Health Plan for coverage of Health Plan Members
under this Section shall supersede any and all other agreements for such
coverage.
As a condition to Health Plan's consent under this Section, Health Plan
may require successor entities to execute documentation furnished by
Health Plan evidencing their agreement to abide by accordance with the
provisions of this Section.
7.13 CONFIDENTIALITY OF THIS AGREEMENT. To the extent reasonably possible,
each party agrees to maintain this Agreement as a confidential document
and not to disclose the Agreement or any of its terms without the
approval of the other party.
7.14 INVALIDITY OF SECTIONS OF AGREEMENT. The unenforceability or invalidity
of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the balance
of this Agreement.
7.15 CAPTIONS. Captions in this Agreement are descriptive only and do not
affect the intent or interpretation of the Agreement.
7.16 WAIVER OF BREACH. The waiver by either party to this Agreement of a
breach or violation of any provision of this Agreement shall not operate
as or be construed to be a waiver of any subsequent breach or violation
thereof.
7.17 ATTORNEYS' FEES AND COSTS. If any action at law or suit in equity is
brought to enforce or interpret the provisions of this Agreement or to
collect any monies due hereunder, the prevailing party shall be entitled
to reasonable attorneys' fees and reasonable costs, together with
interest thereon at the highest rate provided by law, in addition to any
and
<PAGE>
all other relief to which it may otherwise be entitled.
7.18 MEDICAL GROUP'S AUTHORIZED REPRESENTATIVE. Unless otherwise indicated in
writing to Health Plan, Medical Group warrants and authorizes Talbert
Medical Management Corporation to act as its fully authorized
representative to represent Medical Group in this Agreement and to
receive any and all communications and notices hereunder.
7.19 NO THIRD PARTY BENEFICIARIES. This Agreement shall not create any rights
in any third parties who have not entered into this Agreement, nor shall
this Agreement entitle any such third party to enforce any rights or
obligations that may be possessed by such third party.
7.20 ENTIRE AGREEMENT. This Agreement, including all exhibits, attachments
and amendments hereto, contains all the terms and conditions agreed upon
by the parties regarding the subject matter of this Agreement. Any prior
agreements, promises, negotiations or representations of or between the
parties, either oral or written, relating to the subject matter of this
Agreement, which are not expressly set forth in this Agreement are null
and void and of no further force or effect.
7.21 INCORPORATION OF EXHIBITS, ATTACHMENTS AND PROVIDER MANUAL. The exhibits
and attachments to this Agreement and the Provider Manual are an integral
part of this Agreement and are incorporated in full herein by this
reference.
7.22 MEDICAL GROUP COVENANT NOT TO COMPETE. During the term of this
Agreement, including any renewal term, Medical Group and its
Participating Providers agree not to, directly or indirectly, seek or
obtain a contract with the Health Care Finance Administration for the
purpose of offering a Medicare-risk program or benefit plan. This
section shall not be interpreted to prevent Medical Group and its
Participating Providers from providing or arranging for Covered Services
to Medical Group Members in coordination with Health Plan under the terms
specified in this Agreement or from providing or arranging health care
services pursuant to a contract between Medical Group and any other
licensed health maintenance organization or competitive medical plan.
7.22.1 INDIRECTLY DEFINED. For purposes of this section, the use of
the term "indirectly" shall mean activity of, or conducted by, or
through, any subsidiary or affiliate of Medical Group.
7.22.2 EQUITABLE RELIEF. Medical Group acknowledges and agrees that it
would be difficult to measure the damage to Health Plan from any breach
of Medical Group's obligations under Section 7.22, that injury to Health
Plan from any such breach would be impossible to calculate and that
money damages would therefore be an inadequate remedy for any such
breach. Therefore, Medical Group acknowledges and agrees that Health
Plan, in addition to any of its other rights
<PAGE>
or remedies, shall be entitled to seek injunctive and other equitable
relief in the event of an actual or threatened breach of Section 7.22.
7.23 GUARANTY OF PERFORMANCE BY TMMC. Notwithstanding anything to the
contrary herein, this Agreement shall not become effective unless and
until Talbert Medical Management Corporation executes a Guaranty of
Performance in favor of Health Plan, in a form acceptable to Health Plan,
which unconditionally guarantees all of the obligations of Medical Group
under this Agreement.
7.24 AUDIT. Health Plan agrees that Medical Group shall, upon request and
provision of reasonable notice, have the right to audit claims processed
by the Health Plan on behalf of Medical Group under this Agreement.
7.25 BOARD APPROVAL. This Agreement shall be subject to the prior approval of
the Boards of Directors for TMMC and FHP International Corporation, the
ultimate parent of Health Plan, which approval shall be considered at
board meetings of each corporation.
ARTICLE 8
GOVERNING LAW AND REGULATORY REQUIREMENTS
8.1 GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be construed, interpreted, and enforced in
accordance with, and governed by, the laws of the State of California and
the United States of America, including, without limitation, the Knox-
Keene Health Care Service Plan Act of 1975, as amended, and the
regulations adopted thereunder by the California Department of
Corporations, the federal Health Maintenance Organization Act of 1973, as
amended, and the regulations adopted thereunder by the United States
Department of Health and Human Services. Any provisions required to be
in this Agreement by State and Federal Law or by Government Agencies
shall bind Health Plan and Medical Group whether or not expressly
provided in this Agreement.
8.2 NO BILLING OF MEMBERS (MEMBER HOLD HARMLESS PROVISION). With the
exception of Copayments and charges for non-covered services delivered on
a fee-for-service basis to Members, Medical Group shall in no event,
including, without limitation, non-payment by Health Plan, insolvency of
Health Plan, or breach of the Agreement, bill, charge, collect a deposit
from, or attempt to bill, charge, collect or receive any form of payment
from any Member for Covered Services provided or arranged pursuant to
this Agreement.
Medical Group and its Participating Providers shall not maintain any
action at law or equity against a Member to collect sums owed by
Health Plan to Medical Group. Upon notice of any such action, Health
Plan may terminate this Agreement as provided above and take all other
<PAGE>
appropriate action consistent with the terms of this Agreement to
eliminate such charges, including, without limitation, requiring
Medical Group and its Participating Providers to return all sums
collected as Surcharges from Members or their representatives. For
purposes of this Agreement, "Surcharges" are additional fees for
Covered Services which are not disclosed to Members in the Subscriber
Agreement, are not allowable Copayments and are not authorized by this
Agreement. Nothing in this Agreement shall be construed to prevent
Medical Group from providing non-Covered Services on a usual and
customary fee-for-service basis to Members.
Medical Group's obligations under this Section shall survive the
termination of this Agreement with respect to Covered Services
provided or arranged during or after the term of this Agreement,
regardless of the cause giving rise to such termination.
8.3 CONTINUING CARE OBLIGATIONS OF MEDICAL GROUP. In the event of
termination of this Agreement for any reason, Medical Group and its
Participating Providers shall continue to provide or arrange Covered
Services to Members, including any Members who become eligible during the
termination notice period, beginning on the effective date of termination
and continuing until the termination or next renewal date of the Member's
Subscriber Agreement, unless Health Plan arranges for the transfer of the
Member to another Health Plan Participating Provider and provides written
notice to Medical Group of such transfer prior to the termination or next
renewal date of the Subscriber Agreement. Notwithstanding the foregoing,
Medical Group and its Participating Providers will continue to provide or
arrange Covered Services to any Members who cannot be transferred within
the time period specified above in accordance with Health Plan's legal
and contractual obligations to (i) provide Covered Services under the
Managed Care Plans and Subscriber Agreements, (ii) provide notice of
termination to Members and (iii) ensure continuity of care for its
Members.
Notwithstanding the above or any other provisions to the contrary,
Medical Group agrees that in the event Health Plan ceases operations
for any reason, including insolvency, Medical Group shall provide or
arrange Covered Services and shall not bill, charge, collect or
receive any form of payment from any Member for Covered Services
provided after Health Plan ceases operations. This continuation of
Covered Services obligation shall be for the period for which Premium
has been paid, but shall not exceed a period of thirty (30) calendar
days, except for those Members who are hospitalized on an inpatient
basis as provided below.
In the event Health Plan ceases operations or Medical Group terminates
this Agreement on the basis of Health Plan's failure to make timely
Capitation Payments, Medical Group shall continue to arrange for
Covered Services to those Members who are hospitalized on an inpatient
basis at the time Health Plan ceases operations or Medical Group
terminates this Agreement until such Members are discharged from the
hospital. Medical Group may file a claim with Health Plan for such
services as previously specified in this Section.
Medical Group agrees that the provisions of this Section and the
obligations of Medical Group
<PAGE>
and its Participating Providers herein shall survive termination of
this Agreement regardless of the cause giving rise to such
termination, and shall be construed to be for the benefit of Members.
8.4 INSPECTION AND AUDIT OF RECORDS AND FACILITIES. Medical Group and its
Participating Providers shall provide access at reasonable times upon
demand by Health Plan, Accreditation Organizations and Governmental
Agencies to periodically audit or inspect the facilities, offices,
equipment, books, documents and records of Medical Group and its
Participating Providers relating to the performance of this Agreement and
the Covered Services provided to Members, including, without limitation,
all phases of professional and ancillary medical care provided or
arranged for Members by Medical Group and its Participating Providers,
Member medical records and financial records pertaining to the cost of
operations and income received by Medical Group for Covered Services
rendered to Members. Medical Group and its Participating Providers shall
comply with any requirements or directives issued by Health Plan,
Accreditation Organizations and Government Agencies as a result of such
evaluation, inspection or audit of Medical Group and its Participating
Providers. The provisions of this Section shall survive termination of
this Agreement for the period of time required by State and Federal Law.
8.5 NONDISCRIMINATION. Medical Group assures that Covered Services shall be
provided to Members in the same manner as such services are provided to
other patients of Medical Group and its Participating Providers, except
as required pursuant to this Agreement. Medical Group and its
Participating Providers shall not unlawfully discriminate against any
Member on the basis of source of payment or in any manner in regards to
access to, and the provision of, Covered Services. Medical Group and its
Participating Providers shall not unlawfully discriminate against any
Member, employee or applicant for employment on the basis of race,
religion, color, national origin, ancestry, physical handicap, medical
condition, marital status, age or sex.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
, on , 199 .
- ------------------------------- ------------------ --
PACIFICARE OF CALIFORNIA
By:
--------------------------
Title:
----------------------
Address (for purposes of receiving notice)
5701 Katella Avenue
Cypress, California 90630
<PAGE>
For and on Behalf of MEDICAL GROUP
By:
--------------------------
Title:
----------------------
Address (for purposes of receiving notice)
3540 Howard Way
Costa Mesa, California 92626
Attn: Business Development
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is entered into as of
____________, 1996, between Talbert Medical Management Holdings Corporation, a
Delaware corporation (the "Buyer") and FHP International Corporation, a Delaware
corporation (the "Seller").
RECITALS
WHEREAS, in connection with the Seller's merger (the "FHP Merger")
with PacifiCare Health Systems, Inc. ("PacifiCare"), the Seller intends to sell
its shares of common stock of Talbert Medical Management Corporation, a Delaware
corporation ("TMMC"), and Talbert Health Services Corporation, a Delaware
corporation ("THSC"), to the Buyer, which has been formed for the purpose of
acquiring all of the capital stock of TMMC and THSC.
WHEREAS, the Seller owns 2,767,500 shares of common stock, par value
$.01 per share, of TMMC, and 545 shares of common stock, par value $.01 per
share, of THSC, constituting 92.25% of the outstanding common stock of each of
TMMC and THSC (the "Talbert Shares").
WHEREAS, the Buyer has previously acquired 232,500 shares of common
stock, par value $.01 per share, of TMMC and 45 shares of common stock, par
value $.01 per share, of THSC, in each case constituting all outstanding shares
of the common stock of each of TMMC and THSC not held by the Seller, pursuant to
a Management Stock Exchange Agreement of even date herewith among the Buyer and
the various management investors named herein.
WHEREAS, the Seller desires to sell, and the Buyer desires to buy, the
Talbert Shares for the consideration described herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the Seller and the Buyer
hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following will have the
following meanings:
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<PAGE>
"Agreement" means this Stock Purchase Agreement between the Buyer and
the Seller as amended or supplemented.
"Commission" means the Securities and Exchange Commission.
"Encumbrance" means any claim, charge, easement, encumbrance, lease,
covenant, security interest, lien, option, pledge, rights of others, or
restriction (whether on voting, sale, transfer, disposition or otherwise),
whether imposed by agreement, understanding, law, equity or otherwise, except
for any restriction on transfer generally arising under any applicable federal
or state securities law.
ARTICLE 2. PURCHASE OF STOCK
SECTION 2.1 PURCHASE OF STOCK BY BUYER. The Seller hereby sells,
assigns, transfers and conveys to the Buyer all of the Seller's right, title and
interest in and to, and its ownership of, the Talbert Shares in exchange for
rights to purchase 2,767,500 shares of the Buyer's common stock, par value $.01
per share, that when issued will constitute 92.25% of the Buyer's outstanding
common stock (the "Rights"), plus a note (the "Note") with a payoff amount equal
to the proceeds of a fully subscribed offering of the Rights to the Seller's
common and preferred stockholders in connection with the FHP Merger (the
"Offering"). If the Offering is not fully subscribed, the Buyer will sell to
the Seller all of its shares of common stock not subscribed for in the Offering
in exchange for the cancellation of the remaining indebtedness under the Note.
SECTION 2.2 CLOSING. The Buyer's purchase of the Talbert Shares as
contemplated by this Agreement (the "Closing") will take place at the same place
and on the same day as the closing of the FHP Merger (the "Closing Date").
SECTION 2.3 CLOSING DELIVERIES.
(a) BY THE SELLER. At the Closing, the Seller will deliver to
the Buyer certificates evidencing the Talbert Shares. Each certificate
will be properly endorsed for transfer to or accompanied by a duly executed
stock power in favor of the Buyer and will be in a form acceptable for
transfer on the books of TMMC and THSC.
(b) BY THE BUYER. At the Closing, the Buyer will deliver to the
Seller the Note. Certificates evidencing the Rights will be delivered
directly to the Seller's common and preferred stockholders, as contemplated
in the registration statement on Form S-1 filed with the Commission with
respect to the Offering (the "Registration Statement").
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<PAGE>
ARTICLE 3. TAX CONSEQUENCES
SECTION 3.1 IRC Section 338(h)(10) ELECTION. In connection with the
purchase of the Talbert Shares, the Seller and the Buyer will discuss the
possibility of an election under Section 338(h)(10) of the Internal Revenue Code
of 1986, as amended. No such election will be made by the Buyer and the Seller
without the prior written consent of N-T Holdings, Inc., a Delaware corporation
(the "Parent"), which consent will not be withheld unless there is an adverse
effect on the Parent (including through an adverse effect on FHP).
ARTICLE 4. REPRESENTATIONS AND WARRANTIES
SECTION 4.1 SELLER'S REPRESENTATIONS AND WARRANTIES. In order to
induce the Buyer to enter into this transaction, the Seller represents and
warrants that the Seller owns all of the Talbert Shares beneficially and of
record. All of the Talbert Shares are owned free and clear of any Encumbrance.
The Buyer is acquiring good and marketable title to and complete ownership of
the Talbert Shares, free of any Encumbrance.
SECTION 4.2 BUYER'S REPRESENTATIONS AND WARRANTIES. In order to
induce the Seller to enter into this transaction, the Buyer represents and
warrants as follows:
(a) CAPITALIZATION. The authorized capital of the Buyer consists of
15 million shares of common stock, par value $.01 per share, and 1.2 million
shares of preferred stock, par value $.01 per share. There are presently
232,500 issued and outstanding shares of the Buyer's Common Stock. There are no
outstanding options, warrants or other rights to purchase any equity securities
of the Buyer.
(b) RESTRICTIONS ON TRANSFER. The Buyer hereby acknowledges and
agrees that the transfer of the Talbert Shares under this Agreement has not been
registered under the Securities Act of 1933, as amended (the "Act"), or
qualified with the securities regulatory agency of any state and may not be
resold or otherwise disposed of unless registered under the Act and qualified
with the securities regulatory agency of any state that has jurisdiction over
any such transfer or unless an exemption from such registration or qualification
is available. The Buyer will transfer the Talbert Shares only in accordance
with the applicable requirements of all federal and state securities laws. The
Buyer acknowledges that the certificate(s) evidencing the Talbert Shares may
bear a legend regarding restrictions on transfer.
(c) RISK. The Buyer recognizes that investment in TMMC and THSC
involves substantial risks, and it has taken full cognizance of and understands
all of the risk factors related to the purchase of the Talbert Shares and its
knowledge of TMMC and experience in financial and business matters is such that
it is capable of evaluating the risks of an investment in the Talbert Shares.
3
<PAGE>
ARTICLE 5. CONDITIONS OF THE BUYER'S OBLIGATIONS
The obligations of the Buyer under this Agreement are subject to the
fulfillment of the following conditions at or prior to the Closing:
SECTION 5.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties of the Seller contained in Section 4.1 above are
true and correct as of the date hereof, and will be true and correct on and as
of the Closing Date.
SECTION 5.2 CAPITAL CONTRIBUTION. The Seller will contribute to TMMC
an amount of cash sufficient to increase TMMC's net worth to approximately $60
million (the "Capital Contribution"); provided that such amount shall not exceed
$70 million. The Capital Contribution will be made by wire transfer of
immediately available funds to an account in the name of TMMC.
ARTICLE 6. CONDITIONS OF THE SELLER'S OBLIGATIONS
The obligations of the Seller under this Agreement are subject to the
fulfillment of the following conditions at or prior to the Closing:
SECTION 6.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties of the Buyer contained in Section 4.2 above are
true and correct as of the date hereof, and will be true and correct on and as
of the Closing Date.
SECTION 6.2 REGISTRATION OF RIGHTS. The Registration Statement filed
with the Commission by the Buyer with respect to the Offering will have been
declared effective by the Commission.
ARTICLE 7. GENERAL
SECTION 7.1 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of California disregarding
conflict of law provisions.
SECTION 7.2 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
SECTION 7.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties and covenants of both the Buyer and the Seller
contained in or made pursuant to this Agreement will survive the execution and
delivery of this Agreement.
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<PAGE>
SECTION 7.4 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all parties hereto.
SECTION 7.5 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 7.6 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 7.7 COUNTERPARTS. This Agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 7.8 THIRD PARTY BENEFICIARY. The parties to this Agreement
hereby acknowledge and agree that the Parent is an intended third party
beneficiary of the rights of FHP under this Agreement, and in accordance
therewith, is entitled to enforce or seek remedies with respect to any of such
rights in law or in equity.
[remainder of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Stock Purchase
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date provided first written above.
FHP INTERNATIONAL CORPORATION
By: _________________________
Westcott W. Price III
President and Chief Executive
Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: __________________________
Jack D. Massimino
President and Chief Executive
Officer
S-1
<PAGE>
STANDSTILL AGREEMENT
This Standstill Agreement (this "Agreement") is entered into as of
___________, 1996, between FHP International Corporation, a Delaware corporation
(FHP International Corporation, with all of its current and future affiliates
and associates, is hereinafter referred to as "FHP") and Talbert Medical
Management Holdings Corporation, a Delaware corporation (the "Company").
RECITALS
WHEREAS, FHP, as of the date hereof, owns rights (the "Rights") to
purchase 2,767,500 shares of Common Stock of the Company, par value $.01 per
share (the "Common Stock"), that when issued will constitute 92.25% of the
Company's outstanding securities with the power to vote with respect to the
election of directors generally ("Voting Securities").
WHEREAS, the Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (the "Form
S-1") with respect to the offering to FHP's stockholders of the Rights held by
FHP and the underlying shares of the Company's Common Stock (the "Offering").
WHEREAS, if the Offering is not fully subscribed, FHP will receive
from the Company shares of Common Stock not subscribed for in the Offering (any
such shares received by FHP are the "Unsubscribed Shares," which together with
all Voting Securities subsequently acquired by FHP, are the "FHP Shares").
WHEREAS, FHP and the Company are entering into this Agreement to
define the future relationship between FHP and the Company in respect of the
Voting Securities and certain other matters in consideration of the mutual
covenants contained herein. Nothing in this Agreement will prevent the
consummation of sales of Common Stock pursuant to the exercise of Rights.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the Company and FHP hereby
agree as follows:
ARTICLE 1. REPRESENTATIONS AND WARRANTIES
SECTION 1.1 FHP'S REPRESENTATIONS AND WARRANTIES. In order to induce
the Company to enter into this Agreement, FHP represents and warrants that FHP
owns Rights to purchase 2,767,500 shares of Common Stock, which represent all of
the Voting Securities Beneficially Owned by FHP as of the date hereof.
<PAGE>
SECTION 1.2 COMPANY'S REPRESENTATIONS AND WARRANTIES. In order to
induce FHP to enter this Agreement, the Company represents and warrants that the
authorized capital of the Company consists of 15 million shares of Common Stock,
par value $.01 per share, and 1.2 million shares of preferred stock, par value
$.01 per share. There are presently 232,500 outstanding shares of Common Stock.
The Company has also issued to FHP Rights to purchase 2,767,500 shares of Common
Stock. The Company has granted options to purchase 70,250 shares of Common
Stock. The Company has declared, in connection with the adoption of its
Stockholder Rights Agreement, a dividend distribution as of the expiration date
of the Rights (the "Expiration Date") to all holders of Common Stock of a right
to purchase a unit initially consisting of one one-hundredth of a share of
Junior Participating Preferred Stock. There are no other outstanding options,
warrants or rights to purchase any equity securities of the Company.
ARTICLE 2. SALES BY FHP
SECTION 2.1 SALES BY FHP.
(a) With the exception of the transactions contemplated by the
Offering, FHP will not sell any FHP Shares until 180 days after the Expiration
Date (the "Waiting Period").
(b) After the Waiting Period, FHP will be permitted to sell all or
any portion of its total holdings of Common Stock, subject to compliance with
(i) federal and state securities laws, (ii) if applicable, Sections 3.2 or 3.5
of this Agreement, and (iii) the restrictions contained in Section 3.1 of this
Agreement.
ARTICLE 3. REGISTRATION RIGHTS
SECTION 3.1 RESTRICTIONS ON TRANSFER. FHP agrees that it will not,
directly or indirectly, sell, transfer or otherwise dispose of FHP Shares
constituting more than 3% of the outstanding Common Stock of the Company to any
person or group of persons who are affiliates (as defined under Rule 12b-2 of
the regulations promulgated under the Securities Exchange Act of 1934, as
amended) ("Affiliates") except in an underwritten public offering.
SECTION 3.2 SHELF REGISTRATION. The Company will file a registration
statement on Form S-3 (a "Shelf Form S-3") providing for the sale by FHP,
pursuant to Rule 415 of the Commission under the Securities Act, and/or any
similar rule that may be adopted by the Commission, of the FHP Shares and the
Company will use all commercially reasonable efforts to cause the Shelf Form S-3
to become and remain continuously effective for the period beginning on the
first anniversary of the Expiration Date and ending on the date FHP may sell all
of the remaining FHP Shares it holds free of any restrictions under the federal
securities laws (including any restrictions under Rule 144) or, if earlier, on
the date the distribution described in the Shelf Form S-3 is complete.
SECTION 3.3 REGISTRATION PROCEDURES PURSUANT TO SECTION 3.2. In
connection with the Company's obligations pursuant to Section 3.2 hereof, the
Company will:
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<PAGE>
(a) prepare and file with the Commission the Shelf Form S-3, provided
that before filing a Shelf Form S-3 or prospectus or any amendments or
supplements thereto, the Company will furnish to FHP's counsel copies of all
such documents proposed to be filed; and the Company will use its reasonable
efforts to cause the Shelf Form S-3 to become effective by the date set forth in
Section 3.2 or as soon as practicable thereafter;
(b) prepare and file with the Commission such amendments and
supplements to the Shelf Form S-3 and the prospectus used in connection
therewith as may be necessary to maintain the effectiveness of the Shelf
Form S-3 (for the applicable period specified in Section 3.2 hereof), and
comply with the provisions of the Securities Act with respect to the disposition
of all of the FHP Shares during such applicable period in accordance with the
intended methods of disposition by FHP as set forth in the Shelf Form S-3 (which
will include sales on the securities exchange or market system on which the
Common Stock trades, or in private transactions, or underwritten public
offerings, at fixed prices, or market prices, or negotiated prices);
(c) promptly notify FHP and provide copies of all related documents
(i) when the Shelf Form S-3, the prospectus or any prospectus supplement or any
amendment has been filed, and, with respect to a Shelf Form S-3 or any post-
effective amendment, when the same has become effective, (ii) of any request by
the Commission for amendments or supplements to the Shelf Form S-3 or the
prospectus or for additional or supplemental information, (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of the Shelf
Form S-3 or the written threat or initiation of any proceedings for that
purpose, (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the FHP Shares for sale in any
jurisdiction or the written threat or initiation of any proceeding for that
purpose, or (v) at any time when a prospectus is required to be delivered under
the Securities Act in connection with the Shelf Form S-3, the happening of any
event as a result of which the Shelf Form S-3, prospectus, any prospectus
supplement, or any document incorporated by reference in any of the foregoing
contains an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they are made, not misleading;
(d) make reasonable best efforts to obtain the withdrawal of any
order suspending the effectiveness of the Shelf Form S-3 or any post-effective
amendment thereto or any state filing made in connection therewith at the
earliest practicable date;
(e) furnish to FHP such number of copies of the Shelf Form S-3, each
amendment and supplement thereto (in each case including all exhibits thereto),
the prospectus included in the Shelf Form S-3 and such other documents as FHP
may reasonably request in order to facilitate the disposition of the FHP Shares
being offered;
(f) cause all such FHP Shares to be listed on each securities
exchange or market system on which the Company's Common Stock is then listed or
designated;
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<PAGE>
(g) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission;
(h) use all commercially reasonable efforts to (i) register or
qualify the FHP Shares under such other securities laws or Blue Sky laws of such
jurisdictions as FHP will reasonably request, (ii) keep such registrations or
qualifications in effect for so long as the Shelf Form S-3 remains in effect and
(iii) take any and all such actions as may be reasonably necessary or advisable
to enable FHP to consummate the disposition in such jurisdictions of the FHP
Shares; PROVIDED, HOWEVER, that the Company will not be required for any such
purpose to (A) qualify generally to do business as a foreign corporation in any
jurisdiction wherein it would not otherwise be required to qualify or (B)
consent to general service of process in any such jurisdiction; and
(i) cooperate with FHP to effect the offering and to facilitate the
timely preparation and delivery of certificates representing FHP Shares to be
sold under the Shelf Form S-3 and not bearing any restrictive legends and such
other actions as may be reasonably necessary to complete the offering.
SECTION 3.4 SUPPLEMENTS; AMENDMENTS. Upon the occurrence of any
event contemplated by Section 3.3(c)(v), the Company will, as soon as reasonably
practicable, prepare and furnish to FHP a reasonable number of copies of a
prospectus supplemented or amended so that, as thereafter delivered to the
purchasers of FHP Shares, such prospectus will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
SECTION 3.5 PIGGYBACK REGISTRATIONS. The Company will notify FHP in
writing at least thirty (30) days prior to the filing of any registration
statement under the Act for purposes of an underwritten public offering of
securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
excluding registration statements relating to employee benefit plans or with
respect to corporate reorganizations or other transactions under Rule 145 of the
Act) and will afford FHP an opportunity to include in such underwritten offering
all or part of the FHP Shares. Should FHP desire to include in any such
offering all or any part of the FHP Shares, it will, within fifteen (15) days
after the above-described notice from the Company, so notify the Company in
writing. If FHP decides not to include all of the FHP Shares in any such
offering, FHP will nevertheless continue to have the right to include FHP Shares
in any subsequent registration statement or registration statements as may be
filed by the Company with respect to underwritten offerings of its securities.
The right of FHP to be included in a registration pursuant to this
Section 3.5 will be conditioned upon FHP's participation in such underwriting.
If FHP intends to distribute FHP Shares through such underwriting, FHP will
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding any
other provision of the Agreement, if
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<PAGE>
the underwriter determines in good faith that marketing factors require a
limitation of the number of shares to be underwritten, the number of shares that
may be included in the underwriting will be allocated first to the Company;
second to FHP and any other stockholder of the Company (other than FHP) who is
not also an employee or director of the Company, on a pro rata basis; and third,
to any other stockholder of the Company that is also an employee or director of
the Company on a pro rata basis. No such reduction will reduce the securities
being offered by the Company for its own account to be included in the
registration and underwriting.
SECTION 3.6 EXPENSES. All expenses incurred by the Company in
complying with Section 3.2 and 3.5 hereof, including registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees of the National Association of
Securities Dealers, Inc., listing or quotation fees and fees of transfer agents
and registrars, will be borne in full by the Company. FHP will be responsible
for all registration and filing fees, underwriting commissions, transfer taxes,
discounts and fees with respect to the FHP Shares and the fees and expenses of
counsel and accountants for FHP.
SECTION 3.7 INDEMNIFICATION BY THE COMPANY. In connection with any
registration statement that the Company may file pursuant to this Agreement, the
Company will, and it hereby agrees to, indemnify and hold harmless FHP and each
of its directors and officers, and each other person, if any, that controls any
such person within the meaning of the Securities Act, from and against any and
all losses, claims, damages or liabilities, and expenses (including without
limitation reasonable fees of counsel and any amounts paid in any settlement
effected with the consent of the Company) to which any of FHP and/or such
director, officer or controlling person thereof may become subject under the
Securities Act, the common law or otherwise, insofar as such losses, claims,
damages or liabilities (or any actions or proceedings, whether commenced or
threatened and whether civil, criminal or administrative, in respect thereof) or
expenses arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement, or
any preliminary, final or summary prospectus contained therein, or any amendment
or supplement thereto or (ii) any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the statement
therein, in light of the circumstances in which they were made, not misleading;
PROVIDED, HOWEVER, that the Company will not be liable to any such person in any
such case to the extent that any such loss, claim, damage, liability (or action
or proceeding, whether commenced or threatened, in respect thereof) or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any registration statement, or
prospectus, or amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by such person
expressly for use therein; and PROVIDED, FURTHER, that the Company will not be
liable to any such person under the indemnity agreement in this Section 3.7 to
the extent that any such loss, claim, damage or liability (or action or
proceeding, whether commenced or threatened, in respect thereof) or expense
results from the fact that FHP Shares were sold to a person
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<PAGE>
to whom there was not sent or given a copy of the registration statement or
prospectus or of the prospectus as then amended or supplemented.
(b) In connection with the registration statement in which the FHP
Shares are registered, FHP will, and FHP hereby agrees to indemnify and hold
harmless the Company, each director and officer of the Company and such other
person, if any, who controls the Company within the meaning of the Securities
Act, from and against any and all losses, claims, damages or liabilities, and
expenses (including without limitation reasonable fees of counsel and any
amounts paid in settlement effected with the consent of FHP) to which the
Company, such director or officer or controlling person may become subject under
the Securities Act, the common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened and whether civil, criminal or administrative, in respect thereof) or
expenses arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact in or omission or alleged omission to state a
material fact required to be stated in the registration statement or any
prospectus contained therein, or any amendment or supplement thereto, or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, such statement or alleged statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by FHP expressly for use therein; PROVIDED, THAT the
obligation to indemnify will be limited to the net amount of proceeds received
by FHP from the sale of FHP Shares pursuant to the registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding with respect to
which a claim for indemnification may be made pursuant to this Section 3.7 or a
written threat to commence such action or proceeding, the indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
give written notice thereof (including a reasonable explanation of the
circumstances in connection therewith and copies of all writings received
relating thereto) to the latter; PROVIDED, HOWEVER, that the failure of any
indemnified party to give notice as provided herein will not relieve the
indemnifying party of any obligations under this Section 3.7 unless such failure
to provide notice prejudices in any material way the rights of the indemnifying
party to conduct the defense of such action or proceeding. In case any such
action is brought against an indemnified party, the indemnifying party will be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after such
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof unless the indemnifying party has
failed to assume the defense of such claim and to employ counsel reasonably
satisfactory to such indemnified person. No indemnifying party will consent to
entry of any judgment or enter into any settlement with respect to a claim made
against an indemnified party without the consent of the indemnified party, which
consent will not be unreasonably withheld, or unless such judgment or settlement
includes as an unconditional
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term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in connection with the circumstances out of
which the action or proceeding arose for all persons that may be entitled to or
obligated to provide indemnification or contribution under this Section 3.7. No
indemnified party will consent to entry of any judgment or enter into any
settlement of any action the defense of which has been assumed by an
indemnifying party without the consent of such indemnifying party, which consent
will not be unreasonably withheld. An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim will not be obligated to pay
the fees and expenses of more than one counsel for all parties indemnified by
the indemnifying party with respect to such claim.
(d) If for any reason the indemnification provided for in Sections
3.7(b) or 3.7(c) is unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
specifically covered by the indemnification provisions set forth in Sections
3.7(b) or 3.7(c), then the indemnifying party will contribute to the amount paid
or payable by the indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and the indemnified party, as well as
any other relevant equitable considerations; PROVIDED, that the obligation to
contribute will be individual to FHP and will be limited to the net amount of
proceeds received by FHP from the sale of the FHP Shares pursuant to the
registration statement. The relative fault of such indemnifying party and
indemnified party will be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The parties
hereto agree that it would not be just and equitable if contribution pursuant to
this Section 3.7 were determined by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this paragraph. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
SECTION 3.8 NON-ASSIGNABILITY OF REGISTRATION RIGHTS. The rights to
cause the Company, or its successors or assigns to register the FHP shares
pursuant to this Agreement are reserved solely for the use and benefit of FHP
and may not be assigned or transferred by FHP to any other person other than to
an Affiliate of FHP. A merger or consolidation of or transfer of all or
substantially all the assets of FHP or a change of control of FHP (a
"Fundamental Transaction") will not be deemed an assignment for purposes of this
Section 3.8 and the FHP Shares held by FHP immediately prior to the consummation
of a Fundamental Transaction will remain subject to this Agreement subsequent to
such Fundamental Transaction.
SECTION 3.9 BLACKOUT. In the event that the Company determines in
good faith that it would be seriously detrimental to the Company and its
stockholders to allow the
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Shelf Form S-3 to remain effective during the pendency of a transaction that the
Company deems to be material for the purposes of disclosure under the Exchange
Act, and that it would be seriously detrimental to amend the Shelf Form S-3 or
file a Form 8-K under the Exchange Act to disclose such material event, it may
furnish a certificate signed by the Chairman of the Board of Directors or the
President of the Company to FHP setting forth the Company's basis for such
determination (a "Determination Certificate"). Ten business days following the
delivery of a Determination Certificate, the Company will be entitled to suspend
the effectiveness of the Shelf Form S-3 (provided that such suspension does not
conflict with the terms of any underwriting agreement) for a period of not more
than 60 days. Within 10 days before the expiration of such 60-day period, the
Company may deliver another Determination Certificate and may increase the
period of such suspension to a total period not to exceed 90 days. Following
the expiration of the 60-day suspension period or 90-day suspension period, as
applicable, and for a period of 180 days thereafter, the Company may not suspend
the effectiveness of the Shelf Form S-3 without the prior written consent of
FHP.
ARTICLE 4. VOTING
SECTION 4.1 VOTING. FHP agrees that, during the term of this
Agreement, for so long as FHP Beneficially Owns any FHP Shares, FHP will (a) be
present, in person or represented by proxy, at all shareholder meetings of the
Company so that all Voting Securities Beneficially Owned by FHP may be counted
for the purpose of determining the presence of a quorum at such meetings and (b)
vote or consent, or cause to be voted or a consent to be given, with respect to
all Voting Securities Beneficially Owned by FHP on all matters submitted to
shareholders for a vote or consent in the same proportion as Voting Securities
are voted by holders unaffiliated with FHP.
ARTICLE 5. STANDSTILL PROVISIONS
SECTION 5.1 STANDSTILL PROVISIONS. FHP agrees that, during the term
of this Agreement, without the Company's prior written consent, FHP will not:
(a) acquire, announce an intention to acquire, offer or propose to
acquire, or agree to acquire, directly or indirectly, by purchase or otherwise,
Beneficial Ownership of any Voting Securities, or direct or indirect rights to
options to acquire (through purchase, exchange, conversion or otherwise) any
Voting Securities;
(b) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" (within the meaning of the meaning of Rule 14a-1
under the Exchange Act) to vote any Voting Securities, seek to advise, encourage
or influence any person or entity with respect to the voting of any Voting
Securities, initiate or propose any shareholder proposal or induce or attempt to
induce any other person to initiate any shareholder proposal;
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(c) make any statement or proposal, whether written or oral, to the
Board of Directors of the Company, or to any director, officer or agent of the
Company, or make any public announcement or proposal whatsoever with respect to
a merger or other business combination, sale or transfer of assets,
recapitalization, dividend, share repurchase, liquidation or other extraordinary
corporate transaction with the Company or any other transaction which could
result in a change of control, or solicit or encourage any other person to make
any such statement or proposal;
(d) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the 1934 Act) with respect to any securities of
the Company, other than a group which FHP is a member of as of the date hereof
(provided that any "group" formed in connection with the disposition of FHP
Shares pursuant to Article 3 will be permitted);
(e) deposit any FHP Shares into a voting trust or subject any FHP
Shares to any arrangement or agreement with respect to the voting of any FHP
Shares other than this Agreement;
(f) execute any written consent with respect to the Company, except
in accordance with Section 4;
(g) otherwise act, alone or in concert with others, to seek to
exercise any control over the management, Board of Directors or policies of the
Company;
(h) make a public request to the Company (or its directors, officers,
shareholders, employees or agents) to amend or waive any provisions of this
Agreement, the Certificate of Incorporation or Bylaws of the Company, or the
Stockholder Rights Agreement of the Company, including without limitation any
public request to permit FHP or any other person to take any action in respect
of the matters referred to in this Section 5.1;
(i) take any action that might require the Company to make a public
announcement regarding the possibility of any transaction referred to in
paragraph (c) above or similar transaction or, advise, assist or encourage any
other persons in connection with the foregoing;
(j) propose a nominee for director, or express support or opposition
for any nominee for director; or
(k) disclose any intention, plan or arrangement inconsistent with the
foregoing.
ARTICLE 6. GENERAL
SECTION 6.1 NOTIFICATION AS TO CERTAIN MATTERS. FHP will notify the
Company of any change in FHP's Beneficial Ownership involving in the aggregate
not less than 30,000
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shares of Voting Securities not later than two business days after such change
and from time to time, upon request, will notify the Company of the number of
shares of Voting Securities Beneficially Owned by FHP and of the names and
addresses of all persons included in the definition of FHP hereunder, including,
without limitation, affiliates to whom FHP Shares have been transferred in
accordance with Article 3. The Company will notify FHP from time to time, upon
request, of the number of Voting Securities outstanding.
SECTION 6.2 SPECIFIC PERFORMANCE. Each of FHP and the Company
acknowledges that the other party would not have an adequate remedy at law for
money damages if any of the covenants or agreements of the other party in this
Agreement were not performed in accordance with its terms and therefore agrees
that the other party will be entitled to specific enforcement of such covenants
or agreements and to injunctive and other equitable relief in addition to any
other remedy to which it may be entitled, at law or in equity.
SECTION 6.3 NOTIFICATION OF RESTRICTIONS. Any certificates
representing the FHP Shares will bear the following legend, which legend will
remain until such time as the securities represented by the certificates are
transferred in accordance with the provisions of this Agreement:
THESE SECURITIES ARE SUBJECT TO THE PROVISIONS OF AN AGREEMENT BETWEEN
THE ISSUER AND FHP INTERNATIONAL CORPORATION AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN ACCORDANCE THEREWITH.
SECTION 6.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties, covenants and agreements contained in this
Agreement will survive the execution of this Agreement and any investigation at
any time by FHP, the Company, or on behalf of either of them.
SECTION 6.5 ENTIRE AGREEMENT. This Agreement, together with the
other agreements of the parties of even date herewith, contains the entire
understandings of the parties with respect to the subject matter of the
agreements. This Agreement may not be amended except by a writing signed by the
parties. Except as specifically provided herein, this Agreement is not
assignable by either of the parties. This Agreement is binding upon the
respective successors of the parties and upon transferees of Voting Securities
who are affiliates or associates of FHP.
SECTION 6.6 SEVERABILITY. If any terms, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restriction of this Agreement will remain in full force and
effect, unless the action would substantially impair the benefits to either
party of the remaining provisions of this Agreement.
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SECTION 6.7 NOTICES. Any notices and other communications required
to be given pursuant to this Agreement will be delivered by hand, by registered
or certified mail, postage prepaid, return receipt requested, by private
courier, by facsimile or by telex, as follows:
(a) If to the Company:
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, CA 92626-1417
Attention: President
Telecopier: (714) 436-4860
with copies to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Attention: C. James Levin, Esq.
Telecopier: (213) 669-6407
(b) If to FHP International Corporation:
FHP International Corporation
3120 Lake Center Drive
Santa Ana, CA 92704
Attention: Secretary
Telecopier: (714) 825-5710
With copies to:
Konowiecki & Rank
First Interstate World Center
633 W. Fifth Street
Los Angeles, CA 90071-2007
Attention: Joseph Konowiecki
Telecopier: (213) 229-0992
SECTION 6.8 TERM AND EFFECTIVENESS.
(a) This Agreement will become effective upon the Expiration Date,
UNLESS the amount of Unsubscribed Shares is in excess of twenty percent (20%) of
the outstanding Voting Securities on the Expiration Date, in which event this
Agreement will be null and void.
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(b) This Agreement will expire on the seventh anniversary of the
Expiration Date.
(c) Article 2 and Section 6.1 will not apply at any time that FHP
Beneficially Owns less than 3% of the outstanding shares of Voting
Securities. Article 3 will not apply to the extent FHP Beneficially Owns less
than 3% of the outstanding shares of Voting Securities upon the Expiration
Date, and the holding period for restricted securities under Rule 144 has
been reduced to one year.
SECTION 6.9 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of California disregarding
conflict of law provisions.
SECTION 6.10 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, which together will constitute a single agreement.
[remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date provided first written above.
FHP INTERNATIONAL CORPORATION
By: __________________________________
Westcott W. Price III
President and Chief Executive
Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: __________________________________
Jack D. Massimino
President and Chief Executive
Officer
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AMENDED AND RESTATED
REAL ESTATE AND EQUIPMENT MASTER TRANSFER AGREEMENT
This Amended and Restated Real Estate and Equipment Master Transfer
Agreement ("AGREEMENT"), dated December 6, 1996 for reference purposes and
effective as of January 1, 1996 (the "EFFECTIVE DATE"), is made among FHP, Inc.,
a California corporation, FHP of Utah, Inc., a Utah corporation, FHP of New
Mexico, a New Mexico corporation (collectively, "FHP", or each an "FHP
COMPANY"), and Talbert Medical Management Corporation, a Delaware corporation
("TMMC"), who hereby amend and restate the Real Estate and Equipment Master
Transfer Agreement among the same parties dated as of January 1, 1996, with
reference to the following facts:
A. Each FHP Company is the owner or lessee of one or more medical
and/or administrative facilities described below and the furniture, fixtures and
equipment ("FF&E") located therein. The FF&E shall consist of the following
categories of personal property only: (i) furniture, (ii) data processing
equipment, (iii) medical equipment, (iv) minor equipment, (v) PBX equipment,
(vi) art and (vii) soft costs.
B. Each medical and administrative facility that is owned by an FHP
Company and intended to be the subject of this Agreement is described on
attached Exhibit A (collectively, together with the FF&E therein, the "OWNED
FACILITIES", and individually, together with the FF&E therein, an "OWNED
FACILITY").
C. Each medical and administrative facility that is leased by an FHP
Company and intended to be the subject of this Agreement is described on
attached Exhibit B (collectively, together with the FF&E therein, the "LEASED
FACILITIES", and, individually, together with the FF&E therein, a "LEASED
FACILITY").
D. Each medical and administrative facility leased by FHP, Inc.
pursuant to the Lease Agreement, dated August 2, 1990 between HMO Funding, Inc.
and FHP, Inc., as amended (collectively, the "HMO FUNDING LEASE"), is listed on
attached Exhibit C (collectively, together with the FF&E therein, the "HMO
FUNDING FACILITIES", and, individually, together with the FF&E therein, an "HMO
FUNDING FACILITY").
E. Subject to the terms and conditions of this Agreement, FHP
intends to transfer the Owned Facilities, the Leased Facilities, and the HMO
Funding Facilities to TMMC, and TMMC intends to accept such transfers and assume
the obligations arising therefrom.
Therefore, in consideration of the above facts and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Parties agree as follows:
1. LEASE OF THE OWNED FACILITIES. TMMC shall lease each Owned Facility
from the FHP Company listed on attached Exhibit A as owning each such Owned
Facility, and each such FHP Company shall lease each Owned Facility to TMMC
pursuant to a separate lease agreements, which shall be in substantially the
form and contain substantially the terms and conditions of the Amended and
Restated Lease Agreement attached as Exhibit D.
2. ASSIGNMENT AND ASSUMPTION OF LEASED FACILITIES AND LEASE OF FF&E.
Each FHP Company listed in attached Exhibit B as a lessee and/or sublessee of a
Leased Facility hereby assigns its leasehold and subleasehold interests in each
such lease and sublease to TMMC and concurrently therewith leases all FF&E in
each such Leased Facility to TMMC, and TMMC hereby accepts each such assignment
of leases and subleases and lease of FF&E on the terms and conditions of the
Master Assignment of Leases attached as Exhibit E. The foregoing assignment and
acceptance of such assignment shall survive the expiration of this Agreement.
TMMC shall provide such reasonable cooperation and assistance as may be required
by FHP or any successor in connection with its efforts to secure the agreement
of any or all lessors or sublessors of the Leased Facilities that FHP and any
such successor shall be forever released and discharged from any and all
liabilities under each lease or sublease of a Leased Facility assigned by FHP to
TMMC pursuant to this Section 2.
3. SUBLEASE OF HMO FUNDING FACILITIES. TMMC shall sublease or sub-ground
lease, as the case may be, each HMO Funding Facility, from FHP, Inc., and FHP,
Inc. shall sublease or sub-ground lease each HMO Funding Facility to TMMC
pursuant to separate sublease agreements,
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which shall be in substantially the form and contain substantially the terms and
conditions of the Amended and Restated Sublease Agreement attached as
Exhibit F.
4. TERM. This Agreement shall commence on January 1, 1996 and expire on
December 31, 2000.
5. MISCELLANEOUS.
5.1 NOTICES AND ADDRESSES. The addresses for the parties for
delivery of any notices shall be as follows:
If to any FHP Company:
FHP International Corporation
3120 Lake Center Drive
Santa Ana, CA 92704
Attention: Secretary
If to TMMC:
Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attention: President
All notices and documents shall be delivered either by (i) messenger
or courier service, (ii) by nationally recognized overnight courier service
(such as Federal Express), or (iii) by registered or certified U.S. Mail,
postage prepaid, return receipt requested. Delivery shall be effective only
upon actual receipt.
5.2 FURTHER ASSURANCES. Each party hereto shall execute, acknowledge
and deliver to each other all documents, and shall take all actions, reasonably
required by such other party from time to time to confirm or effect the matters
set forth herein, or otherwise to carry out the purposes of this Agreement.
5.3 ATTORNEYS' FEES. In the event that any litigation is commenced
concerning or arising out of this Agreement, the party or parties prevailing in
such litigation shall be entitled to recover, in addition to such other relief
as may be granted, its/their reasonable costs and expenses, including without
limitation reasonable attorneys' fees and court costs, whether or not taxable,
as awarded by a court of competent jurisdiction.
5.4 MODIFICATIONS. This Agreement may not be modified orally or in
any other manner except by an agreement in writing signed by the parties hereto
or their respective successors-in-interest.
5.5 ASSIGNMENT. This Agreement is personal to the parties hereto,
and the rights and obligations hereunder are accordingly not assignable either
in whole or in part.
5.6 GOVERNING LAW. This Agreement shall be governed by the laws of
the State of California.
5.7 EXHIBITS. All exhibits attached to this Agreement are
incorporated herein by reference, it being agreed by FHP and TMMC that, except
as hereinafter otherwise provided, mutually agreed upon revised versions of any
or all of Exhibits A, B and C may be substituted for such exhibits from time to
time to reflect the addition or deletion of Owned Facilities, Leased Facilities,
HMO Funding Facilities or any of the FF&E associated with such facilities to or
from said exhibits; provided that such revised exhibits shall only be effective
after they have been mutually agreed upon and duly executed on behalf of each
FHP Company and TMMC. Notwithstanding the foregoing, it is understood and
agreed that neither mutual agreement or execution on behalf of TMMC shall be
necessary to effectuate the deletion from Exhibit A of any facility which has
been sold or otherwise transferred to a new owner or the deletion from Exhibit C
of any facility which has been acquired from HMO Funding, Inc. by FHP or any
successor.
5.8 SUPERSEDING EFFECT. To the extent any of the Owned Facilities
and/or the Leased Facilities were previously transferred to TMMC, this Agreement
shall supersede such
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transfers, and any agreements or other documentation evidencing such prior
transfers are hereby amended and restated in their entirety by this Agreement.
5.9 COUNTERPARTS. This Agreement may be executed in counterparts
with the same force and effect as if the parties had executed one instrument,
and each such counterpart shall constitute an original hereof.
FHP, Inc., a California corporation
By: /s/ Kenneth S. Ord
---------------------------------------------
Kenneth S. Ord, Senior Vice President and
Chief Financial Officer
FHP of Utah, Inc., a Utah corporation
By: /s/ Kenneth S. Ord
---------------------------------------------
Kenneth S. Ord, Senior Vice President and
Chief Financial Officer
FHP of New Mexico, Inc., a New Mexico corporation
By: /s/ Kenneth S. Ord
---------------------------------------------
Kenneth S. Ord, Senior Vice President and
Chief Financial Officer
Talbert Medical Management Corporation, a Delaware
corporation
By: /s/ Jack Massimino
---------------------------------------------
Jack Massimino, President
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MASTER TRANSFER AGREEMENT
LIST OF EXHIBITS
Exhibit A List of Owned Facilities
Exhibit B List of Leased Facilities
Exhibit C List of HMO Funding Facilities
Exhibit D Amended and Restated Lease Agreement
Exhibit E Amended and Restated Master Lease Assignment
Exhibit F Amended and Restated Master Sublease Agreement
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AMENDED AND RESTATED LEASE AGREEMENT
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Amended and Restated Lease Agreement ("LEASE"), dated
December __, 1996 for reference purposes and made effective as of January 1,
1996 (the "Effective Date), is made by and between FHP __________________, a
_______________ corporation, ("LESSOR") and Talbert Medical Management
Corporation, a Delaware corporation ("LESSEE") (collectively the "PARTIES", or
individually a "PARTY") to amend and restate that certain Master Lease Agreement
dated as of the Effective Date between the Parties as to the Premises provided
for in Paragraph 1.2 below.
1.2 PREMISES: That certain building which is located at
_______________________, ___________, __________, together with the FF&E
situated therein and the land on which it is located (the "PREMISES"), said
Premises having the projected net book value as of the Effective Date shown on
Exhibit I hereto.
1.3 FF&E: The furniture, fixtures and equipment located on the Premises
and consisting of the following categories of personal property only: (a)
furniture, (b) data processing equipment, (c) medical equipment, (d) minor
equipment, (e) PBX equipment, (f) art and (g) soft costs (the "FF&E"), said FF&E
being more fully described by reference to its net book value on Exhibit II
hereto and to the itemized schedule of FF&E attached as Exhibit III hereto.
1.4 TERM: Five (5) years ("TERM") commencing on January 1, 1996
("COMMENCEMENT DATE") and ending on December 31, 2000 ("EXPIRATION DATE").
1.5 BASE RENT: A monthly amount equal to the sum of (A) 0.6667% (eight
percent (8%) per annum) of the book value as of the Effective Date, set forth in
Exhibit A hereto for the Premises as of the Commencement Date plus (B) an amount
equal to the monthly depreciation expense for the Premises (using Lessor's
depreciation schedules attached as Exhibit IV hereto in effect as of the
Commencement Date) calculated as of the end of each calendar month of the Term
(collectively, "BASE RENT"), payable in twelve (12) monthly installments, each
of which shall be paid on the fifteenth (15th) day of each month immediately
following the month for which the calculation was made, with final payment due
on the fifteenth (15th) day of the month following the Expiration Date.
1.6 PERMITTED USE: Any lawful purposes.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises for the Term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. The parties recognize
that this Lease is what is generally considered to be a "triple net" lease
whereby all risks and liabilities of ownership are assumed by the Lessee.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee on an "as is"
basis without any representations or warranties, express or implied, to the full
extent permitted under Applicable Law (as defined in Paragraph 4.3, below). All
repairs and modifications to the Premises (whether structural or non-structural,
capital or non-capital), including, without limitation, those required to
conform the Premises or any parts thereof to the requirements of any Applicable
Law now in effect or enacted in the future, shall be performed at the sole cost
and expense of Lessee. Notwithstanding any factors judicially developed as a
means of allocating the obligation to make alterations to leased premises to
comply with present or future Applicable Law, it is the intention of the Parties
that such obligations are those of Lessee and are accordingly reflected in rent
payments and other consideration under this Lease.
3. RENT.
Lessee shall cause payment of Base Rent and other rent or charges to be
received by Lessor (collectively "RENT") in lawful money of the United States,
without offset, deduction or prior demand, on or before the day on which it is
due under the terms of this Lease.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
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4. USE.
4.1 USE. Lessee shall use the Premises in accordance with all Applicable
Law. Lessee shall not use or permit the use of the Premises in a manner that
creates waste or a nuisance, or that disturbs owners and/or occupants of, or
causes damage to, neighboring premises or properties.
4.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law. "REPORTABLE USE" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying any of the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but in compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of Lessee's business permitted on the Premises, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor.
(b) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, and its agents, employees, and ground lessors, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control.
4.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
all governmental authorities of competent jurisdiction and any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and ground water conditions, (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage, spill
or release of any Hazardous Substance or storage tank), now in effect or which
may hereafter come into effect, and (iv) compliance with the terms and
conditions of the Americans with Disabilities Act. Whether or not reflecting a
change in policy from any previously existing policy Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with copies
of all documents and information, including, but not limited to, permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Law specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation, warning,
complaint or report pertaining to or involving failure by Lessee or the Premises
to comply with any Applicable Law.
4.4 INSPECTION; COMPLIANCE. Lessor shall have the right to enter the
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease and all Applicable Law and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting
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same, unless a Default or Breach (as defined in Paragraph 11.1) of this Lease,
violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse the Lessor for the costs and expenses of
such inspections.
5. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
5.1 LESSEE'S OBLIGATIONS. Lessee shall, at Lessee's sole cost and expense
and at all times, keep the Premises and all parts thereof (including the FF&E)
in good order, condition and repair, structural and non-structural (whether or
not such portion of the Premises requiring repair, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises, and whether or not any
required repairs considered are capital or non-capital), including, without
limiting the generality of the foregoing, landscaping and all equipment or
facilities serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, and life-safety systems. Without
limiting the generality of the foregoing provision, Lessee shall maintain the
Premises in a manner and in a condition which is at least consistent with
comparable buildings in the immediate area in which the Premises is located.
5.2 LESSOR'S OBLIGATIONS. It is intended by the Parties that Lessor have
no obligation, in any manner whatsoever, to repair or maintain the Premises, the
improvements located thereon, or the FF&E therein, whether structural or non-
structural, all of which obligations are intended to be those of the Lessee
under Paragraph 5.1 hereof. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises and the FF&E. Lessee and Lessor expressly waive the
benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease by reason of, any needed repairs.
5.3 EQUIPMENT AND TRADE FIXTURES; ALTERATIONS.
(a) FF&E. This Lease of the Premises shall include all FF&E. Lessee
shall use the FF&E for the purposes for which it is intended, and shall at
Lessee's sole cost and expense maintain and repair the FF&E subject to ordinary
wear and tear and general obsolescence. Lessor shall have no obligation to
maintain or repair any of the FF&E or to replace any FF&E considered inefficient
or obsolete.
(b) ALTERATIONS. Lessee may make any interior alterations or
modifications to the Premises (collectively, "ALTERATIONS") that are not
Structural Alterations (as defined below) without Lessor's prior consent,
provided (i) on the expiration or earlier termination of this Lease, Lessee
shall, at Lessor's election and at Lessee's sole cost, restore all or any
portion of the Premises to the condition existing prior to the installation or
construction of the Alteration(s), (ii) no such Alteration shall affect the
exterior or the structural integrity of the Premises (which shall include the
foundation, bearing walls and structural roof), any telephone closets,
stairwells, elevators, plumbing systems, sprinkler systems (connected to the
building core), life safety systems, HVAC systems (including primary and
secondary loops connected to the building core), and other mechanical or
electrical systems (collectively, "STRUCTURAL ALTERATIONS"), (iii) for any
Alterations where the estimated cost exceeds $50,000, Lessee shall provide
Lessor with at least ten (10) business days prior written notice of the
commencement of construction to permit Lessor the opportunity to post a notice
of non-responsibility pursuant to Applicable Law, and (iv) Lessee shall (A)
obtain, at Lessee's sole cost, all required governmental permits and licenses
required for any proposed Alteration, (B) if required by Lessor, provide Lessor
with copies of all such permits and licenses, and (C) comply with all conditions
imposed on Lessee by such permits and/or licenses. Any Alterations by Lessee
during the Term shall be done in a good and workmanlike manner, with good and
sufficient materials, and in compliance with all Applicable Law. Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications, if any, therefor. Any request for a consent to any Structural
Alteration may be withheld in Lessor's sole and absolute discretion.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or material man's lien against the Premises or any interest therein.
If any such lien attaches or Lessee receives notice of any such lien, Lessee
shall cause the lien to be released and removed of record within ten (10) days
after Lessor's demand. Despite any other provision of this Lease, if the lien
is not released and removed within
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ten (10) days after Lessor delivers notice of the lien to Lessee, Lessor may
immediately take all action necessary to release and remove the lien, without
any duty to investigate the validity of such lien, unless lessee has commenced
legal action to contest, dispute, or defend the claims of the lienholder and the
validity of such lien and continues to prosecute such action to a successful
judgment releasing the lienholder's lien against Lessee or Lessor's interest in
the Premises. All expenses (including reasonable attorney's fees) incurred by
Lessor in connection with release of the lien shall be considered rent under
this Lease and be immediately due and payable by Lessee. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend and protect itself, Lessor and the Premises
against the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof against the Lessor or the
Premises.
5.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as provided herein, all Alterations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Alterations. Unless otherwise instructed per subparagraphs 5.3(b) and 5.4(b)
hereof, all Alterations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon and be surrendered by
Lessee with the Premises.
(b) REMOVAL. Lessor may require that any or all Alterations be
removed by the expiration or earlier termination of this Lease. Lessor may
require the removal or restoration at any time of all or any part of any
Alterations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Term or any earlier termination date, with all of
the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease.
6. INSURANCE; INDEMNITY.
6.1 PAYMENT FOR INSURANCE. Lessee shall carry and pay for all insurance
required under this Paragraph 6.
6.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the Term a Commercial General Liability policy of insurance protecting Lessee
and Lessor (as an additional insured) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis for the
Premises providing single limit coverage in an amount not less than $5,000,000
per occurrence. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary and not contributory with any similar insurance that may be carried
by Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall have no obligation to carry any
insurance under this Lease.
6.3 PROPERTY INSURANCE. Lessee shall obtain and keep in force during the
term of this Lease a policy or policies, naming Lessor as additional insured,
with loss payable to Lessee insuring the Premises for loss or damage caused by
the usual all-risk perils. The amount of such insurance shall be equal to the
full replacement cost of each of the Premises, as the same shall exist from time
to time. In the event of a damage or destruction of the Premises, Lessor may
elect that such insurance proceeds be paid to and disbursed through a third-
party escrow or construction disbursement account selected by Lessor.
6.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least A- 14 as set forth in the most current issue of "Best's Insurance
Guide." Lessee shall not do or permit to be done anything which shall
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invalidate the insurance policies referred to in this Paragraph 6. Lessee shall
cause to be delivered to Lessor certified copies of policies of such insurance
or certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancelable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. If Lessee shall fail to procure and maintain the insurance required to
be carried by Lessee under this Paragraph 6, Lessor may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
6.5 WAIVER OF SUBROGATION. Without affecting any other rights or remedies
and without imposing on Lessor an obligation to procure property insurance,
Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under this
Paragraph 6. The effect of such releases and waivers of the right to recover
damages shall not be limited by the amount of insurance carried or required, or
by any deductibles applicable thereto.
6.6 INDEMNITY. Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, employees, and contractors, from and
against any and all claims, loss of rents and/or damages, costs, liens,
judgments, penalties, permits, attorney's and consultant's fees, expenses and/or
liabilities (collectively, "CLAIMS") arising out of, involving, or dealing with,
the occupancy of the Premises by Lessee, the conduct of Lessee's business, any
act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease, and any active or passive negligence of Lessor whether any such Claims
are caused in whole or in part by such active and/or passive negligence of
Lessor. In case any action or proceeding is brought against Lessor by reason of
any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid
any such Claim in order to be so indemnified.
6.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause (including, without limitation, the active or passive negligence of
Lessor), whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Notwithstanding Lessor's active or passive negligence or breach of this Lease,
Lessor shall under no circumstances be liable for injury to Lessee's business or
for any loss of income or profit therefrom.
7. DAMAGE OR DESTRUCTION.
7.1 LESSEE'S OBLIGATIONS. If all or any part of the Premises are
destroyed, whether or not by a loss that is caused by a risk required to be
insured under this Lease, this Lease shall continue in full force and effect
without interruption, reduction, or abatement of rent or other expenses
hereunder. Upon occurrence of such damage or destruction, Lessee shall, at
Lessee's sole cost and expense, forthwith repair or restore the Premises to the
condition existing before the occurrence of such damage and destruction, and
replace all FF&E destroyed or damaged thereby. In the event this Lease expires
prior to the completion of such repair, Lessee shall, at Lessor's election,
either (i) continue with full repair and restoration of the Premises, or (ii)
deliver to Lessor an amount determined by Lessor's construction consultant to be
necessary to complete such repair or restoration. Lessor shall have no
obligation to Lessee whatsoever in the event of any damage or destruction to the
Premises or any parts thereof.
7.2 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
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8. REAL PROPERTY TAXES.
8.1 PAYMENT OBLIGATION. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 8.2, applicable to the Premises during the Term. All such
payments shall be made at least ten (10) days prior to the delinquency date of
the applicable installment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such Real Property Taxes have been paid. If Lessee
shall fail to pay any Real Property Taxes required by this Lease to be paid by
Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse
Lessor therefor upon demand.
8.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax imposed upon the Premises by
any authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage or other improvement district thereof, levied against any legal
or equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the Term, including but not limited to a
change in the ownership of the Premises or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof, and
whether or not contemplated by the Parties.
8.3 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon the Alterations and all FF&E located
within the Premises.
9. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon.
10. ASSIGNMENT AND SUBLETTING.
10.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage or otherwise transfer or encumber or
sublet (collectively, "ASSIGN" or "ASSIGNMENT") all or any part of Lessee's
interest in this Lease or in any of the Premises without Lessor's prior written
consent, which consent shall not be unreasonably withheld subject to the terms
and conditions set forth below, which the Parties agree are reasonable:
a. Any assignment shall not: (i) be effective without the express
written assumption by such assignee or sublessee (either, a "TRANSFEREE") of the
obligations of Lessee under this Lease, or (ii) release Lessee of any of its
direct and primary obligations hereunder to Lessor.
b. Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
c. The consent of Lessor to any assignment shall not constitute a
consent to any subsequent assignment by Lessee or to any subsequent or
successive assignment by the assignee or sublessee. However, Lessor may consent
to subsequent assignments or any amendments or modifications thereto without
notifying Lessee or anyone else liable on the Lease or sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or sublease.
d. In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any one else
responsible for the performance of the Lessee's obligations under this Lease,
including any sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor or Lessee.
e. Each request for consent to an assignment shall be in writing,
accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any. Lessee agrees to provide Lessor
with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
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f. Upon receiving Lessee's notice requesting consent to an
assignment, together with all information required pursuant to Paragraph
10.1(e), above, then, without limiting the foregoing, Lessor may refuse to
consent on any commercially reasonable grounds, and refusal to so consent shall
be deemed reasonable if the proposed assignment or subletting does not meet the
following conditions:
i. The assignment or subletting shall be on the same terms and
conditions set forth in Lessee's notice given to Lessor;
ii. No assignment or subletting shall be valid, and no Transferee
shall take possession of any of the Premises until an original of the duly
executed counterpart of the assignment documentation has been delivered to
Lessor;
iii. No Transferee shall have been negotiating with Lessor in the
last six (6) months for space in a building owned by Lessor;
iv. The proposed use of the Premises by the Transferee shall be
permitted by the use provisions of this Lease and in accordance with all
Applicable Laws;
v. The Transferee has the financial capability to fulfill the
obligations imposed by the assignment or subletting;
vi. The Transferee has a reputation in the community for financial
reliability and the bank or other financial references support in full the
financial statements delivered to Lessor on behalf of the Transferee;
vii. The Transferee demonstrates, in Lessor's business judgment, that
it is able to perform the obligations on Transferee's part to be performed under
this Lease;
viii. The Transferee shall not have been involved in any civil,
criminal or administrative litigation or proceedings which is unsatisfactory in
the reasonable opinion of Lessor; and
ix. The Transferee intends to use the Premises for the provision of
medical services or as medical office space.
10.2 ASSIGNMENT TO AN AFFILIATE. Notwithstanding the foregoing provisions
of Paragraph 10.1, above, Lessee may assign this Lease to an Affiliate of Lessee
without the prior consent of Lessor, provided Lessor receives notice of such
intent to assign at least ten (10) days prior the effective date of the
assignment. An "AFFILIATE" for purposes of this Paragraph 10.1(b) shall mean
any entity which directly controls, is under common control with, or is directly
or indirectly controlled by Lessee or FHP International Corporation, a Delaware
corporation. Notwithstanding such permitted assignment, Lessee shall remain
directly and primarily liable to Lessor for all obligations and liabilities of
"Lessee" under this Lease.
10.3 TALBERT MEDICAL GROUP. Notwithstanding the foregoing provisions of
Paragraphs 10.1 and 10.2, above, Lessee may allow employees, agents,
contractors, representatives, invitees, guests, visitors and customers of
Talbert Medical Group, including any physicians or physician groups having a
management agreement or management agreements with Lessee, to use all or any
portion of the Premises at any time and from time to time (collectively, the
"TMG USE"). TMG Use shall not include a subletting or an assignment of Lessee's
interest under this Lease. However, TMG Use shall not require notice to Lessor
or Lessor's consent. Lessee shall remain directly responsible to Lessor for any
such TMG Use as if the TMG Use were directly by Lessee.
11. DEFAULT; BREACH; REMEDIES.
11.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "BREACH" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, and shall
entitle Lessor to pursue the remedies set forth in Paragraph 11.2:
(a) NONPAYMENT OF RENT. Failure to pay any installment of Base
Rent or other rent due and payable hereunder, upon the date when
payment is due, such
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failure continuing for a period of ten (10) business days after written
notice of such failure, it being understood and agreed that Lessor shall
not be required to comply with the foregoing grace period and notice
provisions more often than twice in any twelve (12) month period; or
(b) OTHER OBLIGATIONS. Failure to perform any obligation,
agreement or covenant under this Lease, other than Lessee's obligation
to pay Base Rent, such failure continuing for thirty (30) calendar
days after written notice of such failure or such longer period as is
reasonably necessary to remedy such failure, provided that Lessee
shall continuously and diligently pursue such remedy until such
failure is cured.
11.2 REMEDIES. In the event of a Default of this Lease by Lessee, within
thirty (30) days after written notice to Lessee (or in case of an emergency,
without notice), Lessor may at its option (but without obligation to do so),
perform such duty or obligation on Lessee's behalf, including but not limited to
the obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such performance
by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor.
In the event of a Breach of this Lease by Lessee, with or without further notice
or demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of all or any of the
Premises by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the
worth at the time of the award of the unpaid rent which had been earned at the
time of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided, (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom. The worth at the time of award of the amount
referred to in provision (iii) of the prior sentence shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent. Efforts by Lessor to mitigate
damages caused by Lessee's Default or Breach of this Lease shall not waive
Lessor's right to recover damages under this Paragraph.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, and, for such purposes,
Lessee acknowledges that the restrictions on assignment set forth in Paragraph
10, above, are reasonable limitations.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
Provided, however, in the event of a Breach occurring with respect to
Premises located in the State of Utah, Lessee shall have the following remedies
rather than the remedies set forth in the preceding provisions of this Paragraph
11.2:
(X) Terminate Lessee's rights under this Lease by written notice, or
reenter and take possession of the Premises by lawful means with or without
terminating this Lease; and
(Y) Lessee shall pay to Lessor the cost of recovering possession of
the Premises, all costs of reletting, including reasonable renovation,
remodeling and alteration of the Premises, the amount of any commissions paid by
Lessor in connection with such reletting, and all other costs and damages
arising out of Lessee's default, including attorneys' fees and costs.
Notwithstanding any termination or reentry, the liability of Lessee for the rent
payable under this Lease shall not be extinguished for the balance of the Term,
and Lessee agrees to compensate Lessor on demand for any deficiency arising from
reletting the Premises.
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<PAGE>
11.3 BREACH BY LESSOR. In the event of any actual or alleged breach by
Lessor of any obligation to be performed by Lessor under this Lease, Lessee
shall have the sole remedy of damages or injunctive relief; under no
circumstances shall Lessee have the right to terminate this Lease.
12. CONDEMNATION. If any of the Premises or any portion thereof are taken
under the power of eminent domain or sold under the threat of the exercise of
said power (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of any of the Premises, or more than twenty-five percent (25%) of
the land area not occupied by any building, is taken by condemnation, Lessee
may, at Lessee's option, to be exercised in writing within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced in
the same proportion as the rentable floor area of the Premises taken bears to
the total rentable floor area of the building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises taken is
land on which there is no building. Any award for the taking of all or any part
of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any compensation, separately awarded
to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade
Fixtures. In the event that this Lease is not terminated by reason of such
condemnation, Lessor may, to the extent of its net severance damages received,
over and above the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such repair.
In the alternative, Lessor shall have the right to assign all such severance
damages to Lessee, in which case Lessee shall forthwith undertake the full
repair or restoration of the Premises at Lessee's sole cost and expense.
13. TENANCY STATEMENT.
13.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate stating
whether the Responding Party is aware of any default of the Requesting Party,
the remaining Lease term, any unexercised options, the Base Rent payable, the
extent of any Base Rent paid in advance, and such other information as may be
reasonably requested by the Requesting Party.
13.2 If Lessor desires to finance, refinance, or sell any of the Premises,
any part thereof, or the building of which such Premises are a part, Lessee
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee as may be reasonably required by such lender or
purchaser, including but not limited to Lessee's most recent financial
statements.
14. LESSOR'S LIABILITY. In the event of a transfer of Lessor's title or
interest in any of the Premises or in this Lease, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor.
15. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
16. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
17. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
18. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-9-
<PAGE>
19. NOTICES. All notices required or permitted by this Lease shall be in
writing and shall be delivered to Lessor or Lessee at the following addresses,
or at such other address(es) as either party may, from time to time, by like
notice designate:
If to Lessor: FHP, Inc.
3120 Lake Center Drive
Santa Ana, CA 92704
Attention: Secretary
If to Lessee: Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attention: President
All notices and documents shall be delivered either by (i) messenger or courier
services, (ii) by nationally recognized overnight courier service (such as
Federal Express), or (iii) by registered or certified U.S. Mail, postage
prepaid, return receipt requested. Delivery shall be effective only upon actual
receipt.
20. WAIVER. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent.
21. RECORDING. Neither this Lease nor a memorandum thereof shall be recorded.
22. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of any of
the Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
23. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
24. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
25. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and, except as
otherwise expressly provided herein, be governed by the laws of the State in
which the Premises are located. Any litigation, arbitration or other method of
dispute resolution between the Parties concerning this Lease shall be initiated
and determined in the County of Orange, California.
26. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
26.1 SUBORDINATION. This Lease shall be subject and subordinate to any
ground lease, mortgage, deed of trust, or other hypothecation or security device
(collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon any of
the Premises, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the entity holding any such Security Device (a "LENDER")
shall have no duty, liability or obligation to perform any of the obligations of
Lessor under this Lease, but that in the event of Lessor's default with respect
to any such obligation, Lessee will give any such Lender whose name and address
have been furnished Lessee in writing for such purpose notice of Lessor's
default and allow such Lender thirty (30) days following receipt of such notice
for the cure of said default before invoking any remedies Lessee may have by
reason thereof. If any Lender shall elect to have this Lease superior to the
lien of its Security Device and shall give written notice thereof to Lessee,
this Lease shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.
26.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
26.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-10-
<PAGE>
26.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease will not be disturbed so long as
Lessee is not in Breach hereof and attorns to the record owner of the Premises.
26.4 SELF-EXECUTING. The agreements contained in this Paragraph 26 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of any of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
27. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part, as Lessor may reasonably deem necessary. .
28. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
29. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
The Parties hereto have executed this Lease as of the date first above written.
Lessor: Lessee:
_________________________________ Talbert Medical Management Corporation
By: _____________________________ By: _____________________________
Westcott W. Price III Jack D. Massimino
Its: ____________________________ Its: President & CEO
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-11-
<PAGE>
EXHIBIT I
The projected net book value as of January 1, 1996 and the net book value
as of September 30, 1996 of the Premises located at _____________________,
______________, _______________ are $________________ and $________________,
respectively.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-12-
<PAGE>
EXHIBIT II
The net book value as of September 30, 1996 of the FF&E situated within the
Premises located at _____________________, ______________, _______________ is
$_______________________.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-13-
<PAGE>
EXHIBIT III
Schedule of FF&E
To be supplied.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-14-
<PAGE>
EXHIBIT IV
Depreciation Schedule
To be supplied.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
-15-
<PAGE>
MASTER ASSIGNMENT OF LEASES
All initially capitalized terms not otherwise defined in this
Master Assignment of Leases ("ASSIGNMENT") shall have the same meaning as
ascribed to them in the Real Estate and Equipment Master Transfer Agreement
of even date to which this Master Assignment of Leases is attached and into
which it is incorporated by reference (the "MASTER TRANSFER AGREEMENT").
This Assignment, dated for reference purposes and effective on Effective
Date, is made Orange County, California between each FHP Company listed on
attached Exhibit B to the Master Transfer Agreement (each, an "ASSIGNOR" or
collectively, "ASSIGNORS"), and TALBERT MEDICAL MANAGEMENT CORPORATION, a
Delaware corporation ("ASSIGNEE"), with reference to the following facts:
A. Each Assignor is the lessee or sublessee of one or more Leased
Facilities under those certain leases and subleases described more particularly
on Exhibit B attached to the Master Transfer Agreement (collectively, the
"LEASES").
B. Pursuant to the Master Transfer Agreement, Assignors desire to
(i) assign all of their respective right, title and interest as lessees and
sublessee in the Leases to Assignee and, (ii) concurrently therewith, lease the
FF&E in each such Leased Facility to Assignee.
Therefore, based on the above facts and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. Each Assignor hereby respectively assigns to Assignee all of such
Assignor's right, title and interest as lessee and/or sublessee in those Leases
in which such Assignor has an interest as lessee or sublessee (including,
without limitation, any and all options, right of first refusal, rights of first
notice and any other preferential rights in favor of the lessee in the Leases to
the full extent such rights assignable), and Assignee (i) accepts these
assignments and assumes and agrees to perform, as direct obligations to each and
every owner of the Leased Facilities, all the obligations of Assignors as
lessees and/or sublessees under the Leases, which obligations arise after the
Effective Date and (ii) to the extent leasehold improvements were installed at
the expense of the FHP Company leasing such Leased Facility, agrees to pay to
Assignor as additional monthly rent an amount equal to the sum of (A) 0.6667%
(eight percent (8%) per annum) of the book value of the leasehold improvements
in each Leased Facility as of the Effective Date plus (B) the monthly
depreciation expense of such leasehold improvements in each Leased Facility
calculated at the end of each calendar month using the FHP depreciation
schedules in place as of the Effective Date.
2. In addition, subject to the purchase obligations of Assignee as
more particularly set forth in Section 4.2 of the Master Transfer Agreement and
in consideration of the assignment and assumption of Leases in Section 1, above,
each Assignor hereby leases to Assignee all FF&E in each Leased Facility, and
Assignee hereby (i) leases all such FF&E from each such Assignor and (ii) agrees
to pay to assignor as additional monthly rent an amount equal to the sum of (A)
0.6667% (eight percent (8%) per annum) of the book value of the FF&E in each
Leased Facility as of the Effective Date plus (B) the monthly depreciation
expense of the FF&E in each Leased Facility calculated at the end of each
calendar month using the FHP depreciation schedules in place as of the Effective
Date. Assignee shall use the FF&E for the purposes for which it is intended and
shall, at Assignee's sole cost and expense, maintain the FF&E in good condition
and repair, subject to ordinary wear and tear and general obsolescence. No
Assignor shall have any obligation to maintain, repair or replace any of the
FF&E.
3. Assignee shall and does indemnify and hold harmless Assignors and
each of them against all liability, damages, judgments, claims, actions or
demands (collectively, "CLAIMS") against them or any of them arising out of or
in any way connected with (i) the lessee's and/or sublessee's obligations under
the Leases, which obligations arise after the Effective Date and (ii) the FF&E,
whether based on occurrences before or after the Effective Date and whether made
before or after the Effective Date.
4. Assignors shall and do indemnify and hold harmless Assignee
against all Claims against Assignee arising out of or in any way connected with
the lessee's and/or sublessee's obligations under the Leases, which obligations
arise before the Effective Date.
5. Assignee shall have no right to further assign or sublet any of
the Leased Facilities or the leaseholds or subleaseholds thereunder except to an
Affiliate or Assignee. For purposes of this paragraph 5, an "AFFILIATE" shall
mean any entity that directly or indirectly controls, is controlled by or is
under common control with Assignee or FHP International Corporation, a Delaware
corporation. Notwithstanding the foregoing provisions of this Section 5,
assignee may
EXHIBIT E TO MASTER TRANSFER AGREEMENT
<PAGE>
allow employees, agents, contractors, representatives, invitees, guests,
visitors and customers of Talbert Medical Group, including any physicians or
physician groups having a management agreement or management agreements with
Assignee, to use all or any portion of the Leased Facilities at any time and
from time to time (collectively, the "TMG USE"). TMG Use shall not include a
subletting or an assignment of Assignee's interest under the Leases.
However, TMG Use shall not require notice to Assignor or Assignor's consent.
Assignee shall remain directly responsible to Assignor for any such TMG Use
as if the TMG Use were directly by Assignee.
6. This Assignment is subject to all subleases of the Leases and the
Leased Facilities, and the transfer of the leaseholds under this Assignment
includes the benefits and obligations arising under such subleases.
The parties hereto have executed this Assignment by their execution of
the Master Transfer Agreement to which this Assignment is attached.
EXHIBIT E TO MASTER TRANSFER AGREEMENT
<PAGE>
EXHIBIT F
AMENDED AND RESTATED SUBLEASE AGREEMENT
This Sublease Agreement ("Sublease"), dated December __, 1996 for
reference purposes and effective as of January 1, 1996 (the "Effective Date").
is made in Orange County, California between ____________ ("SUBLESSOR") and
Talbert Medical Management Corporation, a Delaware corporation ("SUBLESSEE"),
who hereby amend and restate that certain Master Sublease Agreement dated as of
the Effective Date between the same parties, with reference to the following
facts:
A. Sublessor is the lessee or sub-ground lessee of a facility owned
by HMO Funding, Inc., which is located at ___________, ____________, ______
(hereinafter the "HMO FUNDING FACILITY"), pursuant to a lease between Sublessor
and HMO Funding, Inc. (the "MASTER LEASE").
B. Sublessor desires to (i) sublease the HMO Funding Facility to
Sublessee and, (ii) concurrently therewith, sublease the FF&E (as hereinafter
defined) in such facility to Sublessee.
Therefore, based on the above facts and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. FF&E. As used in this Sublease, the term "FF&E" shall mean the
furniture, fixtures and equipment located in the HMO Funding Facility and
consisting of the following categories of personal property only: (a)
furniture, (b) data processing equipment, (c) medical equipment, (d) minor
equipment, (e) PBX equipment, (f) art and (g) soft costs, said FF&E being more
fully described by reference to its net book value on Exhibit I hereto and to
the itemized schedule of FF&E attached as Exhibit II hereto.
2. SUBLEASE. As of the Effective Date, Sublessor hereby subleases
to Sublessee the HMO Funding Facility and, concurrently therewith, subleases the
FF&E to Sublessee on the terms and conditions hereinafter set forth. Sublessee
shall use such FF&E for the purposes for which it is intended and shall, at
Sublessee's sole cost and expense, maintain the FF&E in good condition and
repair, subject to ordinary wear and tear and general obsolescence. Sublessee
shall perform all obligations of Sublessor under the Master Lease with respect
to such FF&E. As between Sublessor and Sublessee, Sublessor shall have no
obligation to maintain, repair or replace any of the FF&E.
3. SUBLEASE TERM. The term of this Sublease shall be one (1) day
less than the "Initial Term" or the "Extended Term", as the case may be, of the
Master Lease.
4. USE. The HMO Funding Facility shall be used and occupied by
Sublessee for the uses permitted under the Master Lease and for no other
purpose.
5. SUBRENTAL. Sublessee shall pay to Sublessor a monthly subrental
equal to the sum of the following: (A) all monthly rental, operating expenses,
fees, and other expenses due under the Master Lease for the HMO Funding
Facility, (B) 0.6667% (eight percent (8%) per annum) of the projected book value
of the FF&E and leasehold improvements in the HMO Funding Facility as of the
Effective Date as set forth in Exhibit III hereto, plus (C) themonthly
depreciation expense of the FF&E and leasehold improvements in the HMO Funding
Facility, (collectively "Subrental"), payable in twelve (12) monthly
installments, each of which shall be paid on the fifteenth (15th) day of each
month, immediately following the month for which the calculation was made, with
final payment due on the fifteenth (15th) of the month following expiration of
the Sublease term. For purposes of preceding clause (C), net book value and
depreciation shall be calculated at the end of each calendar month using
Sublessor's depreciation schedules (attached as Exhibit IV hereto) in place as
of the Effective Date.
EXHIBIT F TO MASTER TRANSFER AGREEMENT
<PAGE>
6. INCORPORATION OF TERMS OF THE MASTER LEASE.
6.1 This Sublease is subject and subordinate to the Master Lease.
Subject to the modifications set forth in this Sublease, the terms of the Master
Lease are incorporated herein by reference, and shall, as between Sublessor and
Sublessee (as if they were Lessor and Lessee, respectively, under the Master
Lease) constitute the terms of this Sublease except to the extent that they are
inapplicable to, inconsistent with, or modified by, the terms of this Sublease.
In the event of any inconsistencies between the terms and provisions of the
Master Lease and the terms and provisions of this Sublease, the terms and
provisions of this Sublease shall govern. Sublessee acknowledges that it has
reviewed the Master Lease and is familiar with the terms and conditions thereof.
6.2 For the purposes of incorporation herein, the terms of the Master
Lease are subject to the following additional modifications:
(a) In all provisions of the Master Lease (under the terms
thereof and without regard to modifications thereof for purposes of
incorporation into this Sublease) requiring the approval or consent of
HMO Funding, Inc., Sublessee shall be required to obtain the approval
or consent of both Sublessor and HMO Funding, Inc.
(b) In all provisions of the Master Lease requiring Sublessor
to submit, exhibit to, supply or provide HMO Funding, Inc. with
evidence, certificates, or any other matter or thing, Sublessee shall
be required to submit, exhibit to, supply or provide, as the case may
be, the same to both HMO Funding, Inc. and Sublessor. In any such
instance, Sublessor shall first determine, in its sole discretion, if
such evidence, certificate or other matter or thing shall be required
and, to the extent provided, satisfactory.
(c) Sublessor shall have no obligation to restore or rebuild
any portion of the HMO Funding Facility after any destruction or
taking by eminent domain, and all such obligations are hereby assumed
by Sublessee during the Sublease term.
7. SUBLESSEE'S OBLIGATIONS. Sublessee covenants and agrees that all
obligations of Sublessor under the Master Lease shall be done or performed by
Sublessee with respect to the HMO Funding Facility, and Sublessee's obligations
shall run to Sublessor and HMO Funding, Inc. as Sublessor may determine in its
sole discretion to be appropriate or be required by the respective interests of
Sublessor and HMO Funding, Inc. Sublessee agrees to indemnify Sublessor, and
hold it harmless, from and against any and all claims, damages, losses, expenses
and liabilities (including reasonable attorneys' fees) incurred as a result of
the non-performance, non-observance or non-payment of any of Sublessor's
obligations under the Master Lease which, as a result of this Sublease, became
an obligation of Sublessee. If Sublessee makes any payment to Sublessor
pursuant to this indemnity, Sublessee shall be subrogated to the rights of
Sublessor concerning said payment. Sublessee shall not do, nor permit to be
done, any act or thing which is, or with notice or the passage of time would be,
a default under this Sublease or the Master Lease. Any default by HMO Funding,
Inc. under the Master Lease shall not constitute as between Sublessor and
Sublessee a default by Sublessor or an eviction, actual or constructive, of
Sublessee and no such default shall excuse Sublessee from the performance or
observance of any of its obligations to be performed or observed under this
Sublease, or entitle Sublessee to receive any reduction in or abatement of the
rent provided for in this Sublease.
8. DEFAULT BY SUBLESSEE. In the event Sublessee shall be in default
of any covenant of, or shall fail to honor any obligation under, this Sublease,
Sublessor shall have available to it against Sublessee all of the remedies
available (a) to HMO Funding, Inc. under the Master Lease in the event of a
similar default on the part of Sublessor thereunder or (b) at law.
EXHIBIT F TO MASTER TRANSFER AGREEMENT
<PAGE>
9. QUIET ENJOYMENT. So long as Sublessee pays all of the rent and
other amounts due hereunder and performs all of Sublessee's other obligations
hereunder, Sublessor shall do nothing to affect Sublessee's right to peaceably
and quietly have, hold and enjoy the HMO Funding Facility.
10. CONDITION OF PREMISES. Sublessee acknowledges that it is
subleasing the HMO Funding Facility "as-is" and that Sublessor is not making any
representation or warranty concerning the condition of the HMO Funding Facility
and that Sublessor is not obligated to perform any work to prepare the HMO
Funding Facility for Sublessee's occupancy.
11. ASSIGNMENT AND SUBLETTING. Sublessee shall have no right to
assign or further sublet the HMO Funding Facility or any portion thereof or any
right or privilege appurtenant thereto except to an Affiliate of Sublessee. For
purposes of this paragraph 11, an "AFFILIATE" shall mean any entity that
directly or indirectly controls, is controlled by or is under common control
with Sublessee or FHP International Corporation, a Delaware corporation.
Notwithstanding the foregoing provisions of this paragraph 11, Sublessee may
allow employees, agents, contractors, representatives, invitees, guests,
visitors and customers of Talbert Medical Group, including any physicians or
physician groups having a management agreement or management agreements with
Sublessee, to use all or any portion of the HMO Funding Facility at any time and
from time to time (collectively, the "TMG USE"). TMG Use shall not include
subletting or an assignment of Sublessee's interest under this Sublease.
However, TMG Use shall not require notice to Sublessor or Sublessor's consent.
Sublessee shall remain directly responsible to Sublessor for any such TMG Use as
if the TMG Use were directly by Sublessee.
The parties hereto have executed this Sublease as of the date first
above written.
Lessor: Lessee:
______________________________ Talbert Medical Management Corporation
By:___________________________ By:_______________________________
Wescott W. Price III Jack D. Massimino
its:__________________________ Its: President & CEO
EXHIBIT F TO MASTER TRANSFER AGREEMENT
<PAGE>
EXHIBIT 10.6
December 11, 1996
Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, California 92626
Attention: Jack D. Massimino
Re: Letter Agreement
Dear Jack:
As you know, FHP, Inc., FHP of Utah, Inc., FHP of New Mexico, Inc.
(collectively, "FHP", or each an "FHP Company"), and Talbert Medical
Management Corporation ("TMMC") are parties to an Amended and Restated Real
Estate and Equipment Master Transfer Agreement dated December 6, 1996, for
reference purposes and effective as of January 1, 1996 (the "Transfer
Agreement"), which Transfer Agreement provides for, among other things, (i)
the execution and delivery of separate Amended and Restated Leases effective
as of January 1, 1996, in the form attached as Exhibit D to the Transfer
Agreement (the "Leases"), for each of the FHP-owned properties set forth on
Schedule 1 hereto (each a "Premises"), and (ii) the assumption or sublease by
TMMC of certain leases covering the "Leased Facilities" and "HMO Funding
Facilities" defined in such Transfer Agreement.
FHP and TMMC hereby amend the Transfer Agreement and Leases to provide
as follows:
(i) The monthly base rent currently payable pursuant to Section 1.5
of each Lease (the "Old Base Rent") shall be revised to provide for
a new monthly base rent (the "New Base Rent") to be paid thereunder
solely for the rental of the land and buildings at each Premises (the
"Real Property"). The New Base Rent for each Lease shall be equal to
the rental charge per square foot for each such Real Property as set
forth in Schedule 1 hereto multiplied by the square footage for each
such Real Property as set forth in Schedule 1 hereto.
(ii) FHP and TMMC agree to execute a separate master agreement
(collectively, the "FF&E Agreement") for the lease to TMMC of the
"FF&E" as defined in the Transfer Agreement (the "FF&E"), at each
Premises, Leased Facility and HMO Funding Facility. The FF&E Agreement
shall contain the terms of the Leases applicable to FF&E, as amended by
this letter agreement. Upon the execution of the FF&E Agreement, FHP
and TMMC shall execute amended and restated Leases (the "Real Property
Leases") which exclude FF&E from the terms, including New Base Rent,
of the Real Property Leases.
<PAGE>
Jack D. Massimino
December 10, 1996
Page 2
(iii) The sum of (a) the New Base Rent plus (b) the monthly base
rent payable under the FF&E Agreement for the FF&E at the Premises (the
"FF&E Base Rent") shall not exceed the Old Base Rent for the Premises
(and the FF&E Base Rent shall be calculated to equal the Old Base Rent
less the New Base Rent). Estimated FF&E Base Rent is set forth on
Schedule 2.
(iv) The term of each Real Property Lease shall be extended from
the initial term currently reflected in the Leases (the "Initial Term")
to December 31, 2005 (the "First Extension Term"). Notwithstanding the
foregoing sentence, the lessee shall have the unilateral right to
terminate one or more of the Real Property Leases as of the expiration
of the Initial Term by delivering written notice to the lessors
thereunder prior to the effective date of the Registration Statement on
From S-1 filed by TMMC's parent corporation with the Securities and
Exchange Commission, or April 1, 1997, provided that in no event shall
(a) lessee terminate a Real Property Lease for any Premise that is vacant
or undeveloped land or a parking lot or parking structure, and (b) the
total square footage, as set forth on Schedule I hereto, of all Real
Property Leases which are terminated pursuant to lessee's unilateral
right hereunder exceed 90,000 square feet.
(v) Each of the Real Property Leases shall provide for two
extension options which may be exercised by the lessee by written
notice to the lessor at least one year prior to the end of the First
Extension Term or the "Second Extension Term" (as hereinafter defined),
as the case may be, to extend the Lease in each case for an additional
five (5) years (the first such five year period commencing on January 1,
2006, being the "Second Extension Term" and the second such five year
period commencing on January 1, 2011, being the "Third Extension
Term"). The First Extension Term, Second Extension Term and Third
Extension Term are referred to herein as an "Extension Term."
(vi) As of the commencement of an Extension Term for each Real
Property Lease, the Base Rent for each Extension Term shall be adjusted
to reflect prevailing market rent (including a CPI, or similar cost of
living adjustment, if such adjustments are at such time customary
market terms for similar properties in the relevant market) ("Fair
Market Rent"). If the lessor and lessee are unable to agree upon Fair
Market Rent within 150 days prior to the commencement of the relevant
Extension Term, lessor and lessee each shall appoint, at its own
expense, one arbitrator with expertise in commercial real estate
leasing transactions to determine the Fair Market Rent. Fair Market Rent
shall be the mean of the fair market rents determined by the
arbitrators if the determination of the arbitrator appointed by lessor
is no more than five percentage points greater than the other
arbitrator's determination. If the determination of the arbitrator
appointed by lessor is more than five percentage points greater than
the other arbitrator's determination, the arbitrators jointly shall
appoint a third arbitrator and, after the third arbitrator's
determination, Fair Market Rent shall be the mean of (a) the third
arbitrator's determination and (b) the determination of one of the
other arbitrators whose determination is nearer in amounts to the
determination of the third arbitrator. The fees and expenses of the
third arbitrator shall be divided equally between the lessor and lessee.
(vii) The FF&E Agreement shall provide that, during the term of
each Real Property Lease, and for the period of one year after the
termination of such Real Property
<PAGE>
Jack D. Massimino
December 10, 1996
Page 3
Lease, TMMC shall have the right of first offer to purchase the FF&E
located upon the Real Property which is the subject of such Real
Property Lease within 30 days of TMMC's receipt of notice (a "Notice")
that the lessor proposes to sell its interest in such FF&E. If the
lessor proposes to sell any such FF&E, it shall deliver to TMMC the
material terms upon which the lessor proposes to sell the same, and
TMMC shall have 10 days thereafter to elect to purchase such FF&E upon
such terms or to elect not to purchase such FF&E (with a failure to
respond being deemed an election not to purchase) by delivering written
notice to the lessor. If TMMC elects to purchase the FF&E, it shall
close such purchase upon the terms so proposed by the lessor within 20
days thereafter. If TMMC elects not to purchase such FF&E, then the
lessee may sell such FF&E at any time during the six month period
thereafter upon terms that are no less favorable to the lessor than
were the material terms reflected in its proposal to TMMC.
Although all of the foregoing provisions are effective and binding as
of the date of this letter agreement, the parties agree to revise the Transfer
Agreement and the Leases to reflect the provisions of this letter and to take
such other actions as are necessary or appropriate to carry out the provisions
of this letter. The parties agree to use good faith efforts and all due
diligence to enter into the Real Property Leases and the FF&E Agreement on or
before January 10, 1997; provided, however, that this letter agreement shall
remain effective and binding in the event the parties do not execute the Real
Property Leases and the FF&E Agreement on or before January 10, 1997.
Should the terms of this letter agreement conflict in any way with the
terms of the Transfer Agreement or the Leases, the terms of this letter
agreement shall prevail. In all other respects, the Transfer Agreement and
the Leases shall remain in full force and effect, as modified by this letter
agreement.
This letter agreement may be executed in counterparts, each of which
hall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
FHP, Inc.
By: _____________________________________
Title:___________________________________
FHP of Utah, Inc.
By: _____________________________________
Title:___________________________________
FHP of New Mexico, Inc.
By: _____________________________________
Title:___________________________________
ACCEPTED AND AGREED TO:
Talbert Medical Management Corporation
By: __________________________________
Title:________________________________
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT BETWEEN
TALBERT MEDICAL MANAGEMENT CORPORATION
AND FHP INTERNATIONAL CORPORATION
This Administrative Services Agreement (the "Agreement") is entered into by
and between Talbert Medical Management Corporation ("TMMC") and FHP
International Corporation ("FHP") and becomes effective upon the Effective Time,
as that term is defined in the Agreement and Plan of Reorganization among
PacifiCare Health Systems, Inc., NT Holdings, Inc., Neptune Merger Corporation,
Tree Acquisition and FHP International Corporation.
RECITALS
WHEREAS, TMMC was formerly owned and operated by FHP; and
WHEREAS, in order to ensure continuity in TMMC's operations, TMMC desires
to obtain, and FHP desires to provide, certain administrative services as
described below.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. DESCRIPTION OF SERVICES. Throughout the term of this Agreement, FHP
shall provide to TMMC certain administrative services related to TMMC's business
operations, as described in Exhibit A, which is attached hereto and incorporated
herein.
2. FEES. As compensation for the provision of services pursuant to
Section 1 of this Agreement, TMMC shall pay FHP monthly fees in the amount
described in Exhibit A hereof. Payment for each month shall be due and payable
on or before the fifth (5th) of that month.
3. TERM AND TERMINATION
a. The term of this Agreement shall commence at the Effective Time
and shall continue as set forth on Exhibit A.
b. This Agreement may be terminated, in whole or in part, by either
party, with or without cause, upon the provision of prior written notice to the
other party hereto, as described in Exhibit A hereof.
c. This Agreement may be terminated by the mutual written agreement
of the parties.
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<PAGE>
d. Either party may terminate this Agreement with thirty (30) day
prior written notice if the other party commits a material breach of any
provision of this Agreement. The notice must specify the nature of the material
breach and the breaching party shall have twenty (20) days from receipt of such
notice to correct, or commence correcting, the material breach to the other
party's satisfaction. In the event the breaching party fails to cure or
commence to cure within the twenty (20) day period to the satisfaction of the
other party (which non-breaching party may request such certificates and
documentation as it deems appropriate to evidence such cure or commencement to
cure), this Agreement shall automatically terminate upon completion of the
thirty (30) day notice, notwithstanding any other provision of this Agreement.
e. The rights and obligations stated in Sections 4-6, 8, 10 and 12
of this Agreement shall survive the termination of this Agreement.
4. RESPONSIBILITY FOR OWN ACTS. Except as otherwise provided herein,
each party shall be responsible and liable for any claims, liabilities, demands,
lawsuits and expenses, including attorney's fees, relating to the acts or
omissions of that party, its agents and employees committed in the performance
of this Agreement. In the event that a claim is made against either or both
parties, relating to the performance of this Agreement, it is the intent of both
parties to cooperate in the defense of such claims and to cause their insurers
to do likewise. However, each party shall have the right to take any and all
action it believes necessary to protect its interests.
5. DISCLAIMER: LIMITATION OF LIABILITY.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, FHP DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE.
THE LIMIT OF FHP'S LIABILITY (WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT
LIABILITY IN TORT OR BY STATUTE OR OTHERWISE), TO TMMC OR TO ANY THIRD PARTY
CONCERNING PERFORMANCE OR NON-PERFORMANCE BY FHP, OR IN ANY MANNER RELATED TO
THIS AGREEMENT, FOR ANY AND ALL CLAIMS SHALL NOT IN THE AGGREGATE EXCEED THE
FEES PAID TO FHP BY TMMC HEREUNDER WITH RESPECT TO THE SERVICES PROVIDED
HEREUNDER. TMMC'S EXCLUSIVE REMEDY FOR ANY OF THE ABOVE-MENTIONED CLAIMS SHALL
BE FOR FHP, UPON RECEIPT OF WRITTEN NOTICE, TO USE ITS BEST EFFORTS TO CURE THE
BASIS OF SUCH CLAIM AT ITS EXPENSE, AND FAILING THAT, THE RETURN OF FEES PAID TO
FHP FOR THE WORK RELATED TO THE BASIS OF SUCH CLAIM.
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<PAGE>
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR
PUNITIVE LOSS, DAMAGES OR EXPENSES (INCLUDING, BUT NOT LIMITED TO, LOSS OF DATA,
INTERRUPTION OF SERVICE, OR LOST PROFITS) EVEN IF FHP HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH POTENTIAL LOSS, DAMAGE OR EXPENSES. ANY ACTION BY EITHER
PARTY MUST BE BROUGHT WITHIN TWO YEARS AFTER THE CAUSE OF ACTION ARISES.
THE ALLOCATIONS OF LIABILITY SET FORTH IN THIS SECTION 5 REPRESENT THE
AGREED UPON AND BARGAINED FOR UNDERSTANDING OF FHP AND TMMC AND FHP'S
COMPENSATION FOR SERVICES RENDERED HEREUNDER REFLECTS SUCH ALLOCATIONS.
6. CONFIDENTIALITY. The parties agree to be bound by the confidentiality
and nondisclosure covenants set forth on Exhibit B hereto.
7. RELATIONSHIP BETWEEN THE PARTIES. FHP and TMMC are independent
contractors. Nothing in this Agreement shall be construed to create a
principal-agent, employer-employee, master-servant, partnership or joint venture
relationship.
8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9. ASSIGNMENT. The rights and/or obligations of this Agreement may not
be assigned, delegated, transferred, conveyed or sold without the prior written
consent of the other party, except that either party may assign or transfer the
rights and/or obligations arising under this Agreement, in whole or in part, to
a corporate affiliate.
10. ATTORNEY'S FEES. If any action at law, in arbitration, or in equity
is necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to payment by the other party of reasonable attorneys'
fees, costs and expenses, in addition to any other relief to which the
prevailing party may be entitled.
11. SEVERABILITY. If any provision of this Agreement is deemed to be
invalid or unenforceable by a court of competent jurisdiction or in arbitration,
the same shall be deemed severable from the remainder of this Agreement and
shall not cause the invalidity or unenforceability of the remainder of the
Agreement.
12. WAIVER. Either party's failure to perform any covenant or condition
set forth in this Agreement shall not act as a waiver of the same or any other
covenant or condition of this Agreement.
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<PAGE>
13. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties and shall bind and inure to the benefit of both parties and
their successors and assigns. No change, amendment or alteration shall be
effective unless in writing and signed by both parties. This Agreement shall
supersede all prior written and/or oral agreements between the parties that
pertain to the subject of this Agreement, including any amendments, addendum,
letters of understanding and any other documents relating thereto, and both
parties agree to terminate any prior agreements pertaining to the subject of
this Agreement on the effective date of this Agreement.
14. FORCE MAJEURE. Neither TMMC nor FHP shall be responsible for delays
or errors in its performance under this Agreement occurring by reasons or
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties, fire, flood or catastrophe, acts of
God, insurrection, war, riots or failure of transportation, communication or
power supply; provided, however, that should any such delay continue for more
than 90 days, the Agreement may be terminated by the party not affected by the
delay.
IN WITNESS WHEREOF, the parties hereby execute this Agreement.
FHP International Corporation Talbert Medical Management Corporation
By: By:
-------------------------- --------------------------
Name: Name:
------------------------ ------------------------
Title: Title:
----------------------- -----------------------
4
<PAGE>
EXHIBIT A TO THE
ADMINISTRATIVE SERVICES AGREEMENT BETWEEN
TALBERT MEDICAL MANAGEMENT CORPORATION
AND FHP INTERNATIONAL CORPORATION
INFORMATION SERVICES
For the monthly fee of $207,417, FHP shall provide, for the following categories
of services, personnel and system environments as necessary to operate, maintain
and, when appropriate, engineer the following categories of service. Services
will be consistent with what is currently provided to Talbert as a subsidiary of
FHP. The categories of services are as follows:
PHARMACY SYSTEM SUPPORT
All interaction with pharmacy system vendors, ComCoTec, ESI, and POS systems.
Problem determination in coordination with Service Desk and Network Operations.
INFORMATION ACCESS CONSULTATION
Provide skilled Oracle DBA knowledge to assist TMMC with data warehouse project.
Assist in separating TMMC data currently stored in FHP UR repository.
HUMAN RESOURCES (HR-1) / DATACCOUNT CONNECTIVITY/TIME CLOCK LOCATIONS
Provide consultation to HR and Payroll staff to separate TMMC from other FHP
environments. Consolidate TMMC on one HR-1 server and setup environment for
centralized data entry and link to Dataccount. Project underway, must complete.
All system knowledge support currently comes from FHP resources.
IS SERVICE DESK
Receive all incoming calls for help for any TMMC system or to initiate moves,
adds, changes for data and voice equipment. This function triages calls,
documents all calls with trouble tickets to enable tracking, escalation, and
reporting. Some problem resolution based on training for TMMC systems and
general knowledge, hand-off to appropriate second level support, tracking and
follow-up for all calls. This service includes all required communication
expenses and spans extended hours of operation. Management notification of
critical outages within 15 minutes. Reporting on problem trends based on data.
WIDE AREA NETWORK ENGINEERING AND OPERATIONS
Perform wide area network continuous monitoring with appropriate network tools,
take action as soon as a link is down or device unresponsive. Provide some
level of proactive network checking. ( The wide area network includes the frame
relay communications and local circuits up to and including the routers.)
Coordinate with all circuit providers when outages occur or to
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<PAGE>
enhance service levels. As needed, due to increased outage trends or expansion
of business, provide engineering to sustain network availability. Provide
documentation of physical and logical network.
FINANCIAL SYSTEMS (INTEGRAL, FOCUS, AND CONNECTIVITY)
Consult with Financial departments within TMMC. Keep Financial systems current
for all government regulations. Provide system access to meet all required
filing dates. Complete the TMMC split project currently underway to separate
TMMC from FHP data. Provide required operating environment consistent with
current TMMC requirements.
ALL CATEGORIES INCLUDE:
- Management of personnel
- Physical office space, appropriate desktop equipment and clerical
support
- Network access
- System software currently required for production
- Computer hardware currently required for production
- Access to all currently used software unless otherwise negotiated
- Reasonable access to support personnel
- Meeting reasonable service levels
Services can be terminated with mutual consent or by either party, with or
without cause, upon provision of 120 day prior written notice. Every effort
will be made to separate as quickly as is prudent.
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<PAGE>
EXHIBIT B
AGREEMENT OF CONFIDENTIALITY
1. "Confidential Information" as used herein shall mean all information
disclosed from one party (the "Disclosing Party") to the other party (the
"Receiving Party") and shall include, without limitation, trade secrets, know-
how, software programs, and software source documents.
2. The Receiving Party agrees that it will not make use of, disseminate,
or in any way disclose any Confidential Information of the Disclosing Party to
any person, firm or business, except to the extent necessary for the purposes of
the performance of such party under the Agreement to which this Exhibit B is
attached (the "Agreement").
3. The Receiving Party agrees that it shall disclose Confidential
Information of the Disclosing Party only to those of its employees, contractors
or other agents who need to know such information and who have previously
agreed, either as a condition to employment or in order to obtain the
Confidential Information, to be bound by terms and conditions substantially
similar to those of the Agreement.
4. The Receiving Party shall treat all Confidential Information of the
Disclosing Party with the same degree of care as it accords to its own
confidential information of a similar nature, and the Receiving Party will
exercise at least reasonable care to protect its own such confidential
information.
5. The Receiving Party's obligations under Sections 2, 3 and 4 with
respect to any portion of the Confidential Information shall terminate when the
Receiving Party can document that: (a) it was in the public domain at the time
it was communicated to the Receiving Party by the Disclosing Party; (b) it
entered the public domain subsequent to the time it was communicated to the
Receiving Party by the Disclosing Party through no fault of the Receiving Party;
(c) it was in the Receiving Party's possession free of any obligation of
confidence at the time it was communicated to the Receiving Party by the
Disclosing Party; (d) it was rightfully communicated to the Receiving Party free
of any obligation of confidence subsequent to the time it was communicated to
the Receiving Party by the Disclosing Party; or (e) it was developed by
employees or agents of the Receiving Party independently of and without
reference to any information communicated to the Receiving Party by the
Disclosing Party. In addition, the Receiving Party may disclose the Disclosing
Party's Confidential Information in response to a valaid order by a court or
other governmental body, as otherwise required by law.
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<PAGE>
6. All Confidential Information and materials furnished by the Receiving
Party by the Disclosing Party shall remain the property of the Disclosing Party
and shall be returned to it promptly at its request, together with any copies
thereof.
7. The Receiving Party does not acquire any licenses under any
intellectual property rights of the Disclosing Party under the Agreement.
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<PAGE>
EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT
This Employee Benefits and Compensation Allocation Agreement is
entered into as of ___________, 1996 between FHP International Corporation, a
Delaware corporation ("FHP"), and Talbert Medical Management Holdings
Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, FHP has agreed to merge (the "FHP Merger") with PacifiCare
Health Systems, Inc., pursuant to an Amended and Restated Agreement and Plan of
Reorganization dated as of November 11, 1996 (the "FHP Merger Agreement").
WHEREAS, in connection with the FHP Merger, FHP intends to sell its
shares of common stock of Talbert Medical Management Corporation, a Delaware
corporation ("TMMC"), and Talbert Health Services Corporation, a Delaware
corporation ("THSC"), to Holdings in exchange for subscription rights to
purchase shares of Holdings' common stock (the "Rights"), which Rights are to be
distributed to FHP's stockholders as a portion of the consideration in the FHP
Merger (the "Offering").
WHEREAS, if upon the expiration of the Rights (the "Expiration Date"),
FHP holds less than a majority of the shares of Holdings' common stock, Holdings
(including TMMC and THSC) will not be a subsidiary of FHP.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the parties hereby agree
as follows:
ARTICLE 1. PURPOSE AND DEFINITIONS
SECTION 1.1 PURPOSE. The purpose of this Agreement is to set forth
the agreement of the parties regarding (a) the provision of employee benefits
after the Expiration Date to the Talbert Individuals (as defined below), and (b)
the disposition after the Expiration Date of various employee benefit plans
which cover Talbert Individuals.
SECTION 1.2 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following terms will have the
following meanings (applicable to both the singular and plural forms of the
terms defined):
<PAGE>
"Agreement" means this Employee Benefits and Compensation Allocation
Agreement between FHP and Holdings, including any appendices attached hereto, as
amended or supplemented.
"FHP Individual" means any person who immediately after the Expiration
Date is a current or former officer or employee of FHP or any entity which is a
member of the same controlled group of corporations (within the meaning of
Section 1563(a) of the Internal Revenue Code of 1986, as amended (the "Code"))
as FHP (after giving effect to the Offering) or any current or former director
of FHP, who does not then become exclusively a Talbert Individual, and any duly
designated legal representative or beneficiary of any FHP Individual.
"Talbert Individual" means (i) for all references in this Agreement
excluding Articles 2 and 7, the active employees and former employees of
Holdings (including TMMC and THSC), their dependents, beneficiaries, and
alternate payees under qualified domestic relations orders, (ii) for all
references in Article 2 of this Agreement, the individuals described in clause
(i) as well as the employees and former employees of the professional medical
and dental corporations that are listed on Appendix A attached hereto, their
dependents, beneficiaries, and alternate payees under qualified domestic
relations orders, and (iii) for all references in Article 7, any person who
immediately after the Expiration Date is a current officer or employee of
Holdings (including TMMC and THSC) and, for purposes of clause (i), (ii) or
(iii), who is not immediately after the Expiration Date also an FHP Individual,
and any duly designated legal representative or beneficiary of any such Talbert
Individual.
ARTICLE 2. QUALIFIED PLANS
SECTION 2.1 MONEY PURCHASE PENSION PLAN. FHP sponsors the FHP
Money Purchase Pension Plan (the "Pension Plan"), which covers Talbert
Individuals, as well as employees of FHP and its subsidiaries. A portion of the
assets and liabilities of the Pension Plan are attributable to Talbert
Individuals. As soon as administratively feasible following the Expiration
Date, Holdings will establish a plan (and accompanying trust) to which the
account balances attributable to Talbert Individuals in the Pension Plan will be
directly transferred. Such plan will comply with all applicable provisions of
the Code, including, without limitation, Code Section 411(d). As soon as
administratively feasible following the Expiration Date, Holdings will submit
such plan and trust to the Internal Revenue Service for a determination of its
qualified status and tax-exempt status under Code Sections 401 and 501(a).
Holdings will amend such plan and trust as and if requested by the Internal
Revenue Service as a condition of granting a favorable determination of the tax-
qualified and tax-exempt status of such plan and trust. As soon as
administratively feasible following the Expiration Date, FHP will cause the
trustee of the Pension Plan to transfer to the trust established by Holdings the
assets and liabilities of the Pension Plan attributable to Talbert Individuals.
Such assets (other than the real estate assets) will be distributed in-kind
based on the investments of the accounts of the Talbert Individuals, and a
tenancy in common interest will be transferred with respect to
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<PAGE>
the real estate assets. Holdings will be responsible for all required
governmental compliance testing, reporting, disclosure and funding with respect
to the plan established by Holdings pursuant to this Section 2.1 (including
without limitation, the obligation to file Forms 5500). Holdings will have the
same power and authority to amend or terminate coverage under said successor
plan as held by FHP under the Pension Plan.
Notwithstanding anything else contained herein to the contrary, the
parties to this Agreement anticipate that the Investment Committees of the
Pension Plan and the plan established by Holdings (the "Holdings Plan") will
enter into an agreement (the "Real Estate Disposition Agreement") to provide
for the prompt disposition and maintenance pending disposition of certain real
estate assets which will be held as a tenancy in common following the
Expiration Date by the trustee of the Pension Plan and the trustee of the
Holdings Plan. Consistent with the preceding sentence, Holdings will as soon as
practicable appoint the members of the Investment Committee for the Holdings
Plan. In addition, the parties to this Agreement anticipate that the
respective Committees will negotiate and execute the Real Estate Disposition
Agreement within 30 days or such later date as may be mutually agreed to by the
Investment Committees. In the event that the Investment Committees are unable
to reach agreement with respect to the Real Estate Disposition Agreement, the
Investment Committees will appoint a qualified real estate professional to
determine whether the terms of a proposed disposition are fair and reasonable.
SECTION 2.2 EMPLOYEE STOCK OWNERSHIP PLAN.
(a) FHP ESOP. FHP sponsors the FHP International Corporation
Employee Stock Ownership Plan (the "FHP ESOP"), which covers Talbert
Individuals, as well as employees of FHP and its subsidiaries. FHP will
amend, if necessary, the FHP ESOP or otherwise establish appropriate
administrative procedures to allow participants to direct the trustee of
the FHP ESOP with respect to the exercise of any Rights which are
attributable to shares of FHP allocated to their accounts pursuant to the
FHP Merger. Such amendment or procedures will also provide for the
exercise of Rights by the trustee (or pursuant to some other method
determined to be appropriate by the Committee which administers the FHP
ESOP) which are attributable to shares of FHP which are unallocated under
the FHP ESOP, if any.
(b) HOLDINGS ESOP. A portion of the assets and liabilities of
the FHP ESOP are attributable to Talbert Individuals. As soon as
administratively feasible following the Expiration Date, Holdings will
establish a plan (and accompanying trust) to which the account balances
attributable to Talbert Individuals in the FHP ESOP will be directly
transferred. Such plan will comply with all applicable provisions of the
Code, including, without limitation, Code Section 411(d). As soon as
administratively feasible following the Expiration Date, Holdings will
submit such plan and trust to the Internal Revenue Service for a
determination of its qualified status and tax-exempt status under Code
Sections 401 and 501(a). Holdings will amend such plan and trust as and if
requested by the Internal Revenue Service as a condition of granting a
favorable determination of the tax-qualified and tax-exempt status of such
plan and trust. As soon as administratively feasible following the
Expiration Date, FHP will cause the
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trustee of the FHP ESOP to transfer to the trust established by Holdings
the assets and liabilities of the FHP ESOP attributable to Talbert
Individuals. Such assets will be distributed in-kind based on the
investments of the accounts of the Talbert Individuals under the FHP ESOP.
Holdings will be responsible for all required governmental compliance
testing, reporting, disclosure and funding with respect to the plan
established by Holdings pursuant to this section (including without
limitation, the obligation to file Forms 5500). Holdings will have the
same power and authority to amend or terminate coverage under said
successor plan as held by FHP under the FHP ESOP.
ARTICLE 3. COMPENSATION; NON-QUALIFIED DEFERRED COMPENSATION PLANS
SECTION 3.1 ASSUMPTION OF FHP'S OBLIGATIONS. Holdings will, as of
the Expiration Date, assume the obligations of FHP and Holdings (including TMMC
and THSC) to Talbert Individuals under the FHP International Corporation
Deferred Compensation Plan. Holdings will adopt one or more non-qualified
deferred compensation plans under which the liabilities assumed by Holdings will
be provided to Talbert Individuals. FHP will amend the FHP International
Corporation Deferred Compensation Plan to provide that no distribution of
benefits will take place as a result of the Offering. In addition, as soon as
administratively feasible following the Expiration Date, Holdings will establish
a grantor trust to which the balance of the Holdings subtrust maintained under
the FHP International Corporation Master Trust Agreement will be directly
transferred in-kind.
SECTION 3.2 FICA TAX OBLIGATIONS. Holdings will, as of the
Expiration Date, assume any obligation of FHP, if any, to pay FICA, Medicare,
income tax withholding and similar taxes for any benefits earned by or owed to
the Talbert Individuals under the FHP International Corporation Deferred
Compensation Plan, whether before or after the Expiration Date.
SECTION 3.3 AMENDMENT OR TERMINATION BY HOLDINGS. Holdings will
have the same power and authority as held by FHP under the FHP International
Corporation Deferred Compensation Plan to amend or terminate benefits under the
Holdings successor plan contemplated by Section 3.1.
ARTICLE 4. MEDICAL AND DENTAL PLANS
SECTION 4.1 IMMEDIATE COVERAGE. Holdings will establish a medical
and dental plan or plans providing to Talbert Individuals medical and dental
benefits similar to those provided by FHP immediately prior to the Expiration
Date. Coverage under the medical and dental plan or plans of Holdings will
commence immediately after the Expiration Date with respect to the Talbert
Individuals. Effective as of the Expiration Date, the medical and
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<PAGE>
dental plan or plans established by Holdings will not contain any exclusions or
limitations for preexisting conditions. Holdings will continue to maintain such
similar plans for a period of at least 12 months following the Expiration Date.
SECTION 4.2 CLAIMS PAYMENT AND REIMBURSEMENT. Holdings medical and
dental plan or plans will be responsible for all claims incurred by Talbert
Individuals on or after the Expiration Date. FHP's medical and dental plan and
any other group health plans, if any, will be responsible for all claims
incurred by Talbert Individuals before the Expiration Date.
SECTION 4.3 SUCCESSOR EMPLOYER. For purposes of the obligations
set forth in Section 601, ET SEQ., of the Employee Retirement Income Security
Act, (commonly known as "COBRA continuation coverage"), Holdings (including TMMC
and THSC) will be considered a successor employer to FHP. Holdings medical and
dental plan or plans will provide COBRA continuation coverage to Talbert
Individuals even if such individuals became entitled to COBRA continuation
coverage prior to the Expiration Date.
SECTION 4.4 REPORTING, COMPLIANCE AND FUNDING. Holdings will be
responsible for all required governmental compliance testing, reporting,
disclosure and funding with respect to the medical and dental plan or plans
established by Holdings after the Expiration Date (including without limitation,
the obligation to file Forms 5500). Subject to Section 4.1, Holdings will have
the same power and authority as held by FHP under FHP's medical plan or plans to
amend or terminate coverage under said successor plan(s).
ARTICLE 5. OTHER WELFARE BENEFITS
SECTION 5.1 INSURED PLANS. Coverage of Talbert Individuals under
any insured welfare benefit plans sponsored by FHP will continue until the
Expiration Date, pursuant to the terms of such plans, and will then terminate.
SECTION 5.2 FUTURE BENEFITS. Except as specifically provided in
this Benefits Agreement, Holdings will establish benefit plans and programs
following the Expiration Date according to the terms and conditions it selects.
SECTION 5.3 REPORTING, COMPLIANCE AND FUNDING. Holdings will be
responsible for all required governmental compliance testing, reporting,
disclosure and funding with respect to any welfare plan or plans established by
Holdings (including without limitation, the obligation to file Forms 5500) on or
after the Expiration Date.
ARTICLE 6. SEVERANCE BENEFITS
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SECTION 6.1 SEVERANCE BENEFITS. FHP will, if necessary, amend its
severance plans to provide that no severance benefits will be payable to Talbert
Individuals as a result of the Offering.
ARTICLE 7. STOCK OPTION PLAN
Section 7.1 STOCK OPTION PLAN. FHP maintains the FHP
International Corporation Executive Incentive Plan (the "EIP"). Some Talbert
Individuals currently hold outstanding options (the "FHP Options") granted under
the EIP. Pursuant to Section 4.8 of the FHP Merger Agreement, FHP Options
outstanding as of the date of the FHP Merger will either be (i) cashed out in
accordance with Section 4.8(a) of the FHP Merger Agreement or (ii) exchanged for
options (the "Exchange Options") to purchase Class B common stock of N-T
Holdings, Inc., the holding company for FHP and PacifiCare following the FHP
Merger, in accordance with Section 4.8(b) of the FHP Merger Agreement. The
effect of the separation of TMMC and THSC from N-T Holdings, Inc. on the
Exchange Options held by Talbert Individuals will be as set forth in Section
4.8(b) of the FHP Merger Agreement.
ARTICLE 8. GENERAL
SECTION 8.1 INDEMNIFICATION. Holdings will indemnify and hold
harmless FHP for any costs, liabilities and expenses, including attorneys'
fees and other costs of defense, for any claims or actions against FHP (or
any plan established or maintained by FHP, or any successor thereto), and for
any liabilities or obligations imposed upon FHP, (or any plan established or
maintained by FHP, or any successor thereto) with respect to (i) the
obligations or liabilities assumed by Holdings (or any plan established or
maintained by Holdings, or its subsidiaries, or any successor thereto) under
this Benefits Agreement, and (ii) actions or omissions of Holdings (or any
plan established or maintained by Holdings or its subsidiaries, or any
successor thereto) with respect to any employee pension, benefit, health,
welfare or other plans which are established by Holdings and which relate to
any period after the Expiration Date.
SECTION 8.2 NO THIRD PARTY BENEFICIARIES. Notwithstanding anything
to the contrary herein, this Benefits Agreement is solely for the benefit of FHP
and Holdings. There will be no third party beneficiaries under this Benefits
Agreement, including, without limitation, any Talbert Individual or FHP
Individual.
SECTION 8.3 OTHER ACTIONS. FHP and Holdings will take such other
and further actions as may be necessary or appropriate to carry out this
Benefits Agreement.
SECTION 8.4 GOVERNING LAW. This Benefits Agreement and the legal
relations between the parties hereto will be governed by and construed in
accordance with the internal laws of the State of California and without regard
to conflict of laws principles.
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SECTION 8.5 OBLIGATIONS BINDING UPON SUCCESSOR. Obligations of FHP
and Holdings under this Benefits Agreement will be binding upon their respective
successors or assigns.
SECTION 8.6 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
SECTION 8.7 AMENDMENT AND MODIFICATIONS. No amendment or other
modification of this Agreement will be binding upon any party unless executed in
writing by all parties thereto.
SECTION 8.8 WAIVER. No waiver by any party of any of the
provisions of this Agreement will be deemed, or will constitute, a waiver of any
other provision, whether similar, nor will any waiver constitute a continuing
waiver. No waiver will be binding unless executed in writing by the party
making the waiver.
SECTION 8.9 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 8.10 COUNTERPARTS. This agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 8.11 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
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IN WITNESS WHEREOF, the parties have caused this Benefits
Agreement to be executed by their duly authorized officers as of the day and
year first written above.
FHP INTERNATIONAL CORPORATION
By: __________________________
Westcott W. Price
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: __________________________
Jack D. Massimino
President and Chief Executive Officer
S-1
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APPENDIX A
PROFESSIONAL MEDICAL AND DENTAL CORPORATIONS
1. Robert Anderson, DDS, Inc. (CA), (dba Talbert Dental Group).
2. James Brodahl, DDS, Inc. (CA), (dba Talbert Dental Group).
3. Larry Kaban, DDS, Inc. (CA), (dba Talbert Dental Group).
4. John Whitley, DDS, Inc. (CA), (dba Talbert Dental Group).
5. Talbert Medical Group, Inc. (CA) (dba Talbert Medical Group).
6. Talbert Medical Group, Ltd. (NV).
7. Talbert Dental Group, P.C. (AZ).
8. Talbert Medical Group, P.C. (AZ).
9. Talbert Dental Group, Inc. (UT).
10. Talbert Medical Group, Inc. (UT).
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TAX ALLOCATION AGREEMENT
This Tax Allocation Agreement is entered into as of ____________,
1996, between FHP International Corporation, a Delaware corporation ("FHP"),
Talbert Medical Management Corporation ("TMMC"), Talbert Health Services
Corporation, a Delaware corporation ("THSC"), and Talbert Medical Management
Holdings Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc. ("PacifiCare"), Holdings intends to acquire
FHP's shares of the common stock of TMMC and THSC (the "Acquisition") in
exchange for subscription rights to purchase shares of Holdings' common stock
(the "Rights"), which Rights are to be distributed to FHP's stockholders as a
portion of the consideration in the FHP Merger (the "Offering").
WHEREAS, TMMC and THSC have previously been parties to the FHP
International Corporation and Subsidiaries Amended and Restated Tax Allocation
Agreement (the "Existing Tax Allocation Agreement").
WHEREAS, if upon expiration of the Rights (the "Expiration Date"), FHP
holds less than a majority of the shares of Holdings' common stock, Holdings
(including TMMC and THSC) will not be a subsidiary of FHP.
WHEREAS, in light of the Acquisition and the Offering, TMMC, THSC,
Holdings (collectively, "Talbert") and FHP have agreed that it is appropriate
and desirable to terminate the Existing Tax Allocation Agreement as to TMMC and
THSC and set forth herein the principles of their relationship and
responsibilities going forward regarding Taxes and other related Tax matters.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
of the parties contained herein, the parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following terms will have the
following meanings:
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"Agreement" means this Tax Allocation Agreement between FHP and
Talbert as amended or supplemented.
"Closing Date" means the date on which the closing of the Acquisition
occurs.
"FHP" means FHP International Corporation and all of its subsidiaries
after the Closing Date.
"Return" means any return, report, form or similar statement or
document (including, without limitation, any related or supporting information
or schedule attached thereto and any information return, claim for refund, amend
return and declaration of estimated tax) that has been or is required to be
filed with any Taxing Authority or that has been or is required to be furnished
to any Taxing Authority in connection with the determination, assessment or
collection of any Taxes or the administration of any laws, regulations or
administrative requirements to any Taxes.
"Tax" (and, with correlative meanings, "Taxes" and "Taxable") means,
without limitation, and as determined on a jurisdiction-by-jurisdiction basis,
each foreign or U.S. federal, state, local or municipal income, alternative or
add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property or any other tax, custom, tariff, impost, levy,
duty, governmental fee or other like assessment or charge or any kind
whatsoever, together with any interest or penalty, addition to tax or additional
amount related thereto, imposed by any Taxing Authority.
"Taxing Authority" means any Governmental Authority or any
subdivision, agency, commission or authority thereof, or any quasi-governmental
or private body having jurisdiction over the assessment, determination,
collection or other imposition of Taxes.
"Talbert" means TMMC, THSC, Holdings and all of their respective
subsidiaries after the Closing Date.
ARTICLE 2. TAX ALLOCATION FOLLOWING THE TMMC ACQUISITION
SECTION 2.1 SETTLEMENT OF ACCOUNTS. Prior to the Closing Date, the
parties will settle their accounts with respect to Tax matters under the
Existing Tax Allocation Agreement for all periods prior to the Closing Date, and
will agree as to their respective Tax Liabilities for any Taxable periods
beginning before, and ending after, the Closing Date.
SECTION 2.2 TERMINATION OF EXISTING TAX ALLOCATION AGREEMENT. Upon
the completion of the Acquisition, the Existing Tax Allocation Agreement will be
terminated with respect to TMMC and THSC, and any and all obligations and
responsibilities of
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TMMC, THSC and FHP under the Existing Tax Allocation Agreement for all
periods commencing prior to the Closing Date will be terminated. There will
be no further adjustments to Taxes with respect to such prior Taxable periods
following the Closing Date, PROVIDED, HOWEVER, that Talbert will indemnify
and hold harmless FHP against any adverse adjustment, or receive from FHP the
benefit of any favorable adjustment, of an FHP Return by a Governmental
Authority to the extent that the adjustment (a) relates to a Taxable period
commencing prior to the Acquisition, (b) arises out of Talbert's activities,
and (c) when combined with all other such adjustments that have occurred,
exceeds $2 million but does not exceed $4 million. To the extent any such
adjustment, when combined with all other such adjustments that have occurred,
exceed $4 million, Talbert and FHP will share equally the liability for, or
benefit of, such an adjustment to the extent that it exceeds $4 million.
SECTION 2.3 FHP RETURNS. FHP agrees to file all Returns with respect
to, and to pay all Taxes imposed upon or attributable to, FHP and its affiliates
(other than Talbert for periods described in Section 2.4) for all Taxable
periods, including all Taxes incurred in connection with the Acquisition.
SECTION 2.4 TALBERT RETURNS. Talbert agrees to file all Returns with
respect Talbert for all Taxable periods ending after the Closing Date and to pay
all Taxes imposed upon or attributable to Talbert for all Taxable periods ending
after the Closing Date.
ARTICLE 3. GENERAL
SECTION 3.1 COOPERATION. FHP and Talbert will, each at its own
expense, cooperate with each other in any matters relating to Taxes and, in
connection therewith, will (i) maintain appropriate books and records as
required by the Internal Revenue Code of 1986, for any and all Taxable periods
or any portion of a Taxable period; (ii) provide to each other such information
as may be necessary or useful in the filing of any such Return; (iii) execute
and deliver such consents, elections, powers of attorney and other documents
that may be required or appropriate for the proper filing of any such Return;
and (iv) make available for responding to inquiries of any other party or any
Taxing Authority, appropriate employees and officers of and advisors retained by
FHP or Talbert.
SECTION 3.2 GOVERNING LAW. To the extent not preempted by any
applicable foreign or U.S. federal, state, or local Tax law, this Agreement will
be governed by and construed and interpreted in accordance with the laws of the
State of California, disregarding conflict of law provisions.
SECTION 3.3 AFFILIATES. Each of the parties hereto will cause to be
performed, and hereby guarantees the performance of all actions, agreements and
obligations set forth herein to be performed by any affiliate of such party.
SECTION 3.4 NOTICES. Unless specifically provided otherwise in this
Agreement, all notices or other communications under this Agreement will be in
writing and will be deemed to be duly given when delivered in person, sent by
facsimile, deposited in the United States mail, postage prepaid and sent
certified mail, return
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receipt requested or deposited in private express mail, postage prepaid,
addressed as follows:
If to FHP to:
FHP INTERNATIONAL CORPORATION
3120 Lake Center Drive
Santa Ana, CA 92704
Attn: Secretary
Facsimile: (714) 825-5710
With copies to:
KONOWIECKI & RANK
First Interstate World Center
633 W. 5th Street
Los Angeles, CA 90071-2007
Attn: Joseph Konowiecki
Facsimile: (213) 229-0992
If to TMMC, THSC or Holdings:
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
3540 Howard Way
Costa Mesa, CA 92626-1417
Attn: President
Facsimile: (714) 436-4860
With copies to:
O'MELVENY & MYERS LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: C. James Levin, Esq.
Facsimile: (213) 669-6407
Any party may, by written notice to the other parties, change the address to
which such notices are to be given.
SECTION 3.5 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
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SECTION 3.6 CONFLICTING OR INCONSISTENT PROVISIONS. In the event
that any provision or term of this Agreement conflicts or is inconsistent with
any provision or term of any other agreement between or among FHP or any other
member of the FHP group and/or Talbert or any other member of the Talbert group,
as the case may be, which is in effect on or prior to the date hereof, the
provision or term of this Agreement will control and apply and the provision or
term of any other agreement will, to the extent of such conflict or
inconsistency, be inoperative and inapplicable.
SECTION 3.7 SEVERABILITY. The parties agree that each provision to
this Agreement will be construed independent of any other provision of this
Agreement. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provisions hereof. This Agreement
will be construed in all respects as if such invalid or unenforceable provision
were omitted.
SECTION 3.8 DURATION. Notwithstanding anything in this Agreement to
the contrary, the provisions of this Agreement will survive for the full period
of all applicable statutes of limitations (giving effect to any waiver,
mitigation or extension thereof).
SECTION 3.9 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all of the parties hereto.
SECTION 3.10 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 3.11 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 3.12 COUNTERPARTS. This Agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 3.13 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
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IN WITNESS WHEREOF, the parties hereto have caused this Tax Allocation
Agreement to be executed by their duly authorized representatives.
FHP INTERNATIONAL CORPORATION
By: ________________________________
Westcott W. Price III
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT
CORPORATION
By: ________________________________
Jack D. Massimino
President and Chief Executive
Officer
TALBERT HEALTH SERVICES
CORPORATION
By: ________________________________
Jack D. Massimino
President and Chief Executive
Officer
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
By: ________________________________
Jack D. Massimino
President and Chief Executive
Officer
S-1
<PAGE>
ALLOCATION OF LIABILITIES AND INDEMNIFICATION AGREEMENT
This Allocation of Liabilities and Indemnification Agreement (the
"Agreement") is entered into as of __________, 1996 between FHP International
Corporation, a Delaware corporation ("FHP"), Talbert Medical Management
Corporation, a Delaware corporation ("TMMC"), Talbert Health Services
Corporation, a Delaware corporation ("THSC"), and Talbert Medical Management
Holdings Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, TMMC and THSC were organized as wholly-owned subsidiaries of
FHP and succeeded to certain portions of FHP's former staff model operations as
of January 1, 1996, since which date TMMC and THSC have maintained their own
balance sheets, which have been consolidated with FHP's balance sheet for
purposes of reporting FHP's consolidated financial condition.
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc. ("PacifiCare"), Holdings intends to acquire
FHP's shares of the common stock of TMMC and THSC (the "Acquisition") in
exchange for subscription rights to purchase shares of Holdings' common stock
("Rights"), which Rights are to be distributed to FHP's stockholders as a
portion of the consideration in the FHP Merger (the "Offering").
WHEREAS, in light of the Acquisition and the Offering, TMMC, THSC and
Holdings (collectively, "Talbert") and FHP have agreed that it is appropriate
and desirable to set forth herein the principles of their relationship and
responsibilities after the Acquisition and the Offering regarding the allocation
of liabilities between them and their indemnification obligations with respect
to those liabilities.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
of the parties contained herein, the parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement, the following terms will have
the following meanings:
"Affiliate" will have the meaning provided under Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
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"Claim" means (a) a suit, proceeding or investigation by or before
any court or governmental or regulatory agency or body, or a written demand for
payment of a Liability or cause of action asserted against FHP, Talbert or both
by a person or entity other than Talbert or FHP (a "Claimant"); or (b) a written
demand or assertion by or on behalf of a Claimant that a cause of action giving
rise to a Liability exists against Talbert or FHP.
"Expiration Date" means the date on which the Rights expire.
"FHP" means FHP International Corporation, its parent and all of their
respective subsidiaries after the Acquisition.
"FHP Balance Sheet" means the consolidated balance sheet of the FHP
Group, including the consolidating balance sheets of each subsidiary of FHP
and all asset and liability work schedules underlying such balance sheets.
"FHP Business" means any business conducted by FHP after the
Expiration Date.
"FHP Group" means FHP International Corporation, and all of its
existing and former subsidiaries (including Talbert) and Affiliates, immediately
prior to the Acquisition.
"Indemnified Loss" means a cost or loss for which an Indemnitee
receives or is entitled to receive a payment from an Indemnifying Party.
"Indemnifying Party" means a party indemnifying another party pursuant
to Article 3, or a party against whom such indemnification is sought pursuant to
those provisions of this Agreement.
"Indemnitee" means a party or other person or entity entitled to be
indemnified pursuant to Article 3.
"Liability or Liabilities" means losses, debts, liabilities, damages,
obligations, claims, demands, judgments or settlements of any nature or kind,
including all costs and expenses (legal, accounting or otherwise) associated
therewith, but excluding "Taxes" as such term is defined in the Tax Allocation
Agreement of even date herewith between FHP and Talbert.
"Offering Balance Sheet Date" means [June 30, 1996].
"Rights Offering" means the offering of rights to purchase the Common
Stock of Holdings in connection with the FHP Merger.
"Rights Offering Costs" means all legal, accounting, printing and
filing fees incurred by Talbert and FHP in connection with the Rights Offering.
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"Talbert" means TMMC, THSC, Holdings, and all of their respective
subsidiaries after the Acquisition.
"Talbert Balance Sheet" means the consolidated balance sheet of TMMC,
THSC and Holdings, including the consolidating balance sheets of each subsidiary
of TMMC and THSC and all asset and liability work schedules underlying such
balance sheets.
"Talbert Business" means any business conducted by TMMC, THSC,
Holdings or their predecessors at any time.
"Talbert Medical Malpractice Liabilities" means any Liabilities for
medical malpractice, clinic professional liability, or errors and omissions that
result from a Claim arising out of the Talbert Business prior to February 15,
1996.
"Tax Allocation Agreement" means the Tax Allocation Agreement of even
date herewith between the parties.
"Talbert Pre-1996 Liabilities" means Liabilities other than Talbert
Medical Malpractice Liabilities that are not disclosed or for which no reserves
have been established on the FHP Balance Sheet as of June 30, 1996, and result
from a Claim arising out of the Talbert Business and based on events occurring
after January 1, 1994 and prior to the Expiration Date.
ARTICLE 2. ASSUMPTION AND ALLOCATION OF LIABILITIES
SECTION 2.1 FHP LIABILITIES. On and after the Expiration Date, FHP
will assume, the following Liabilities (the "FHP Liabilities"):
(a) Liabilities (including any Liabilities for which reserves
have been established) reflected on the FHP Balance Sheet as of the
Expiration Date (excluding any Talbert Liabilities), regardless of the
adequacy of the amount set forth thereon;
(b) Liabilities that result from a Claim arising out of the
business of the FHP Group based on events occurring prior to January 1,
1996 (excluding any Talbert Pre-1996 Liabilities);
(c) Liabilities that arise out of the FHP Business or any other
activity undertaken by, or any failure to act by, FHP after the Expiration
Date;
(d) Liabilities for Rights Offering Costs; and
(e) Talbert Medical Malpractice Liabilities.
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SECTION 2.2 TALBERT LIABILITIES. On and after the Expiration Date,
Talbert will assume, the following Liabilities (the "Talbert Liabilities"):
(a) Liabilities reflected on the Talbert Balance Sheet as of the
Expiration Date, regardless of the adequacy of the amount set forth
thereon;
(b) Liabilities that are disclosed, or for which reserves have
been established, on the FHP Balance Sheet as of June 30, 1996, and
result from a Claim arising out of the Talbert Business and based on events
occurring after January 1, 1996 and prior to the Expiration Date;
(c) the Talbert Pre-1996 Liabilities, except to the extent of
any reserves established by FHP between June 30, 1996 and the Offering
Balance Sheet Date with respect to Talbert Pre-1996 Liabilities; and
(d) Liabilities that arise out of the Talbert Business or any
other activity undertaken by, or any failure to act by, Talbert after the
Expiration Date.
ARTICLE 3. INDEMNIFICATION
SECTION 3.1 BY FHP. FHP will indemnify and hold harmless Talbert,
its subsidiaries and Affiliates, and each officer, director, employee and agent
thereof, from and against any and all FHP Liabilities.
SECTION 3.2 BY TALBERT. Talbert will indemnify and hold harmless
FHP, its subsidiaries and Affiliates, and each officer, director, employee and
agent thereof, from and against any and all Talbert Liabilities.
SECTION 3.3 PAYMENT TERMS. All requests for payments to be made
pursuant to this Article 3 will be made by the party seeking indemnification
pursuant to a "Claims Notice." A Claims Notice will set forth, in reasonable
detail (a) the nature of the Liability, (b) the name of the Claimant, (c) the
amount of damages or other demand being sought and (d) the basis for the
indemnification obligation. Within thirty (30) calendar days of receipt of a
Claims Notice, the party from whom indemnification is being sought shall either
(i) make the payment as requested in the Claims Notice or (ii) notify the party
seeking indemnification in writing that such party disputes all or part of the
amounts being sought (a "Dispute Notice"). The Dispute Notice shall set forth,
in detail, the basis for such dispute. The parties shall in good faith, attempt
to resolve in a diligent manner the matter set forth in the Dispute Notice.
SECTION 3.4 TAXES. Any Indemnified Loss will be calculated net of
any tax benefits (net of any tax detriments) realized or realizable by the
Indemnified Party based on the present value thereof in respect of the
Indemnified Loss.
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SECTION 3.5 INSURANCE. The indemnification provisions of this
Agreement are not to be construed to be insurance coverage and do not amend or
affect in any manner any insurance policies purchased by the FHP Group prior to
the Expiration Date. Each party will use commercially reasonable efforts to
collect on insurance as to which it is the insured party, without regard to
whether it is the Indemnitee or the Indemnifying Party hereunder. If either
party receives insurance proceeds from an unrelated insurance company after a
payment has been made between the parties for an Indemnified Loss, it will
promptly remit to the other a portion of such proceeds equal to the other
party's proportion of the Indemnified Loss (but net of the other party's pro
rata portion of any resulting premium increase). In the event that the
Indemnitee collects on or otherwise receives proceeds from insurance and such
insurance is used to satisfy the indemnification obligations of the Indemnifying
Party, the Indemnifying Party shall pay to the Indemnitee any deductible amount
and other fees, costs and expenses (including any expenses incurred in
connection with enforcing the Indemnitee's right to collect on insurance).
SECTION 3.6 EFFECT OF OTHER REDUCTIONS OF INDEMNIFIED LOSS. If the
amount of any Indemnified Loss will at any time subsequent to indemnification
pursuant to this Agreement be reduced by recovery, settlement or otherwise, the
Indemnifying Party's share of such reduction, less any expenses reasonably
incurred in connection therewith, will promptly be repaid by the Indemnitee to
the Indemnifying Party.
SECTION 3.7 WAIVER OF SUBROGATION. Each party hereby waives any
right of subrogation it may have with respect to any Indemnified Loss.
ARTICLE 4. CONTROL OF CLAIMS
SECTION 4.1 FHP LIABILITIES. Subject to the restrictions and
provisions in this Article 4, FHP will have full control over any action taken
with respect to all Claims subject to assumption and allocation under Section
2.1.
SECTION 4.2 TALBERT LIABILITIES. Subject to the restrictions and
provisions in this Article 4, Talbert will have full control over any action
taken with respect to all Claims subject to assumption and allocation under
Section 2.2.
SECTION 4.3 LEGAL ACTION. If either party is served with any
judicial or administrative process concerning any Claim the defense of which
such party believes should be conducted by the other party, such party will:
(a) take all steps necessary or appropriate to preserve both parties' legal
rights and remedies; (b) notify the other party of the pendency of the action;
and (c) request that the other party assume conduct of the defense and that the
other party use its reasonable best efforts to have itself substituted as a
party to the action. Acceptance of control will not act as an admission of
liability. Unless and until the parties agree to a transfer of control of a
particular action, the party originally notified or served will have full
control over, and responsibility for, the conduct of the proceedings, and will
be solely liable for any default. If both parties are served with judicial or
administrative process
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concerning any Claim covered by this Agreement, each party will use its
reasonable best efforts to reach agreement with the other as to which party
should control the conduct of the proceedings. Pending such agreement, each
party will have full control over, and responsibility for, preserving its legal
rights and remedies, and will be solely responsible for any default entered
against it.
SECTION 4.4 OTHER ACTIONS. If either party receives from a Claimant
any demand, not related to judicial or administrative action, for payment
against which such party believes it is entitled to be indemnified pursuant to
this Agreement, the Indemnitee will promptly forward such demand to the
Indemnifying Party with a request that the Indemnifying Party assume control of
the Claim and acknowledge its obligation to indemnify the Indemnitee with
respect to such Claim. The Indemnifying Party will respond to such a request
from the Indemnitee within 30 days. If the parties cannot agree as to which
party should control the Claim, the party upon whom the demand was made may
settle the Claim and resolve any dispute over indemnification under the
provisions of Section 3.3.
SECTION 4.5 CONSULTATION AND COOPERATION. FHP and Talbert agree to
cooperate with each other in good faith in connection with all Claims in order
to minimize the Liability resulting from Claims asserted against either party
and the adverse effects on the businesses of both parties.
ARTICLE 5. MISCELLANEOUS PROVISIONS
SECTION 5.1 GOVERNING LAW. This Agreement will be governed by, and
construed in accordance with, the laws of the State of California, disregarding
conflict of law provisions.
SECTION 5.2 NOTICES. Unless specifically provided otherwise in this
Agreement, all notices or other communications under this Agreement will be in
writing and will be deemed to be duly given when delivered in person, sent by
facsimile, deposited in the United States mail, postage prepaid and sent
certified mail, return receipt requested or deposited in private express mail,
postage prepaid, addressed as follows:
If to FHP to:
FHP INTERNATIONAL CORPORATION
3120 Lake Center Drive
Santa Ana, CA 92704
Attn: Secretary
Facsimile: (714) 825-5710
6
<PAGE>
With copies to:
KONOWIECKI & RANK
First Interstate World Center
633 W. 5th Street
Los Angeles, CA 90071-2007
Attn: Joseph Konowiecki
Facsimile: (213) 229-0992
If to TMMC, THSC or Holdings:
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
3540 Howard Way
Costa Mesa, CA 92626-1417
Attn: President
Facsimile: (714) 436-4860
With copies to:
O'MELVENY & MYERS LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: C. James Levin, Esq.
Facsimile: (213) 669-6407
Any party may, by written notice to the other parties, change the address to
which such notices are to be given.
SECTION 5.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties regarding its subject matter. It supersedes all
prior written or contemporaneous oral agreements related thereto.
SECTION 5.4 SEVERABILITY. The parties agree that each provision to
this Agreement will be construed independent of any other provision of this
Agreement. The invalidity or unenforceability of any particular provision of
this Agreement will not affect the other provisions hereof. This Agreement will
be construed in all respects as if such invalid or unenforceable provision were
omitted.
SECTION 5.5 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all of the parties hereto.
7
<PAGE>
SECTION 5.6 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 5.7 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision hereof.
SECTION 5.8 CUMULATIVE REMEDIES. No right or remedy conferred upon
or reserved to any of the parties under the terms of this Agreement is intended
to be, nor will it be deemed, exclusive of any other right or remedy provided
herein or by law or equity, but each will be cumulative of every other right or
remedy.
SECTION 5.9 BINDING EFFECT OF AGREEMENT. This Agreement will be
binding upon, and will inure to the benefit of and be enforceable by, the
parties hereto, their respective Affiliates, successors and assigns.
SECTION 5.10 NO THIRD PARTY BENEFICIARY. Nothing in this Agreement,
express or implied, will confer on any person other than the parties any rights
or remedies under or by virtue of this Agreement.
SECTION 5.11 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
[Remainder of page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties, by their duly authorized officers,
have executed and delivered this Agreement on the date first written above.
FHP INTERNATIONAL CORPORATION
By: ____________________________
Westcott W. Price III
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT CORPORATION
By: ____________________________
Jack D. Massimino
President and Chief Executive Officer
TALBERT HEALTH SERVICES CORPORATION
By: ____________________________
Jack D. Massimino
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: ____________________________
Jack D. Massimino
President and Chief Executive Officer
S-1
<PAGE>
EXHIBIT 10.11
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
1996 STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Administration and Authorization; Power and Procedure . 1
1.3 Participation. . . . . . . . . . . . . . . . . . . . . . 3
1.4 Shares Available for Awards; Share Limits. . . . . . . . 3
1.5 Grant of Awards. . . . . . . . . . . . . . . . . . . . . 4
1.6 Award Period . . . . . . . . . . . . . . . . . . . . . . 4
1.7 Limitations on Exercise and Vesting of Awards . . . . . 4
1.8 No Transferability; Limited Exception to Transfer
Restrictions. . . . . . . . . . . . . . . . . . . . 5
2. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Option Price . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Limitations on Grant and Terms of Incentive Stock
Options . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Limits on 10% Holders. . . . . . . . . . . . . . . . . . 7
2.5 Cancellation and Regrant/Waiver of Restrictions . . . . 7
2.6 Options and Rights in Substitution for Stock Options
Granted by Other Corporations . . . . . . . . . . . 7
3. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . 8
3.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Exercise of Stock Appreciation Rights. . . . . . . . . . 8
3.3 Payment. . . . . . . . . . . . . . . . . . . . . . . . . 8
4. RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . 9
4.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.2 Restrictions . . . . . . . . . . . . . . . . . . . . . . 9
4.3 Return to the Corporation. . . . . . . . . . . . . . . . 10
5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES. . . . . . . . . . 10
5.1 Grants of Performance Share Awards . . . . . . . . . . . 10
5.2 Special Performance-Based Share Awards . . . . . . . . . 11
5.3 Grants of Stock Bonuses. . . . . . . . . . . . . . . . . 12
5.4 Deferred Payments. . . . . . . . . . . . . . . . . . . . 13
6. OTHER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 13
i
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6.1 Rights of Eligible Persons, Participants and
Beneficiaries . . . . . . . . . . . . . . . . . . . 13
6.2 Adjustments; Acceleration. . . . . . . . . . . . . . . . 14
6.3 Effect of Termination of Employment. . . . . . . . . . . 15
6.4 Compliance with Laws . . . . . . . . . . . . . . . . . . 15
6.5 Tax Withholding. . . . . . . . . . . . . . . . . . . . . 16
6.6 Plan Amendment, Termination and Suspension . . . . . . . 16
6.7 Privileges of Stock Ownership. . . . . . . . . . . . . . 17
6.8 Effective Date of the Plan . . . . . . . . . . . . . . . 17
6.9 Term of the Plan . . . . . . . . . . . . . . . . . . . . 17
6.10 Governing Law/Construction/Severability. . . . . . . . . 17
6.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . 18
6.12 Effect of Change of Subsidiary Status. . . . . . . . . . 18
7. NON-EMPLOYEE DIRECTOR OPTIONS . . . . . . . . . . . . . . . . 19
7.1 Participation. . . . . . . . . . . . . . . . . . . . . . 19
7.2 Annual Option Grants . . . . . . . . . . . . . . . . . . 19
7.3 Option Price . . . . . . . . . . . . . . . . . . . . . . 19
7.4 Option Period and Exercisability . . . . . . . . . . . . 20
7.5 Termination of Directorship. . . . . . . . . . . . . . . 20
7.6 Adjustments. . . . . . . . . . . . . . . . . . . . . . . 20
7.7 Acceleration Upon a Change in Control Event . . . . . . 21
8. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . 21
ii
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
1996 STOCK INCENTIVE PLAN
1. THE PLAN.
1.1 PURPOSE.
The purpose of this Plan is to promote the success of the Company by
providing an additional means through the grant of Awards to attract, motivate,
retain and reward key employees, including officers, whether or not directors,
of the Company with awards and incentives for high levels of individual
performance and improved financial performance of the Company and to attract,
motivate and retain experienced and knowledgeable independent directors through
the benefits provided under Article 7. "Corporation" means Talbert Medical
Management Holdings Corporation, and "Company" means the Corporation and its
Subsidiaries, collectively. These terms and other capitalized terms are defined
in Article 8.
1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE.
(a) COMMITTEE. This Plan shall be administered by and all Awards to
Eligible Persons shall be authorized by the Committee. Action of the Committee
with respect to the administration of this Plan shall be taken pursuant to a
majority vote or by unanimous written consent of its members.
(b) PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the
express provisions of this Plan, the Committee shall have the authority:
(i) to determine from among those persons eligible the
particular Eligible Persons who will receive any Awards;
(ii) to grant Awards to Eligible Persons, determine the price at
which securities will be offered or awarded and the amount of securities
to be offered or awarded to any of such persons, and determine the other
specific terms and conditions of such Awards consistent with the express
limits of this Plan, and establish the installments (if any) in which
such Awards shall become exercisable or shall vest, or determine that no
delayed exercisability or vesting is required, and establish the events
of termination or reversion of such Awards;
(iii) to approve the forms of Award Agreements (which need
not be identical either as to type of award or among Participants);
<PAGE>
(iv) to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and Participants who
are granted Awards under Articles 2, 3, 4 or 5 of this Plan, further
define the terms used in this Plan, and prescribe, amend and rescind
rules and regulations relating to the administration of this Plan;
(v) to cancel, modify, or waive the Corporation's rights with
respect to, or modify, discontinue, suspend, or terminate any or all
outstanding Awards held by Eligible Persons, subject to any required
consent under Section 6.6;
(vi) to accelerate or extend the exercisability or extend the
term of any or all such outstanding Awards within the maximum ten-year
term of Awards under Section 1.6; and
(vii) to make all other determinations and take such other
action as contemplated by this Plan or as may be necessary or advisable
for the administration of this Plan and the effectuation of its purposes.
Notwithstanding the foregoing, the provisions of Article 7 relating to
Non-Employee Director Awards shall be automatic and, to the maximum extent
possible, self-effectuating.
(c) BINDING DETERMINATIONS. Any action taken by, or inaction of, the
Corporation, any Subsidiary, the Board or the Committee relating or pursuant to
this Plan shall be within the absolute discretion of that entity or body and
shall be conclusive and binding upon all persons. No member of the Board or
Committee, or officer of the Corporation or any Subsidiary, shall be liable for
any such action or inaction of the entity or body, of another person or, except
in circumstances involving bad faith, of himself or herself. Subject only to
compliance with the express provisions hereof, the Board and Committee may act
in their absolute discretion in matters within their authority related to this
Plan.
(d) RELIANCE ON EXPERTS. In making any determination or in taking
or not taking any action under this Plan, the Committee or the Board, as the
case may be, may obtain and may rely upon the advice of experts, including
professional advisors to the Corporation. No director, officer or agent of the
Company shall be liable for any such action or determination taken or made or
omitted in good faith.
(e) DELEGATION. The Committee may delegate ministerial,
non-discretionary functions to a third-party administrator or to individuals
who are officers or employees of the Company.
2
<PAGE>
1.3 PARTICIPATION.
Awards may be granted by the Committee only to those persons that the
Committee determines to be Eligible Persons. An Eligible Person who has been
granted an Award may, if otherwise eligible, be granted additional Awards if the
Committee shall so determine.
1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS.
(a) SHARES AVAILABLE. Subject to the provisions of Section 6.2, the
capital stock that may be delivered under this Plan shall be shares of the
Corporation's authorized but unissued Common Stock and any shares of its Common
Stock held as treasury shares. The shares may be delivered for any lawful
consideration.
(b) SHARE LIMITS. The maximum number of shares of Common Stock that
may be delivered pursuant to all Awards granted under this Plan shall not exceed
180,000 shares (the "SHARE LIMIT"). The maximum number of shares of Common
Stock that may be delivered pursuant to Options qualified as Incentive Stock
Options granted under Article 2 of this Plan is 50,000 shares. The maximum
number of shares of Common Stock that may be delivered to Non-Employee Directors
under the provisions of Article 7 shall not exceed 60,000 shares. The maximum
number of shares subject to Options and Stock Appreciation Rights that are
granted during any calendar year to any individual shall be limited to 50,000.
Each of the four foregoing numerical limits shall be subject to adjustment as
contemplated by this Section 1.4 and Section 6.2.
(c) SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED
AWARDS. No Award may be granted under this Plan unless, on the date of grant,
the sum of (i) the maximum number of shares issuable at any time pursuant to
such Award, plus (ii) the number of shares that have previously been issued
pursuant to Awards granted under this Plan, other than reacquired shares
available for reissue consistent with any applicable legal limitations, plus
(iii) the maximum number of shares that may be issued at any time after such
date of grant pursuant to Awards that are outstanding on such date, does not
exceed the Share Limit. Shares that are subject to or underlie Awards which
expire or for any reason are cancelled or terminated, are forfeited, fail to
vest, or for any other reason are not paid or delivered under this Plan, as
well as reacquired shares, shall again, except to the extent prohibited by
law, be available for subsequent Awards under the Plan. Except as limited by
law, if an Award is or may be settled only in cash, such Award need not be
counted against any of the limits under this Section 1.4.
3
<PAGE>
1.5 GRANT OF AWARDS.
Subject to the express provisions of this Plan, the Committee shall
determine the number of shares of Common Stock subject to each Award, the
price (if any) to be paid for the shares or the Award and, in the case of
Performance Share Awards, in addition to matters addressed in Section 1.2(b),
the specific objectives, goals and performance criteria (such as an increase
in sales, market value, earnings or book value over a base period, the years
of service before vesting, the relevant job classification or level of
responsibility or other factors) that further define the terms of the
Performance Share Award. Each Award shall be evidenced by an Award Agreement
signed by the Corporation and, if required by the Committee, by the
Participant. The Award Agreement shall set forth the material terms and
conditions of the Award established by the Committee consistent with the
specific provisions of this Plan.
1.6 AWARD PERIOD.
Each Award and all executory rights or obligations under the related
Award Agreement shall expire on such date (if any) as shall be determined by
the Committee, but in the case of Options or other rights to acquire Common
Stock not later than ten (10) years after the Award Date.
1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS.
(a) PROVISIONS FOR EXERCISE. Unless the Committee otherwise
expressly provides, no Award shall be exercisable or shall vest until at
least 12 months after the initial Award Date, and once exercisable an Award
shall remain exercisable until the expiration or earlier termination of the
Award.
(b) PROCEDURE. Any exercisable Award shall be deemed to be
exercised when the Secretary of the Corporation receives written notice of
such exercise from the Participant, together with any required payment made
in accordance with Section 2.2(a) or 7.4, as the case may be.
(c) FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests
shall be disregarded, but may be accumulated. The Committee, however, may
determine in the case of Eligible Persons that cash, other securities, or
other property will be paid or transferred in lieu of any fractional share
interests. No fewer than 100 shares may be purchased on exercise of any Award
at one time unless the number purchased is the total number at the time
available for purchase under the Award.
4
<PAGE>
1.8 NO TRANSFERABILITY; LIMITED EXCEPTION TO TRANSFER RESTRICTIONS.
(a) LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly
provided in (or pursuant to) this Section 1.8, by applicable law and by the
Award Agreement, as the same may be amended, (i) all Awards are
non-transferable and shall not be subject in any manner to sale, transfer,
anticipation, alienation, assignment, pledge, encumbrance or charge; Awards
shall be exercised only by the Participant; and (ii) amounts payable or
shares issuable pursuant to an Award shall be delivered only to (or for the
account of) the Participant.
(b) EXCEPTIONS. The Committee may permit Awards to be exercised by
and paid to certain persons or entities related to the Participant pursuant
to such conditions and procedures as the Committee may establish. Any
permitted transfer shall be subject to the condition that the Committee
receive evidence satisfactory to it that the transfer is being made for
estate and/or tax planning purposes or a gratuitous or donative basis and
without consideration (other than nominal consideration). Notwithstanding
the foregoing, Incentive Stock Options and Restricted Stock Awards shall be
subject to any and all applicable transfer restrictions under the Code.
(c) FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. The exercise and
transfer restrictions in Section 1.8(a) shall not apply to:
(i) transfers to the Corporation,
(ii) the designation of a beneficiary to receive benefits in the
event of the Participant's death or, if the Participant has died,
transfers to or exercise by the Participant's beneficiary, or, in the
absence of a validly designated beneficiary, transfers by will or the
laws of descent and distribution,
(iii) transfers pursuant to a QDRO order,
(iv) if the Participant has suffered a disability, permitted
transfers or exercises on behalf of the Participant by his or her legal
representative, or
(v) the authorization by the Committee of "cashless exercise"
procedures with third parties who provide financing for the purpose of
(or who otherwise facilitate) the exercise of Awards consistent with
applicable laws and the express authorization of the Committee.
Notwithstanding the foregoing, Incentive Stock Options and Restricted Stock
Awards shall be subject to all applicable transfer restrictions under the
Code.
5
<PAGE>
2. OPTIONS.
2.1 GRANTS.
One or more Options may be granted under this Article to any
Eligible Person. Each Option granted shall be designated in the applicable
Award Agreement by the Committee as either an Incentive Stock Option subject
to Section 2.3, or a Non-Qualified Stock Option.
2.2 OPTION PRICE.
(a) PRICING LIMITS. The purchase price per share of the Common
Stock covered by each Option shall be determined by the Committee at the time
of the Award, but in the case of Incentive Stock Options shall not be less
than 100% (110% in the case of a Participant described in Section 2.4) of the
Fair Market Value of the Common Stock on the date of grant.
(b) PAYMENT PROVISIONS. The purchase price of any shares purchased
on exercise of an Option granted under this Article shall be paid in full at
the time of each purchase in one or a combination of the following methods:
(i) in cash or by electronic funds transfer; (ii) by check payable to the
order of the Corporation; (iii) by notice and third party payment in such
manner as may be authorized by the Committee; or (iv) by the delivery of
shares of Common Stock of the Corporation already owned by the Participant,
PROVIDED, HOWEVER, that the Committee may in its absolute discretion limit
the Participant's ability to exercise an Award by delivering such shares.
Shares of Common Stock used to satisfy the exercise price of an Option shall
be valued at their Fair Market Value on the date of exercise.
2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS.
(a) $100,000 LIMIT. To the extent that the aggregate Fair Market
Value of stock with respect to which incentive stock options first become
exercisable by a Participant in any calendar year exceeds $100,000, taking
into account both Common Stock subject to Incentive Stock Options under this
Plan and stock subject to incentive stock options under all other plans of
the Company or any parent corporation, such options shall be treated as
Nonqualified Stock Options. For this purpose, the Fair Market Value of the
stock subject to options shall be determined as of the date the options were
awarded. In reducing the number of options treated as incentive stock
options to meet the $100,000 limit, the most recently granted options shall
be reduced first. To the extent a reduction of simultaneously granted
options is necessary to meet the $100,000 limit, the Committee may, in the
manner and to the extent permitted by law, designate which shares of Common
Stock are to be treated as shares acquired pursuant to the exercise of an
Incentive Stock Option.
6
<PAGE>
(b) OPTION PERIOD. Each Option and all rights thereunder shall
expire no later than ten years after the Award Date.
(c) OTHER CODE LIMITS. Incentive Stock Options may only be granted
to Eligible Employees who are actually employed by the Corporation or a
Subsidiary and that satisfy the other eligibility requirements of the Code.
There shall be imposed in any Award Agreement relating to Incentive Stock
Options such other terms and conditions as from time to time are required in
order that the Option be an "incentive stock option" as that term is defined
in Section 422 of the Code.
2.4 LIMITS ON 10% HOLDERS.
No Incentive Stock Option may be granted to any person who, at the
time the Option is granted, owns (or is deemed to own under Section 424(d) of
the Code) shares of outstanding Common Stock possessing more than 10% of the
total combined voting power of all classes of stock of the Corporation,
unless the exercise price of such Option is at least 110% of the Fair Market
Value of the stock subject to the Option and such Option by its terms is not
exercisable after the expiration of five years from the date such Option is
granted.
2.5 CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS.
Subject to Section 1.4 and Section 6.6 and the specific limitations
on Awards contained in this Plan, the Committee from time to time may
authorize, generally or in specific cases only, for the benefit of any
Eligible Person any adjustment in the exercise or purchase price, the vesting
schedule, the number of shares subject to, the restrictions upon or the term
of, an Award granted under this Article by cancellation of an outstanding
Award and a subsequent regranting of an Award, by amendment, by substitution
of an outstanding Award, by waiver or by other legally valid means. Such
amendment or other action may result among other changes in an exercise or
purchase price which is higher or lower than the exercise or purchase price
of the original Award or prior Award, provide for a greater or lesser number
of shares subject to the Award, or provide for a longer or shorter vesting or
exercise period.
2.6 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY
OTHER CORPORATIONS. Options and Stock Appreciation Rights may be granted to
Eligible Persons under this Plan in substitution for employee stock options
granted by other entities to persons who are or who will become Eligible
Persons in respect of the Company, in connection with a distribution, merger
or reorganization by or with the granting entity or an affiliated entity, or
the acquisition by the Company, directly or indirectly, of all or a
substantial part of the stock or assets of the other entity.
7
<PAGE>
3. STOCK APPRECIATION RIGHTS.
3.1 GRANTS.
In its discretion, the Committee may grant a Stock Appreciation
Right to any Eligible Person either concurrently with the grant of another
Award or in respect of an outstanding Award, in whole or in part, or
independently of any other Award. Any Stock Appreciation Right granted in
connection with an Incentive Stock Option shall contain such terms as may be
required to comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder, unless the holder otherwise agrees.
3.2 EXERCISE OF STOCK APPRECIATION RIGHTS.
(a) EXERCISABILITY. Unless the Award Agreement or the Committee
otherwise provides, a Stock Appreciation Right related to another Award shall
be exercisable at such time or times, and to the extent, that the related
Award shall be exercisable.
(b) EFFECT ON AVAILABLE SHARES. To the extent that a Stock
Appreciation Right is exercised, the number of underlying shares of Common
Stock theretofore subject to a related Award shall be charged against the
maximum amount of Common Stock that may be delivered pursuant to Awards under
this Plan. The number of shares subject to the Stock Appreciation Right and
the related Option of the Participant shall be reduced by the number of
underlying shares as to which the exercise related, unless the Award
Agreement otherwise provides.
(c) STAND-ALONE SARS. A Stock Appreciation Right granted
independently of any other Award shall be exercisable pursuant to the terms
of the Award Agreement but in no event earlier than six months after the
Award Date, except in the case of death or Total Disability.
3.3 PAYMENT.
(a) AMOUNT. Unless the Committee otherwise provides, upon exercise
of a Stock Appreciation Right and the attendant surrender of an exercisable
portion of any related Award, the Participant shall be entitled to receive
payment of an amount determined by multiplying
(i) the difference obtained by subtracting the exercise price
per share of Common Stock under the related Award (if applicable) or the
initial share value specified in the Award from the Fair Market Value of
a share of Common Stock on the date of exercise of the Stock Appreciation
Right, by
8
<PAGE>
(ii) the number of shares with respect to which the Stock
Appreciation Right shall have been exercised.
(b) FORM OF PAYMENT. The Committee, in its sole discretion, shall
determine the form in which payment shall be made of the amount determined
under paragraph (a) above, either solely in cash, solely in shares of Common
Stock (valued at Fair Market Value on the date of exercise of the Stock
Appreciation Right), or partly in such shares and partly in cash, provided
that the Committee shall have determined that such exercise and payment are
consistent with applicable law. If the Committee permits the Participant to
elect to receive cash or shares (or a combination thereof) on such exercise,
any such election shall be subject to such conditions as the Committee may
impose.
4. RESTRICTED STOCK AWARDS.
4.1 GRANTS.
The Committee may, in its discretion, grant one or more Restricted
Stock Awards to any Eligible Person. Each Restricted Stock Award Agreement
shall specify the number of shares of Common Stock to be issued to the
Participant, the date of such issuance, the consideration for such shares
(but not less than the minimum lawful consideration under applicable state
law) by the Participant, the extent to which the Participant shall be
entitled to dividends, voting and other rights in respect of the shares prior
to vesting and the restrictions imposed on such shares and the conditions of
release or lapse of such restrictions. Such restrictions shall not lapse
earlier than 12 months after the Award Date, except to the extent the
Committee may otherwise provide. Stock certificates evidencing shares of
Restricted Stock pending the lapse of the restrictions ("restricted shares")
shall bear a legend making appropriate reference to the restrictions imposed
hereunder and shall be held by the Corporation or by a third party designated
by the Committee until the restrictions on such shares shall have lapsed and
the shares shall have vested in accordance with the provisions of the Award
and Section 1.7. Upon issuance of the Restricted Stock Award, the
Participant may be required to provide such further assurance and documents
as the Committee may require to enforce the restrictions.
4.2 RESTRICTIONS.
(a) PRE-VESTING RESTRAINTS. Except as provided in Section 4.1 and
1.8, restricted shares comprising any Restricted Stock Award may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered, either
voluntarily or involuntarily, until the restrictions on such shares have
lapsed and the shares have become vested.
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(b) DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the
applicable Award Agreement, a Participant receiving a Restricted Stock Award
shall be entitled to cash dividend and voting rights for all shares issued even
though they are not vested, provided that such rights shall terminate
immediately as to any restricted shares which cease to be eligible for vesting.
(c) CASH PAYMENTS. If the Participant shall have paid or received
cash (including any dividends) in connection with the Restricted Stock Award,
the Award Agreement shall specify whether and to what extent such cash shall be
returned (with or without an earnings factor) as to any restricted shares which
cease to be eligible for vesting.
4.3 RETURN TO THE CORPORATION.
Unless the Committee otherwise expressly provides, restricted shares
that remain subject to restrictions at the time of termination of employment
or are subject to other conditions to vesting that have not been satisfied by
the time specified in the applicable Award Agreement shall not vest and shall
be returned to the Corporation in such manner and on such terms as the
Committee shall therein provide.
5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES.
5.1 GRANTS OF PERFORMANCE SHARE AWARDS.
The Committee may, in its discretion, grant Performance Share Awards
to Eligible Persons based upon such factors as the Committee shall deem
relevant in light of the specific type and terms of the award. An Award
Agreement shall specify the maximum number of shares of Common Stock (if any)
subject to the Performance Share Award, the consideration (but not less than
the minimum lawful consideration) to be paid for any such shares as may be
issuable to the Participant, the duration of the Award and the conditions
upon which delivery of any shares or cash to the Participant shall be based.
The amount of cash or shares or other property that may be deliverable
pursuant to such Award shall be based upon the degree of attainment over a
specified period (a "performance cycle") as may be established by the
Committee of such measure(s) of the performance of the Company (or any part
thereof) or the Participant as may be established by the Committee. The
Committee may provide for full or partial credit, prior to completion of such
performance cycle or the attainment of the performance achievement specified
in the Award, in the event of the Participant's death, or Total Disability, a
Change in Control Event or in such other circumstances as the Committee
consistent with Section 6.10(c)(2), if applicable, may determine.
5.2 SPECIAL PERFORMANCE-BASED SHARE AWARDS.
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Without limiting the generality of the foregoing, and in addition to
Options and Stock Appreciation Rights granted under other provisions of this
Plan which are intended to satisfy the exception for "performance-based
compensation" under Section 162(m) of the Code (with such Awards hereinafter
referred to as a "Qualifying Option" or a "Qualifying Stock Appreciation
Right," respectively), other performance-based awards within the meaning of
Section 162(m) of the Code ("PERFORMANCE-BASED AWARDS"), whether in the form
of restricted stock, performance stock, phantom stock, Cash-Based Awards, or
other rights, the grant, vesting, exercisability or payment of which depends
on the degree of achievement of the Performance Goals relative to
preestablished targeted levels for the Corporation or the Corporation and one
or more of its Subsidiaries, may be granted under this Plan. Any Qualifying
Option or Qualifying Stock Appreciation Right shall be subject only to the
requirements of subsections (a) and (c) below in order for such Awards to
satisfy the requirements for Performance-Based Awards under this Section 5.2.
With the exception of any Qualifying Option or Qualifying Stock Appreciation
Right, an Award that is intended to satisfy the requirements of this Section
5.2 shall be designated as a Performance-Based Award at the time of grant.
(a) ELIGIBLE CLASS. The eligible class of persons for
Performance-Based Awards under this Section shall be the executive officers
of the Corporation.
(b) PERFORMANCE GOAL ALTERNATIVES. The specific performance goals
for Performance-Based Awards granted under this Section (other than
Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on an
absolute or relative basis, one or more of the Performance Goals, as selected
by the Committee in its sole discretion. The Committee shall establish in
the applicable Award Agreement the specific performance target(s) relative to
the Performance Goal(s) which must be attained before the compensation under
the Performance-Based Award becomes payable. The specific targets shall be
determined within the time period permitted under Section 162(m) of the Code
(and any regulations issued thereunder) so that such targets are considered
to be preestablished and so that the attainment of such targets is
substantially uncertain at the time of their establishment. The applicable
performance measurement period may not be less than one nor more than 10
years.
(c) MAXIMUM PERFORMANCE-BASED AWARD. Notwithstanding any other
provision of the Plan to the contrary, the maximum number of shares of Common
Stock which may be delivered pursuant to options, stock appreciation rights,
restricted stock or other share-based awards that are granted as
Performance-Based Awards to any Participant in any calendar year shall not
exceed 100,000 shares, either individually or in the aggregate, subject to
adjustment as provided in Section 6.2. Awards that are cancelled during the
year shall be counted against this limit to the extent required by Section
162(m) of the Code. In addition, the aggregate amount of compensation to be
paid to any Participant in respect of any Cash-Based Awards that are granted
during any calendar year as Performance-Based Awards shall not exceed
$1,000,000.
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(d) COMMITTEE CERTIFICATION. Before any Performance-Based Award
under this Section 5.2 (other than Qualifying Options or Qualifying Stock
Appreciation Rights) is paid, the Committee must certify in writing that the
Performance Goal(s) and any other material terms of the Performance-Based
Award were satisfied; provided, however, that a Performance-Based Award may
be paid without regard to the satisfaction of the applicable Performance Goal
in the event of a Change in Control Event in accordance with Section 6.2(d).
(e) TERMS AND CONDITIONS OF AWARDS. The Committee will have the
discretion to determine the restrictions or other limitations of the
individual Awards granted under this Section 5.2 including the authority to
reduce Awards, payouts or vesting or to pay no Awards, in its sole
discretion, if the Committee preserves such authority at the time of grant by
language to this effect in its authorizing resolutions or otherwise.
(f) ADJUSTMENTS FOR CHANGES IN CAPITALIZATION AND OTHER MATERIAL
CHANGES. In the event of a change in corporate capitalization, such as a
stock split or stock dividend, or a corporate transaction, such as a merger,
consolidation, spinoff, reorganization or similar event, or any partial or
complete liquidation of the Corporation, or any similar event consistent with
regulations issued under Section 162(m) of the Code including, without
limitation, any material change in accounting policies or practices affecting
the Corporation and/or the Performance Goals or targets, then the Committee
may make adjustments to the Performance Goals and targets relating to
outstanding Performance-Based Awards to the extent such adjustments are made
to reflect the occurrence of such an event; provided, however, that
adjustments described in this subsection may be made only to the extent that
the occurrence of an event described herein was unforeseen at the time the
targets for a Performance-Based Award were established by the Committee.
5.3 GRANTS OF STOCK BONUSES.
The Committee may grant a Stock Bonus to any Eligible Person to
reward exceptional or special services, contributions or achievements in the
manner and on such terms and conditions (including any restrictions on such
shares) as determined from time to time by the Committee. The number of
shares so awarded shall be determined by the Committee. The Award may be
granted independently or in lieu of a cash bonus.
5.4 DEFERRED PAYMENTS.
The Committee may authorize for the benefit of any Eligible Person
the deferral of any payment of cash or shares that may become due or of cash
otherwise payable under this Plan, and provide for accredited benefits
thereon based upon such deferment, at the election or at the request of such
Participant, subject to the other terms of this Plan. Such deferral shall be
subject to such further conditions, restric-
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tions or requirements as the Committee may impose, subject to any then vested
rights of Participants.
6. OTHER PROVISIONS.
6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND
BENEFICIARIES.
(a) EMPLOYMENT STATUS. Status as an Eligible Person shall not be
construed as a commitment that any Award will be made under this Plan to an
Eligible Person or to Eligible Persons generally.
(b) NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in
any other documents related to this Plan or to any Award) shall confer upon
any Eligible Person or other Participant any right to continue in the employ
or other service of the Company or constitute any contract or agreement of
employment or other service, nor shall interfere in any way with the right of
the Company to change such person's compensation or other benefits or to
terminate the employment of such person, with or without cause, but nothing
contained in this Plan or any document related hereto shall adversely affect
any independent contractual right of such person without his or her consent
thereto.
(c) PLAN NOT FUNDED. Awards payable under this Plan shall be
payable in shares or from the general assets of the Corporation, and no
special or separate reserve, fund or deposit shall be made to assure payment
of such Awards. No Participant, Beneficiary or other person shall have any
right, title or interest in any fund or in any specific asset (including
shares of Common Stock, except as expressly otherwise provided) of the
Company by reason of any Award hereunder. Neither the provisions of this
Plan (or of any related documents), nor the creation or adoption of this
Plan, nor any action taken pursuant to the provisions of this Plan shall
create, or be construed to create, a trust of any kind or a fiduciary
relationship between the Company and any Participant, Beneficiary or other
person. To the extent that a Participant, Beneficiary or other person
acquires a right to receive payment pursuant to any Award hereunder, such
right shall be no greater than the right of any unsecured general creditor of
the Company.
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6.2 ADJUSTMENTS; ACCELERATION.
(a) ADJUSTMENTS. If there shall occur any extraordinary dividend or
other extraordinary distribution in respect of the Common Stock (whether in
the form of cash, Common Stock, other securities, or other property), or any
reclassification, recapitalization, stock split (including a stock split in
the form of a stock dividend), reverse stock split, reorganization, merger,
combination, consolidation, split-up, spin-off, combination, repurchase, or
exchange of Common Stock or other securities of the Corporation, or there
shall occur any other like corporate transaction or event in respect of the
Common Stock or a sale of substantially all the assets of the Corporation as
an entirety, then the Committee shall, in such manner and to such extent (if
any) as it deems appropriate and equitable (1) proportionately adjust any or
all of (i) the number and type of shares of Common Stock (or other
securities) which thereafter may be made the subject of Awards (including the
specific numbers of shares set forth elsewhere in this Plan), (ii) the
number, amount and type of shares of Common Stock (or other securities or
property) subject to any or all outstanding Awards, (iii) the grant,
purchase, or exercise price of any or all outstanding Awards, (iv) the
securities, cash or other property deliverable upon exercise of any
outstanding Awards, or (v) the performance standards appropriate to any
outstanding Awards, or (2) in the case of an extraordinary dividend or other
distribution, recapitalization, reclassification, merger, reorganization,
consolidation, combination, sale of assets, split up, exchange, or spin off,
make provision for a cash payment or for the substitution or exchange of any
or all outstanding Awards or the cash, securities or property deliverable to
the holder of any or all outstanding Awards based upon the distribution or
consideration payable to holders of the Common Stock of the Corporation upon
or in respect of such event; PROVIDED, HOWEVER, in each case, that with
respect to Awards of Incentive Stock Options, no such adjustment shall be
made which would cause the Plan to violate Section 424(a) of the Code or any
successor provisions thereto without the written consent of holders
materially adversely affected thereby. In any of such events, the Committee
may take such action sufficiently prior to such event if necessary to permit
the Participant to realize the benefits intended to be conveyed with respect
to the underlying shares in the same manner as is available to shareholders
generally.
(b) ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. As to any
Participant, unless prior to a Change in Control Event the Committee
determines that, upon its occurrence, there shall be no acceleration of
benefits under Awards or determines that only certain or limited benefits
under Awards shall be accelerated and the extent to which they shall be
accelerated, and/or establishes a different time in respect of such Change in
Control Event for such acceleration, then upon the occurrence of a Change in
Control Event (i) each Option and Stock Appreciation Right shall become
immediately exercisable, (ii) Restricted Stock shall immediately vest free of
restrictions, and (iii) each Performance Share Award shall become payable to
the Participant; provided, however, that in no event shall any Award be
accelerated as to any Section 16 Person to a date less than six months after
the Award
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Date of such Award. The Committee may override the limitations on
acceleration in this Section 6.2(b) by express provision in the Award
Agreement and may accord any Eligible Person a right to refuse any
acceleration, whether pursuant to the Award Agreement or otherwise, in such
circumstances as the Committee may approve. Any acceleration of Awards shall
comply with applicable regulatory requirements, including without limitation
Section 422 of the Code.
(c) POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any
Option or other right to acquire Common Stock under this Plan (other than
under Article 7) has been fully accelerated as permitted by Section 6.2(b)
but is not exercised prior to (i) a dissolution of the Corporation, or (ii)
an event described in Section 6.2(a) that the Corporation does not survive,
or (iii) the consummation of an event described in Section 6.2(a) that
results in a Change in Control Event approved by the Board, such Option or
right shall thereupon terminate, subject to any provision that has been
expressly made by the Committee for the survival, substitution, exchange or
other settlement of such Option or right.
6.3 EFFECT OF TERMINATION OF EMPLOYMENT.
The Committee shall establish in respect of each Award granted to an
Eligible Person the effect of a termination of employment on the rights and
benefits thereunder and in so doing may make distinctions based upon the
cause of termination. In addition, in the event of, or in anticipation of, a
termination of employment with the Company for any reason, other than
discharge for cause, the Committee may, in its discretion, increase the
portion of the Participant's Award available to the Participant, or
Participant's Beneficiary or Personal Representative, as the case may be, or,
subject to the provisions of Section 1.6, extend the exercisability period
upon such terms as the Committee shall determine and expressly set forth in
or by amendment to the Award Agreement.
6.4 COMPLIANCE WITH LAWS.
This Plan, the granting and vesting of Awards under this Plan and
the offer, issuance and delivery of shares of Common Stock and/or the payment
of money under this Plan or under Awards granted hereunder are subject to
compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Corporation,
be necessary or advisable in connection therewith. Any securities delivered
under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Corporation, provide
such assurances and representations to the Corporation as the Corporation may
deem necessary or desirable to assure compliance with all applicable legal
requirements.
6.5 TAX WITHHOLDING.
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Upon any exercise, vesting, or payment of any Award or upon the
disposition of shares of Common Stock acquired pursuant to the exercise of an
Incentive Stock Option prior to satisfaction of the holding period
requirements of Section 422 of the Code, the Company shall have the right at
its option to (i) require the Participant (or Personal Representative or
Beneficiary, as the case may be) to pay or provide for payment of the amount
of any taxes which the Company may be required to withhold with respect to
such Award event or payment or (ii) deduct from any amount payable in cash
the amount of any taxes which the Company may be required to withhold with
respect to such cash payment. In any case where a tax is required to be
withheld in connection with the delivery of shares of Common Stock under this
Plan, the Committee may in its sole discretion grant (either at the time of
the Award or thereafter) to the Participant the right to elect, pursuant to
such rules and subject to such conditions as the Committee may establish, to
have the Corporation reduce the number of shares to be delivered by (or
otherwise reacquire) the appropriate number of shares valued at their then
Fair Market Value, to satisfy such withholding obligation.
6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION.
(a) BOARD AUTHORIZATION. The Board may, at any time, terminate or,
from time to time, amend, modify or suspend this Plan, in whole or in part.
No Awards may be granted during any suspension of this Plan or after
termination of this Plan, but the Committee shall retain jurisdiction as to
Awards then outstanding in accordance with the terms of this Plan.
(b) SHAREHOLDER APPROVAL. Any amendment that would (i) materially
increase the benefits accruing to Participants under this Plan, (ii)
materially increase the aggregate number of securities that may be issued
under this Plan, or (iii) materially modify the requirements as to
eligibility for participation in this Plan, shall be subject to stockholder
approval only to the extent then required by Section 425 of the Code or
applicable law, or deemed necessary or advisable by the Board.
(c) AMENDMENTS TO AWARDS. Without limiting any other express
authority of the Committee under but subject to the express limits of this
Plan, the Committee by agreement or resolution may waive conditions of or
limitations on Awards to Eligible Persons that the Committee in the prior
exercise of its discretion has imposed, without the consent of a Participant,
and may make other changes to the terms and conditions of Awards that do not
affect in any manner materially adverse to the Participant, his or her rights
and benefits under an Award.
(d) LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment,
suspension or termination of the Plan or change of or affecting any
outstanding Award shall, without written consent of the Participant, affect
in any manner materially adverse to the Participant any rights or benefits of
the Participant or obligations of the Corporation under any Award granted
under this Plan prior to
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the effective date of such change. Changes contemplated by Section 6.2 shall
not be deemed to constitute changes or amendments for purposes of this
Section 6.6.
6.7 PRIVILEGES OF STOCK OWNERSHIP.
Except as otherwise expressly authorized by the Committee or this
Plan, a Participant shall not be entitled to any privilege of stock ownership
as to any shares of Common Stock not actually delivered to and held of record
by him or her. No adjustment will be made for dividends or other rights as a
shareholders for which a record date is prior to such date of delivery.
6.8 EFFECTIVE DATE OF THE PLAN.
This Plan shall be effective as of November 21, 1996, the date of
Board approval, subject to shareholder approval within 12 months thereafter.
6.9 TERM OF THE PLAN.
No Award shall be granted more than ten years after the effective
date of this Plan (the "termination date"). Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award granted
prior to the termination date may extend beyond such date, and all authority
of the Committee with respect to Awards hereunder, including the authority to
amend an Award, shall continue during any suspension of this Plan and in
respect of outstanding Awards on the termination date.
6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY.
(a) CHOICE OF LAW. This Plan, the Awards, all documents evidencing
Awards and all other related documents shall be governed by, and construed in
accordance with the laws of the state of incorporation of the Corporation.
(b) SEVERABILITY. If any provision shall be held by a court of
competent jurisdiction to be invalid and unenforceable, the remaining
provisions of this Plan shall continue in effect.
(c) PLAN CONSTRUCTION.
(1) RULE 16b-3. It is the intent of the Corporation that
transactions in and affecting Awards in the case of Participants who are or may
be subject to Section 16 of the Exchange Act satisfy any then applicable
requirements of Rule 16b-3 so that such persons (unless they otherwise agree)
will be entitled to the benefits of Rule 16b-3 or other exemptive rules under
Section 16 of the Exchange Act in respect of these transactions and will not be
subjected to avoidable liability thereunder. If any provision of this Plan or
of any Award would otherwise frustrate
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or conflict with the intent expressed above, that provision to the extent
possible shall be interpreted so as to avoid such conflict. If the conflict
remains irreconcilable, the Committee may disregard the provision if it
concludes that to do so furthers the interest of the Corporation and is
consistent with the purposes of this Plan as to such persons in the
circumstances.
(2) SECTION 162(m). It is the further intent of the Company
that Options or Stock Appreciation Rights with an exercise or base price not
less than Fair Market Value on the date of grant and Performance Share Awards
under Section 5.2 of this Plan that are granted to or held by a Section 16
Person shall qualify as performance-based compensation under Section 162(m)
of the Code, and this Plan shall be interpreted consistent with such intent.
6.11 CAPTIONS.
Captions and headings are given to the sections and subsections of
this Plan solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
6.12 EFFECT OF CHANGE OF SUBSIDIARY STATUS.
For purposes of this Plan and any Award hereunder, if an entity
ceases to be a Subsidiary a termination of employment and service shall be
deemed to have occurred with respect to each Eligible Person in respect of
such Subsidiary who does not continue as an Eligible Person in respect of
another entity within the Company.
6.13 NON-EXCLUSIVITY OF PLAN.
Nothing in this Plan shall limit or be deemed to limit the authority
of the Board or the Committee to grant awards or authorize any other
compensation, with or without reference to the Common Stock, under any other
plan or authority.
7. NON-EMPLOYEE DIRECTOR OPTIONS.
7.1 PARTICIPATION.
Awards under this Article 7 shall be made only to Non-Employee
Directors and shall be evidenced by Award Agreements substantially in the
form of Exhibit A hereto.
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7.2 ANNUAL OPTION GRANTS.
(a) TIME OF INITIAL AWARD. Subject to approval by the stockholders
of the Corporation, (i) the Chairman of the Board at the date of the Plan's
adoption on November 21, 1996 shall be granted without further action a
Nonqualified Stock Option dated as of September 17, 1996 to purchase 6,000
shares of Common Stock; (ii) each person who is the chairman of the Audit
Committee, Finance Committee or Compensation Committee of the Board at the
date of the Plan's adoption on November 21, 1996 shall be granted without
further action a Nonqualified Stock Option dated as of September 17, 1996 to
purchase 5,000 shares of Common Stock and (iii) each person who is a
Non-Employee Director in office on November 21, 1996 and who is not described
in clause (i) or (ii) shall be granted without further action a Nonqualified
Stock Option dated as of September 17, 1996 to purchase 3,000 shares of
Common Stock. After approval of this Plan by the stockholders of the
Corporation on November 21, 1996, if any person who is not then an officer or
employee of the Company shall become a director of the Corporation, there
shall be granted automatically to such person (without any action by the
Board or Committee) a Nonqualified Stock Option (the Award Date of which
shall be the date such person takes office) to purchase 3,000 shares of
Common Stock.
(b) SUBSEQUENT ANNUAL AWARDS. With respect to each Non-Employee
Director, as of each anniversary of the date of his or her initial option
grant under Section 7.2(a), there shall be granted automatically (without any
action by the Committee or the Board) a Nonqualified Stock Option (the Award
Date of which shall be such anniversary date) to purchase 1,000 shares of
Common Stock provided that the Non-Employee Director continues to serve in
office on such date.
(c) MAXIMUM NUMBER OF SHARES. Annual grants that would otherwise
exceed the maximum number of shares under Section 1.4(a) shall be prorated
within such limitation. A Non-Employee Director shall not receive more than
one Nonqualified Stock Option under this Section 7.2 in any calendar year.
7.3 OPTION PRICE.
The purchase price per share of the Common Stock covered by each
Option granted pursuant to Section 7.2 hereof shall be 100 percent of the
Fair Market Value of the Common Stock on the Award Date. The exercise price
of any Option granted under this Article shall be paid in full at the time of
each purchase in cash or by check or in shares of Common Stock valued at
their Fair Market Value on the date of exercise of the Option, or partly in
such shares and partly in cash, PROVIDED THAT any such shares used in payment
shall have been owned by the Participant at least six months prior to the
date of exercise.
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7.4 OPTION PERIOD AND EXERCISABILITY.
Each Option granted under this Article 7 and all rights or
obligations thereunder shall expire ten years after the Award Date and shall
be subject to earlier termination as provided below. Each Option granted
under the first sentence of Section 7.2(a) shall become exercisable as
follows: (i) at the rate of 20% on the later of 60 days after the Award Date
or the date of commencement of trading of the Common Stock on a national
securities exchange (the "Initial Award Date") and (ii) at the rate of 20%
per annum commencing on the first anniversary of the Initial Award Date and
each of the next three anniversaries thereof. Each other Option granted
under Section 7.2 shall become exercisable at the rate of 20% per annum
commencing on the first anniversary of the Award Date and each of the next
four anniversaries thereof.
7.5 TERMINATION OF DIRECTORSHIP.
If a Non-Employee Director's services as a member of the Board of
Directors terminate by reason of death or Total Disability, an Option granted
pursuant to this Article held by such Participant shall immediately become
and shall remain exercisable for two years after the date of such termination
or until the expiration of the stated term of such Option, whichever first
occurs. If a Non-Employee Director fails to be renominated or re-elected to
the Board of Directors, the Options granted pursuant to this Article shall
immediately become vested and shall remain exercisable for ninety (90) days
from the date such Non-Employee Director ceases to be renominated or
re-elected as a member of the Board of Directors. If a Non-Employee
Director's services as a member of the Board of Directors terminate for any
other reason, any portion of an Option granted pursuant to this Article which
is not then exercisable shall terminate and any portion of such Option which
is then exercisable may be exercised for ninety (90) days after the date of
such termination or until the expiration of the stated term whichever first
occurs.
7.6 ADJUSTMENTS.
Options granted under this Article 7 shall be subject to adjustment
as provided in Section 6.2, but only to the extent that (a) such adjustment
and the Committee's actions in respect thereof satisfy any applicable
criteria under Rule 16, (b) such adjustment in the case of a Change in
Control Event is effected pursuant to the terms of a reorganization agreement
approved by shareholders of the Corporation, and (c) such adjustment is
consistent with adjustments to Options held by persons other than executive
officers or directors of the Corporation.
7.7 ACCELERATION UPON A CHANGE IN CONTROL EVENT
Upon the occurrence of a Change in Control Event, each Option
granted under Section 7.2 hereof shall become immediately exercisable in
full;
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provided, however, that none of the Options granted under Section 7.2 shall
be accelerated to a date less than six months after the Award Date of such
Option. To the extent that any Option granted under this Article 7 is not
exercised prior to (i) a dissolution of the Corporation or (ii) a merger or
other corporate event that the Corporation does not survive, and no provision
is (or consistent with the provisions of Section 7.7 can be) made for the
assumption, conversion, substitution or exchange of the Option, the Option
shall terminate upon the occurrence of such event.
8. DEFINITIONS.
8.1 DEFINITIONS.
(a) "AWARD" shall mean an award of any Option, Stock Appreciation
Right, Restricted Stock, Stock Bonus, Performance Share Award,
Performance-Based Award, Cash-Based Award, dividend equivalent or deferred
payment right or other right or security that would constitute a "derivative
security" under Rule 16a-1(c) of the Exchange Act, or any combination
thereof, whether alternative or cumulative, authorized by and granted under
this Plan.
(b) "AWARD AGREEMENT" shall mean any writing setting forth the
terms of an Award that has been authorized by the Committee.
(c) "AWARD DATE" shall mean the date upon which the Committee took
the action granting an Award or such later date as the Committee designates
as the Award Date at the time of the Award or, in the case of Awards under
Article 7, the applicable dates set forth therein.
(d) "AWARD PERIOD" shall mean the period beginning on an Award Date
and ending on the expiration date of such Award.
(e) "BENEFICIARY" shall mean the person, persons, trust or trusts
designated by a Participant or, in the absence of a designation, entitled by
will or the laws of descent and distribution, to receive the benefits
specified in the Award Agreement and under this Plan in the event of a
Participant's death, and shall mean the Participant's executor or
administrator if no other Beneficiary is designated and able to act under the
circumstances.
(f) "BOARD" shall mean the Board of Directors of the Corporation.
(g) "CASH-BASED AWARDS" shall mean Awards that, if paid, must be
paid in cash and that are neither denominated in nor have a value derived
from the value of, nor an exercise or conversion privilege at a price related
to, shares of Common Stock.
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(h) "CASH FLOW" shall mean cash and cash equivalents derived from
either (i) net cash flow from operations or (ii) net cash flow from
operations, financings and investing activities, as determined by the
Committee at the time an Award is granted.
(i) "CHANGE IN CONTROL EVENT" shall mean any of the following:
(1) Approval by the shareholders of the Corporation of the
dissolution or liquidation of the Corporation;
(2) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Corporation (the "Outstanding
Corporation Common Stock:) or (ii) the combined voting power of the then
outstanding voting securities of the Corporation entitled to vote
generally in the election of directors (the "Outstanding Corporation
Voting Securities"); provided, however, that for purposes of this
subsection (2), the following acquisitions shall not constitute a Change
in Control Event: (i) any acquisition directly from the Corporation, (ii)
any acquisition by the Corporation, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the
Corporation or any entity controlled by the Corporation or (iv) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (4) below; or
(3) Individuals who, as of the effective date of the Plan,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Corporation's stockholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(4) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Corporation (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners, respectively,
of the Outstanding Corporation Common Stock and Outstanding Corporation
Voting Securities
22
<PAGE>
immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 70% of, respectively, the then
outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation,
a corporation which as a result of such transaction owns the Corporation
or all or substantially all of the Corporation's assets either directly
or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, (ii) no Person
(excluding any employee benefit plan (or related trust) of the
Corporation or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement,
or of the action of the Board, providing for such Business Combination.
(j) "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(k) "COMMISSION" shall mean the Securities and Exchange Commission.
(l) "COMMITTEE" shall mean the Board or a committee appointed by
the Board to administer this Plan, which committee shall be comprised only of
two or more directors or such greater number of directors as may be required
under applicable law, each of whom, in respect of any decision at a time when
the Participant affected by the decision may be subject to Section 162(m) of
the Code, shall be an "outside" director within the meaning of Section 162(m)
of the Code.
(m) "COMMON STOCK" shall mean the Common Stock of the Corporation
and such other securities or property as may become the subject of Awards, or
become subject to Awards, pursuant to an adjustment made under Section 6.2 of
this Plan.
(n) "COMPANY" shall mean, collectively, the Corporation and its
Subsidiaries.
(o) "CORPORATION" shall mean Talbert Medical Management Holdings
Corporation, a Delaware corporation, and its successors.
23
<PAGE>
(p) "DISINTERESTED" shall mean disinterested within the meaning of
any applicable regulatory requirements, including Rule 16b-3.
(q) "ELIGIBLE EMPLOYEE" shall mean an officer (whether or not a
director) or key employee of the Company, or, prior to the time that the
Corporation's Common Stock is registered on a Registration Statement on Form
S-8, any person who has agreed to commence serving in any such capacity
within 120 days of the date of grant.
(r) "ELIGIBLE PERSON" means an Eligible Employee, or any Other
Eligible Person, as determined by the Committee in its discretion.
(s) "EPS" shall mean earnings per common share on a fully diluted
basis determined by dividing (i) net earnings, less dividends on preferred
stock of the Corporation by (ii) the weighted average number of common shares
and common shares equivalents outstanding.
(t) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
(u) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
(v) "FAIR MARKET VALUE" on any date shall mean (i) if the stock is
listed or admitted to trade on a national securities exchange, the closing
price of the stock on the Composite Tape, as published in the Western Edition
of The Wall Street Journal, of the principal national securities exchange on
which the stock is so listed or admitted to trade, on such date, or, if there
is no trading of the stock on such date, then the closing price of the stock
as quoted on such Composite Tape on the next preceding date on which there
was trading in such shares; (ii) if the stock is not listed or admitted to
trade on a national securities exchange, the last price for the stock on such
date, as furnished by the National Association of Securities Dealers, Inc.
("NASD") through the NASDAQ National Market Reporting System or a similar
organization if the NASD is no longer reporting such information; (iii) if
the stock is not listed or admitted to trade on a national securities
exchange and is not reported on the National Market Reporting System, the
mean between the bid and asked price for the stock on such date, as furnished
by the NASD or a similar organization; or (iv) if the stock is not listed or
admitted to trade on a national securities exchange, is not reported on the
National Market Reporting System and if bid and asked prices for the stock
are not furnished by the NASD or a similar organization, the value as
established by the Committee at such time for purposes of this Plan.
(w) "INCENTIVE STOCK OPTION" shall mean an Option which is
intended, as evidenced by its designation, as an incentive stock option
within the meaning of Section 422 of the Code, the award of which contains
such provisions
24
<PAGE>
(including but not limited to the receipt of shareholder approval of this
Plan, if the Award is made prior to such approval) and is made under such
circumstances and to such persons as may be necessary to comply with that
section.
(x) "NONQUALIFIED STOCK OPTION" shall mean an Option that is
designated as a Nonqualified Stock Option and shall include any Option
intended as an Incentive Stock Option that fails to meet the applicable legal
requirements thereof. Any Option granted hereunder that is not designated as
an incentive stock option shall be deemed to be designated a nonqualified
stock option under this Plan and not an incentive stock option under the Code.
(y) "NON-EMPLOYEE DIRECTOR" shall mean a member of the Board of
Directors of the Corporation who is not an officer or employee of the Company.
(z) "NON-EMPLOYEE DIRECTOR PARTICIPANT" shall mean a Non-Employee
Director who holds an outstanding Award under the provisions of Article 7.
(aa) "OPTION" shall mean an option to purchase Common Stock granted
under this Plan. The Committee shall designate any Option granted to an
Eligible Person as a Nonqualified Stock Option or an Incentive Stock Option.
Options granted under Article 8 shall be Nonqualified Stock Options.
(bb) "OTHER ELIGIBLE PERSON" shall mean any Non-Employee Director or
any individual consultant or advisor who renders or has rendered BONA FIDE
services (other than services in connection with the offering or sale of
securities of the Company in a capital raising transaction) to the Company,
and who is selected to participate in this Plan by the Committee. A
non-employee agent providing BONA FIDE services to the Company (other than as
an eligible advisor or consultant) may also be selected as an Other Eligible
Person if such agent's participation in this Plan would not adversely affect
(i) the Corporation's eligibility to use Form S-8 to register under the
Securities Act of 1933, as amended, the offering of shares issuable under
this Plan by the Company or (ii) the Corporation's compliance with any other
applicable laws.
(cc) "PARTICIPANT" shall mean an Eligible Person who has been
granted an Award under this Plan and a Non-Employee Director who has received
an Award under Article 7 of this Plan.
(dd) "PERFORMANCE-BASED AWARD" shall mean an Award of a right to
receive shares of Common Stock or other compensation (including cash) under
Section 5.2, the issuance or payment of which is contingent upon, among other
conditions, the attainment of performance objectives specified by the
Committee.
(ee) "PERFORMANCE GOALS" shall mean EPS or ROE or Cash Flow or Total
Stockholder Return, and "Performance Goals" means any combination thereof.
25
<PAGE>
(ff) "PERFORMANCE SHARE AWARD" shall mean an Award of a right to
receive shares of Common Stock made in accordance with Section 5.1, the
issuance or payment of which is contingent upon, among other conditions, the
attainment of performance objectives specified by the Committee.
(gg) "PERSONAL REPRESENTATIVE" shall mean the person or persons who,
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant, by legal proceeding or otherwise, the power to
exercise the rights or receive benefits under this Plan and who shall have
become the legal representative of the Participant.
(hh) "PLAN" shall mean this 1996 Stock Incentive Plan.
(ii) "QDRO" shall mean a qualified domestic relations order as
defined in Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA
(to the same extent as if this Plan were subject thereto), or the applicable
rules thereunder.
(jj) "RESTRICTED STOCK AWARD" shall mean an award of a fixed number
of shares of Common Stock to the Participant subject, however, to payment of
such consideration, if any, and such forfeiture provisions, as are set forth
in the Award Agreement.
(kk) "RESTRICTED STOCK" shall mean shares of Common Stock awarded to
a Participant under this Plan, subject to payment of such consideration, if
any, and such conditions on vesting and such transfer and other restrictions
as are established in or pursuant to this Plan, for so long as such shares
remain unvested under the terms of the applicable Award Agreement.
(ll) "ROE" shall mean consolidated net income of the Corporation
(less preferred dividends), divided by the average consolidated common
shareholders equity.
(mm) "RULE 16b-3" shall mean Rule 16b-3 as promulgated by the
Commission pursuant to the Exchange Act, as amended from time to time.
(nn) "SECTION 16 PERSON" shall mean a person subject to Section
16(a) of the Exchange Act.
(oo) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended from time to time.
(pp) "STOCK APPRECIATION RIGHT" shall mean a right to receive a number
of shares of Common Stock or an amount of cash, or a combination of shares and
cash, the aggregate amount or value of which is determined by reference to a
26
<PAGE>
change in the Fair Market Value of the Common Stock that is authorized under
this Plan.
(qq) "STOCK BONUS" shall mean an Award of shares of Common Stock
granted under this Plan for no consideration other than past services and
without restriction other than such transfer or other restrictions as the
Committee may deem advisable to assure compliance with law.
(rr) "SUBSIDIARY" shall mean any corporation or other entity a
majority of whose outstanding voting stock or voting power is beneficially
owned directly or indirectly by the Corporation.
(ss) "TOTAL DISABILITY" shall mean a "permanent and total
disability" within the meaning of Section 22(e)(3) of the Code and (except in
the case of a Non-Employee Director) such other disabilities, infirmities,
afflictions or conditions as the Committee by rule may include.
(tt) "TOTAL STOCKHOLDER RETURN" shall mean with respect to the
Corporation or other entities (if measures on a relative basis), the (i)
change in the market price of its common stock (as quoted in the principal
market on which it is traded as of the beginning and ending of the period)
plus dividends and other distributions paid, divided by (ii) the beginning
quoted market price, all of which is adjusted for any changes in equity
structure, including but not limited to stock splits and stock dividends.
27
<PAGE>
EXHIBIT A
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
ELIGIBLE DIRECTOR
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of the _____ day of _____________, 19__,
between Talbert Medical Management Holdings Corporation, a Delaware corporation
(the "Corporation"), and ________________ (the "Director").
W I T N E S S E T H
WHEREAS, the Corporation has adopted and the shareholders of the
Corporation have approved a Talbert Medical Management Holdings Corporation 1996
Stock Incentive Plan (the "Plan").
WHEREAS, pursuant to Article 7 of the Plan, the Corporation has
granted an option (the "Option") to the Director upon the terms and conditions
evidenced hereby, as required by the Plan, which Option is not intended as and
shall not be deemed to be an incentive stock option within the meaning of
Section 422 of the Code.
NOW, THEREFORE, in consideration of the services rendered and to be
rendered by the Director, the Corporation and the Director agree to the terms
and conditions set forth herein as required by the terms of the Plan.
1. OPTION GRANT. This Agreement evidences the grant to the
Director, as of ___________, ____ (the "Option Date"), of an Option to purchase
an aggregate of _____ shares of Common Stock, par value _____ per share, under
Article 7 of the Plan, subject to the terms and conditions and to adjustment as
set forth herein or in pursuant to the Plan.
2. EXERCISE PRICE. The Option entitles the Director to purchase
(subject to the terms of Sections 3 through 5 below) all or any part of the
Option shares at a price per share of $_______, which amount represents the Fair
Market Value of the shares on the Option Date.
3. OPTION EXERCISABILITY AND TERM. Subject to adjustment pursuant
to Section 7.6 of the Plan, the Option shall first become and remain exercisable
as to ______________ of the shares on ___________________ and as to an
additional _________ shares on each of the following dates: ______________,
199_,
A-1
<PAGE>
__________, 199_ and _____________, 199_, in each case subject to adjustments
under Section ____ of the Plan and acceleration under Section 7.7 of the
Plan. The Option shall terminate on ____________, 19__,* unless earlier
terminated in accordance with the terms of Sections 7.7 of the Plan.
4. SERVICE AND EFFECT OF TERMINATION OF SERVICE. The Director
agrees to serve as a director in accordance with the provisions of the
Corporation's Articles of Incorporation, bylaws and applicable law. If the
Director's services as a member of the Board shall terminate, this Option shall
terminate at the times and to the extent set forth in Section 7.5 of the Plan.
5. GENERAL TERMS. The Option and this Agreement are subject to, and
the Corporation and the Director agree to be bound by, the provisions of the
Plan that apply to the Option. Such provisions are incorporated herein by this
reference. The Director acknowledges receiving a copy of the Plan and reading
its applicable provisions. Capitalized terms not otherwise defined herein shall
have the meaning assigned to such terms in the Plan.
6. NONTRANSFERABILITY. The grant of the Option is intended to
constitute an exempt transaction under Rule 16b-3. In furtherance thereof, the
Option shall be non-transferable to the fullest extent required by Rule 16b-
3(a)(2) as in effect on the date of adoption of this Plan or during the
transition period by former Rule 16b-3(d)(1)(ii), incorporated herein by this
reference.
______________________
* insert day before tenth anniversary of date of grant.
A-2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
(a Delaware corporation)
By: ___________________________
Title: ___________________________
Optionee Director
_____________________________
(Signature)
_____________________________
(Print Name)
_____________________________
(Address)
_____________________________
(City, State, Zip Code)
In consideration of the execution of the foregoing Stock Option
Agreement by Talbert Medical Management Holdings Corporation, I,
_________________, the spouse of the Director therein named, do hereby agree to
be bound by all of the terms and provisions thereof and of the Plan.
DATED: ______________, 19__.
___________________________
Signature of Spouse
A-3
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
1996 STOCK INCENTIVE PLAN
EMPLOYEE NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is dated as of the 21st day of November 1996,
between TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION, a Delaware
corporation (the "Corporation"), and ________________________________________
(the "Employee").
W I T N E S S E T H
WHEREAS, the Corporation maintains the Talbert Medical Management
Holdings Corporation 1996 Stock Incentive Plan (the "Plan"); and
WHEREAS, pursuant to the Plan, the Corporation has granted to the
Employee effective as of the 17th day of September, 1996 (the "Award Date") an
option to purchase all or any part of ____________ authorized but unissued or
treasury shares of Common Stock, par value $.01 per share, of the Corporation
upon the terms and conditions set forth herein and in the Plan;
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties agree as
follows:
1. DEFINED TERMS. Capitalized terms used herein and not otherwise
defined herein shall have the meaning assigned to such terms in the Plan.
2. GRANT OF OPTION. This Agreement evidences the Corporation's
grant to the Employee of the right and option to purchase, on the terms and
conditions set forth herein and in the Plan, all or any part of an aggregate of
_______ shares of the Common Stock at the price of $29.17 per share (the
"Option"), exercisable from time to time, subject to the provisions of this
Agreement and the Plan, prior to the close of business on the day before the
tenth anniversary of the Award Date (the "Expiration Date"). Such price equals
the Fair Market Value of a share of the Corporation's Common Stock as of the
Award Date. It is the intent of the Corporation that this Option constitute a
nonqualified stock option and such option shall not be deemed an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("Code").
1
<PAGE>
3. CONTINUANCE OF EMPLOYMENT. As a condition of this Option, the
Employee hereby agrees to remain in the employ of the Corporation or one of
its Subsidiaries for a period of one year after the Award Date. Nothing
contained herein or in the Plan shall confer upon the Employee any right with
respect to the continuation of employment by the Corporation or any
Subsidiary or interfere in any way with the right of the Corporation or of
any Subsidiary at any time to terminate such employment or to increase or
decrease the compensation of the Employee from the rate in existence at any
time.
4. EXERCISABILITY OF OPTION. Except as earlier permitted by or
pursuant to the Plan or by resolution of the Committee adopted AFTER the date
hereof, no shares may be purchased by exercise of the Option until the
expiration of twelve months after the Award Date. [ALTERNATIVE 1: The Option
will become exercisable (i) at the rate of 20% on the later of the first
anniversary of the Award Date or the date of commencement of trading of the
Common Stock on a national securities exchange (the "Initial Award Date") and
(ii) at the rate of 20% per annum commencing on the first anniversary of the
Initial Award Date and each of the next three anniversaries thereof. Should the
Employee die or suffer a Total Disability while employed by the Corporation or
any Subsidiary, the Option will become fully exercisable on the later of (i)
such date of death or Total Disability, or (ii) the date of commencement of
trading of the Common Stock on a national securities exchange.]
[ALTERNATIVE 2: After such date, the Option may be exercised in whole or in
part, from time to time, until its expiration or earlier termination.]
To the extent the Employee does not in any year purchase all or any
part of the shares to which the Employee is entitled, the Employee has the
right cumulatively thereafter to purchase any shares not so purchased and
such right shall continue until the Option terminates or expires. Fractional
share interests shall be disregarded, but may be cumulated. No fewer than
100 shares may be purchased at any one time, unless the number purchased is
the total number at the time available for purchase under the Option.
5. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable
by the delivery to the Corporation of a written notice stating the number of
shares to be purchased pursuant to the Option and accompanied by payment made
in accordance with and in a form permitted in Section 2.2 of the Plan for the
full purchase price of the shares to be purchased, subject to such further
limitations and rules or procedures as the Committee may from time to time
establish as toy any non-cash payment and as to the tax withholding
requirements of Section 6.5 of the Plan. Shares delivered in payment of the
exercise price must have been owned by Employee for at least six months prior
to the exercise. In
2
<PAGE>
addition, the Employee (or the Employee's Beneficiary or Personal
Representative) shall furnish any written statements required pursuant to
Section 6.4 of the Plan.
6. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH; CHANGE IN
SUBSIDIARY STATUS. The Option and all other rights hereunder, to the extent
not exercised, shall terminate and become null and void at such time as the
Employee ceases to be employed by either the Corporation or any Subsidiary,
except that
(a) if the Employee terminates (i) by reason deemed by the
Committee, in its discretion, to be for the convenience of the Corporation,
or (ii) under a retirement plan of the Company or any Subsidiary after
attainment of normal retirement age as provided for in such retirement
plan, or retirement at an earlier age with the consent of the Committee, in
its discretion, the Employee may at any time within a period of 90 days
after such termination exercise the Option to the extent the Option was
exercisable at the date of such termination;
(b) if the Employee terminates by reason of death or Total
Disability, or if the Employee dies or suffers a Total Disability within 90
days after a termination described in subsection (a), then the Option may
be exercised within a period of two years after such date of death or Total
Disability (or, if earlier, the Employee's termination from employment), to
the extent that the Option was exercisable on such date (or, if such death
or Total Disability occurred while the Employee was employed by the
Corporation or any Subsidiary, to the extent the Option will become
exercisable pursuant to Section 4 hereof);
provided, however, that in no event may the Option be exercised by anyone
under this Section or otherwise after the Expiration Date. If Employee is
employed by an entity which ceases to be a Subsidiary, such event shall be
deemed for purposes of this Section 6 to be a termination of employment
described in subsection (a) in respect of Employee. Absence from work caused
by military service or authorized sick leave shall not be considered as a
termination of employment for purposes of this Section.
7. TERMINATION OF OPTION UNDER CERTAIN EVENTS. As permitted by
Section 6.2 of the Plan, the Committee retains the right to terminate the
Option to the extent not previously exercised upon an event or transaction
which the Corporation does not survive.
8. NON-TRANSFERABILITY OF OPTION. The Option and any other rights
of the Employee under this Agreement or
3
<PAGE>
the Plan are nontransferable as provided in Section 1.8 of the Plan.
9. NOTICES. Any notice to be given under the terms of this
Agreement shall be in writing and addressed to the Corporation at its
principal office located at 3540 Howard Way, Costa Mesas, California 92626,
to the attention of the Corporate Secretary and to the Employee at the
address given beneath the Employee's signature hereto, or at such other
address as either party may hereafter designate in writing to the other.
10. PLAN. The Option and all rights of Employee thereunder are
subject to, and the Employee agrees to be bound by, all of the terms and
conditions of Articles 1, 2, 6, and 8 of the Plan, incorporated herein by this
reference, to the extent such provisions are applicable to options granted to
Eligible Persons. The Employee acknowledges receipt of a copy of the Plan,
which is made a part hereof by this reference, and agrees to be bound by the
terms thereof. Unless otherwise expressly provided in other Sections of this
Agreement, provisions of the Plan that confer discretionary authority on the
Committee do not (and shall not be deemed to) create any rights in the Employee
unless such rights are expressly set forth herein or are otherwise in the sole
discretion of the Committee so conferred by appropriate action of the Committee
under the Plan after the date hereof.
11. GRANT CONDITIONAL UPON LISTING OF SHARES. Notwithstanding
anything else contained herein to the contrary, this Option is expressly
conditioned upon the commencement of trading of the shares of the Corporation's
Common Stock on a national securities exchange. In the event that the
Corporation's Common Stock does not commence trading on a national securities
exchange within 12 months from the Option Date, this Option shall be null and
void.
4
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed on its behalf by a duly authorized officer and the Employee has
hereunto set his or her hand.
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
(a Delaware corporation)
By: _________________________
Title: ______________________
EMPLOYEE
___________________________
(Signature)
___________________________
(Print Name)
___________________________
(Address)
___________________________
(City, State, Zip Code)
CONSENT OF SPOUSE
In consideration of the execution of the foregoing Nonqualified Stock
Option Agreement by Talbert Medical Management Holdings Corporation, I,
_______________________, the spouse of the Employee herein named, do hereby join
with my spouse in executing the foregoing Employee Nonqualified Stock Option
Agreement and do hereby agree to be bound by all of the terms and provisions
thereof and of the Plan.
DATED: ____________, 199__. _____________________________
Signature of Spouse
5
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
1996 STOCK INCENTIVE PLAN
ELIGIBLE DIRECTOR
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is dated as of the 21st day of November 1996, between
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION, a Delaware corporation (the
"Corporation"), and ______________________ (the "Director").
W I T N E S S E T H
WHEREAS, the Corporation has adopted and the stockholders of the
Corporation have approved the Talbert Medical Management Holdings Corporation
1996 Stock Incentive Plan (the "Plan").
WHEREAS, pursuant to Article 7 of the Plan, the Corporation has
granted an option (the "Option") to the Director upon the terms and conditions
evidenced hereby, as required by the Plan, which Option is not intended as and
shall not be deemed to be an incentive stock option within the meaning of
Section 422 of the Code.
NOW, THEREFORE, in consideration of the services rendered and to be
rendered by the Director, the Corporation and the Director agree to the terms
and conditions set forth herein as required by the terms of the Plan.
1. OPTION GRANT. This Agreement evidences the grant to the
Director, as of September 17, 1996 (the "Option Date"), of an Option to purchase
an aggregate of _________ shares of Common Stock, par value $.01 per share,
under Article 7 of the Plan, subject to the terms and conditions and to
adjustment as set forth herein or pursuant to the Plan.
2. EXERCISE PRICE. The Option entitles the Director to purchase
(subject to the terms of Sections 3 through 6 below) all or any part of the
Option shares at a price per share of $29.17, which amount represents the Fair
Market Value of the shares on the Option Date.
3. OPTION EXERCISABILITY AND TERM. Subject to adjustment pursuant
to Section 7.6 of the Plan, the Option shall become and remain exercisable: (i)
at the rate of 25% on the later of 90 days after the Option Date or 60 days
after the date of commencement of trading of the Common Stock on a national
securities exchange (the "Initial Award Date") and (ii) at the rate of 25%
per annum commencing on the first anniversary of the Initial Award Date and
each of the next
<PAGE>
two anniversaries thereof. The Option shall terminate on September 16,
2006 unless earlier terminated in accordance with the terms of Section 7.7 of
the Plan.
4. SERVICE AND EFFECT OF TERMINATION OF SERVICE. The Director
agrees to serve as a director in accordance with the provisions of the
Corporation's Articles of Incorporation, bylaws and applicable law. If the
Director's services as a member of the Board shall terminate, this Option
shall terminate at the times and to the extent set forth in Section 7.5 of
the Plan.
5. GENERAL TERMS. The Option and this Agreement are subject to,
and the Corporation and the Director agree to be bound by, the provisions of
the Plan that apply to the Option. Such provisions are incorporated herein
by this reference. The Director acknowledges receiving a copy of the Plan
and reading its applicable provisions. Capitalized terms not otherwise
defined herein shall have the meaning assigned to such terms in the Plan.
6. GRANT CONDITIONED UPON LISTING OF SHARES. Notwithstanding
anything else contained herein to the contrary, this Option is expressly
conditioned upon the commencement of trading of the shares of the
Corporation's Common Stock on a national securities exchange. In the event
that the Corporation's Common Stock does not commence trading on a national
securities exchange within 12 months from the Option Date, this Option shall
be null and void.
7. NONTRANSFERABILITY. The Option and any other rights of the
Director under this Agreement or the Plan are nontransferable as provided in
Section 1.8 of the Plan.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
(a Delaware corporation)
By: ___________________________
Title: ___________________________
DIRECTOR
_____________________________
(Signature)
_____________________________
(Print Name)
_____________________________
(Address)
_____________________________
(City, State, Zip Code)
CONSENT OF SPOUSE
In consideration of the execution of the foregoing Stock Option
Agreement by Talbert Medical Management Holdings Corporation, I,
________________________________, the spouse of the Director therein named,
do hereby agree to be bound by all of the terms and provisions thereof and of
the Plan.
DATED: ______________, 19__.
___________________________
Signature of Spouse
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TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
DEFERRED COMPENSATION PLAN
EFFECTIVE __________________, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
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Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 Selection, Enrollment, Eligibility . . . . . . . . . . . . . . 8
2.1 Selection by Committee. . . . . . . . . . . . . . . . . . . . 8
2.2 Enrollment Requirements . . . . . . . . . . . . . . . . . . . 8
2.3 Eligibility; Commencement of Participation. . . . . . . . . . 8
2.4 Termination of Participation and/or Deferrals . . . . . . . . 9
ARTICLE 3 Deferral Commitments, Interest Crediting, Taxes. . . . . . . . 9
3.1 Minimum Deferral. . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Maximum Deferral. . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Election to Defer, Effect of Election Form. . . . . . . . . . 10
3.4 Withholding of Deferral Amounts . . . . . . . . . . . . . . . 11
3.5 Interest Crediting Prior to Distribution. . . . . . . . . . . 11
3.6 Interest Crediting for Installment Distributions. . . . . . . 11
3.7 FICA and Other Taxes. . . . . . . . . . . . . . . . . . . . . 12
3.8 Annual Company Contribution Amount. . . . . . . . . . . . . . 12
3.9 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.10 Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 4 Short-Term Payout, Withdrawal Election . . . . . . . . . . . . 13
4.1 Short-Term Payout . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Other Benefits Take Precedence Over Short-Term Payout . . . . 14
4.3 Withdrawal Election . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 5 Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . 14
5.1 Retirement Benefit. . . . . . . . . . . . . . . . . . . . . . 14
5.2 Payment of Retirement Benefit . . . . . . . . . . . . . . . . 14
5.3 Death Prior to Completion of Retirement Benefit . . . . . . . 15
ARTICLE 6 Pre-Retirement Survivor Benefit. . . . . . . . . . . . . . . . 15
6.1 Pre-Retirement Survivor Benefit . . . . . . . . . . . . . . . 15
6.2 Payment of Pre-Retirement Survivor Benefit. . . . . . . . . . 15
6.3 Restriction in the Event of Suicide or Falsely Provided
Information . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 7 Termination Benefit. . . . . . . . . . . . . . . . . . . . . . 16
7.1 Termination Benefit . . . . . . . . . . . . . . . . . . . . . 16
7.2 Payment of Termination Benefit. . . . . . . . . . . . . . . . 16
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PAGE
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ARTICLE 8 Disability Benefit . . . . . . . . . . . . . . . . . . . . . . 16
8.1 Disability. . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Continued Eligibility, Disability Benefit . . . . . . . . . . 17
ARTICLE 9 Beneficiary Designation. . . . . . . . . . . . . . . . . . . . 17
9.1 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.2 Beneficiary Designation, Change, Spousal Consent. . . . . . . 17
9.3 Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . 18
9.4 No Beneficiary Designation. . . . . . . . . . . . . . . . . . 18
9.5 Doubt as to Beneficiary . . . . . . . . . . . . . . . . . . . 18
9.6 Discharge of Obligations. . . . . . . . . . . . . . . . . . . 18
ARTICLE 10 Leave of Absence. . . . . . . . . . . . . . . . . . . . . . . 18
10.1 Paid Leave of Absence . . . . . . . . . . . . . . . . . . . . 18
10.2 Unpaid Leave of Absence . . . . . . . . . . . . . . . . . . . 18
ARTICLE 11 Termination, Amendment or Modification. . . . . . . . . . . . 19
11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.3 Plan Agreement. . . . . . . . . . . . . . . . . . . . . . . . 20
11.4 Interest Rate in the Event of a Change of Control . . . . . . 20
11.5 Effect of Payment . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 12 Administration. . . . . . . . . . . . . . . . . . . . . . . . 20
12.1 Committee Duties. . . . . . . . . . . . . . . . . . . . . . . 20
12.2 Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12.3 Binding Effect of Decisions . . . . . . . . . . . . . . . . . 20
12.4 Indemnity of Committee. . . . . . . . . . . . . . . . . . . . 21
12.5 Employer Information. . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 13 Other Benefits and Agreements . . . . . . . . . . . . . . . . 21
13.1 Coordination with Other Benefits. . . . . . . . . . . . . . . 21
ARTICLE 14 Claims Procedures . . . . . . . . . . . . . . . . . . . . . . 21
14.1 Presentation of Claim . . . . . . . . . . . . . . . . . . . . 21
14.2 Notification of Decision. . . . . . . . . . . . . . . . . . . 22
14.3 Review of a Denied Claim. . . . . . . . . . . . . . . . . . . 22
14.4 Decision on Review. . . . . . . . . . . . . . . . . . . . . . 22
14.5 Legal Action. . . . . . . . . . . . . . . . . . . . . . . . . 23
ii
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Page
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ARTICLE 15 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
15.1 Establishment of the Trust. . . . . . . . . . . . . . . . . . 23
15.2 Interrelationship of the Plan and the Trust . . . . . . . . . 23
15.3 Distributions From the Trust. . . . . . . . . . . . . . . . . 23
ARTICLE 16 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 23
16.1 Unsecured General Creditor. . . . . . . . . . . . . . . . . . 23
16.2 Employer's Liability. . . . . . . . . . . . . . . . . . . . . 24
16.3 Nonassignability. . . . . . . . . . . . . . . . . . . . . . . 24
16.4 Not a Contract of Employment. . . . . . . . . . . . . . . . . 24
16.5 Furnishing Information. . . . . . . . . . . . . . . . . . . . 24
16.6 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
16.7 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
16.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 25
16.9 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
16.10 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . 25
16.11 Spouse's Interest. . . . . . . . . . . . . . . . . . . . . . . 25
16.12 Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
16.13 Incompetent. . . . . . . . . . . . . . . . . . . . . . . . . . 25
16.14 Court Order. . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.15 Distribution in the Event of Taxation. . . . . . . . . . . . . 26
iii
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
DEFERRED COMPENSATION PLAN
EFFECTIVE ___________________, 1997
PURPOSE
The purpose of this Plan is to provide specified benefits to
Directors and to a select group of management or highly compensated Employees
who contribute materially to the continued growth, development and future
business success of Talbert Medical Management Holdings Corporation, a
Delaware corporation, and its subsidiaries, if any, that sponsor this Plan.
This Plan shall be unfunded for tax purposes and for purposes of Title I of
ERISA.
ARTICLE 1
DEFINITIONS
For purposes hereof, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:
1.1 "ACCOUNT BALANCE" shall mean (i) the Deferral Account balance plus
(ii) the vested Company Contribution Account balance. These balances
shall be a bookkeeping entry only and shall be utilized solely as a
device for the measurement and determination of the amounts to be paid
to a Participant, or his or her designated Beneficiary, pursuant to
this Plan.
1.2 "AFFILIATE" shall mean any corporation or other business entity that
has entered into a contractual obligation with an Employer to provide
professional medical services. If such contractual obligation ends,
without renewal or modification, the corporation or business entity
shall lose its status as an "Affiliate."
1.3 "ANNUAL COMPANY CONTRIBUTION AMOUNT" for any one Plan Year shall be
the amount determined in accordance with Section 3.8.
1.4 "ANNUAL DEFERRAL AMOUNT" shall mean that portion of a Participant's
Base Annual Salary, Bonus and/or Directors Fees that a Participant
elects to have deferred in accordance with Article 3 for any one Plan
Year. In the event of a Participant's Retirement, death or a
Termination of Employment prior to the end of a Plan Year, such year's
Annual Deferral Amount shall be the actual amount withheld prior to
such event.
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<PAGE>
1.5 "BASE ANNUAL SALARY" shall mean the annual compensation, excluding
bonuses, commissions, overtime, fringe benefits, stock options,
relocation expenses, incentive payments, non-monetary awards,
directors fees and other fees, automobile and other allowances, paid
to a Participant for employment services rendered (whether or not such
allowances are included in the Participant's gross income). Base
Annual Salary shall be calculated before reduction for compensation
voluntarily deferred or contributed by the Participant pursuant to all
qualified or non-qualified plans and shall be calculated to include
amounts not otherwise included in the Participant's gross income under
Code Sections 125, 402(e)(3), 402(h) or 403(b) pursuant to plans
established by any Employer; provided, however, that all such amounts
will be included in compensation only to the extent that, had there
been no such plan, the amount would have been payable in cash to the
Participant.
1.6 "BENEFICIARY" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 9, that are entitled
to receive benefits under this Plan upon the death of a Participant.
1.7 "BENEFICIARY DESIGNATION FORM" shall mean the form established from
time to time by the Committee that a Participant completes, signs and
returns to the Committee to designate one or more Beneficiaries.
1.8 "BOARD" shall mean the board of directors of the Company.
l.9 "BONUS" shall mean any compensation, in addition to Base Annual
Salary, paid to a Participant as an Employee under any Employer's
bonus and/or incentive plans.
1.10 "CHANGE OF CONTROL" shall mean the first to occur of any of the
following events:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control:
(i) any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the
Company, or any corporation
2
<PAGE>
controlled by the Company or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses
(i), (ii) and (iii) of subsection (c) of this Section 1.10; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than 70% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding any employee
benefit plan (or related trust) of the Company of such
corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership
existed prior to the Business combination and (iii) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the
3
<PAGE>
execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
1.11 "CLAIMANT" shall have the meaning set forth in Section 14.1.
1.12 "CODE" shall mean the Internal Revenue Code of 1986, as may be amended
from time to time.
1.13 "COMMITTEE" shall mean the committee described in Article 12.
1.14 "COMPANY" shall mean Talbert Medical Management Holdings Corporation,
a Delaware corporation.
1.15 "COMPANY CONTRIBUTION ACCOUNT" shall mean (i) the sum of a
Participant's Annual Company Contribution Amounts, plus (ii) interest
credited in accordance with all the applicable interest crediting
provisions of this Plan that relate to a Participant's Company
Contribution Account, less (iii) all distributions made to the
Participant or his or her Beneficiary pursuant to this Plan that
relate to the Participant's Company Contribution Account. This
account shall be a bookkeeping entry only and shall be utilized solely
as a device for the measurement and determination of the amounts to be
paid to the Participant, or his or her designated Beneficiary,
pursuant to this Plan.
1.16 "CREDITING RATE" shall mean, for each Plan Year, an interest rate,
stated as an annual rate, determined and announced by the Committee
before the Plan Year for which it is to be used that is equal to
either (i) the applicable "Moody's Rate" or (ii) such other rate as
determined by the Committee in its sole discretion. For purposes of
the foregoing, the Moody's Rate for a Plan Year shall be an interest
rate, stated as an annual rate, that (i) is published in Moody's Bond
Record under the heading of "Moody's Corporate Bond Yield Averages --
Av. Corp." and (ii) is equal to the average corporate bond yield
calculated for the month of September that immediately precedes the
Plan Year for which the rate is to be used.
1.17 "DEDUCTION LIMITATION" shall mean the following described limitations
on a benefit that may otherwise be distributable pursuant to the
provisions of this Plan. Except as otherwise provided, this
limitation shall be applied to all distributions that are subject to
the "Deduction Limitation" under this Plan. If an Employer determines
in good faith prior to a Change of Control that there is a reasonable
likelihood that any compensation paid to a Participant for a taxable
year of the Employer would not be deductible by the Employer solely by
reason of the limitation under Code Section 162(m), then to the extent
4
<PAGE>
deemed necessary by the Employer to ensure that the entire amount of
any distribution to the Participant pursuant to this Plan prior to the
Change of Control is deductible, the Employer may defer all or any
portion of a distribution under this Plan. Any amounts deferred
pursuant to this limitation shall continue to be credited with
interest in accordance with Section 3.5 below, even if such amount is
an installment payment. The amounts so deferred and interest thereon
shall be distributed to the Participant or his or her Beneficiary (in
the event of the Participant's death) at the earliest possible date,
as determined by the Employer in good faith, on which the
deductibility of compensation paid or payable to the Participant for
the taxable year of the Employer during which the distribution is made
will not be limited by Code Section 162(m), or if earlier, the
effective date of a Change of Control. Notwithstanding anything to
the contrary in this Plan, the Deduction Limitation shall not apply to
any distributions made after a Change of Control
1.18 "DEFERRAL ACCOUNT" shall mean (i) the sum of all of a Participant's
Annual Deferral Amounts, plus (ii) the Participant's Rollover Amount,
if any, plus (iii) interest credited in accordance with all the
applicable interest crediting provisions of this Plan that relate to
the Participant's Deferral Account, less (iv) all distributions made
to the Participant or his or her Beneficiary pursuant to this Plan
that relate to the Participant's Deferral Account. This account shall
be a bookkeeping entry only and shall be utilized solely as a device
for the measurement and determination of the amounts to be paid to the
Participant, or his or her designated Beneficiary, pursuant to this
Plan.
1.19 "DIRECTOR" shall mean any member of the board of directors of any
Employer.
1.20 "DIRECTORS FEES" shall mean the annual fees paid by any Employer,
including retainer fees and meetings fees, as compensation for serving
on the board of directors or a committee thereof.
1.21 "DISABILITY" shall be determined by the Committee in its sole
discretion.
1.22 "DISABILITY BENEFIT" shall mean the benefit set forth in Article 8.
1.23 "ELECTION FORM" shall mean the form established from time to time by
the Committee that a Participant must complete, sign and return to the
Committee to make an election under the Plan.
1.24 "EMPLOYEE" shall mean a person who is employed by any Employer.
1.25 "EMPLOYER(S)" shall mean the Company and/or any of its subsidiaries
(now in existence or hereafter formed or acquired) that have adopted
the Plan as a sponsor. For this purpose, a subsidiary is any
corporation in which the Company possesses more than 50% of either (i)
the total combined voting
5
<PAGE>
power of all classes of stock of such corporation or (ii) the total
combined value of shares of all classes of stock of such corporation.
1.26 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as it may be amended from time to time.
1.27 "PARTICIPANT" shall mean any Employee or Director (i) who is selected
to participate in the Plan, (ii) who elects to participate in the
Plan, (iii) who signs a Plan Agreement, an Election Form and a
Beneficiary Designation Form, (iv) whose signed Plan Agreement,
Election Form and Beneficiary Designation Form are acknowledged by the
Committee, (v) who commences participation in the Plan, and (vi) whose
Plan Agreement has not terminated. A spouse or former spouse of a
Participant shall not be treated as a Participant in the Plan, even if
he or she has an interest in the Participant's benefits under the Plan
as a result of applicable law or property settlements resulting from
legal separation or divorce.
1.28 "PLAN" shall mean the Company's Deferred Compensation Plan, which
shall be evidenced by this instrument and by each Plan Agreement, as
it may be amended from time to time.
1.29 "PLAN AGREEMENT" shall mean a written agreement, as may be amended
from time to time, which is entered into by and between an Employer
and a Participant. Each Plan Agreement executed by a Participant and
the Participant's Employer shall provide for the entire benefit to
which such Participant is entitled to under the Plan, and the Plan
Agreement bearing the latest date of acknowledgement by the Committee
shall govern such entitlement. The terms of any Plan Agreement may be
varied among Participants, and any Plan Agreement may provide
additional benefits not set forth in the Plan or limit the benefits
otherwise provided under the Plan; provided, however, that any such
additional benefits or benefit limitations must be agreed to by both
the Employer and the Participant.
1.30 "PLAN YEAR" shall mean the 12 consecutive month period beginning on
January 1 each year; provided, however, that the first Plan Year shall
be a short year beginning on __________, 1997 and ending on December
31, 1997.
1.31 "PREFERRED RATE" shall mean, for each Plan Year, an interest rate that
is the sum of the Crediting Rate and the Premium Rate for that Plan
Year.
1.32 "PREMIUM RATE" shall mean, for a Plan Year, an interest rate, if any,
determined by the Committee, in its sole discretion, which rate shall
be determined and announced before the commencement of the Plan Year
for which the rate applies. This rate may be zero for any Plan Year.
6
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1.33 "PRE-RETIREMENT SURVIVOR BENEFIT" shall mean the benefit set forth in
Article 6.
1.34 "RETIREMENT," "Retires" or "Retired" shall mean, with respect to an
Employee, severance from employment from all Employers for any reason
other than a leave of absence, death or Disability on or after the
earlier of or the attainment of (i) age sixty-five (65) or (ii) age
fifty-five (55) with ten (10) Years of Service; and shall mean, with
respect to a Director who is not an Employee, severance of his or her
directorships with all Employers. If a Participant is both an
Employee and a Director, Retirement shall be deemed to occur when he
or she has severed his or her employment with all Employers, if he or
she has then either attained age sixty-five (65) or attained age
fifty-five (55) with ten (10) Years of Service, regardless of whether
he or she has severed his or her service as a Director. Despite the
foregoing, and for purposes of this Plan only, if a Participant (i)
transferred his or her employment from all Employers to an Affiliate,
or a Participant terminated his or her employment with all Employers
and became employed by an Affiliate within 30 days of such
termination, and (ii) remains employed by that Affiliate, another
Affiliate or any Employer until attaining age sixty-five (65) or age
fifty-five (55) with ten (10) Years of Service, he or she shall be
treated has having Retired under this Plan as of his or her
Termination of Employment.
1.35 "RETIREMENT BENEFIT" shall mean the benefit set forth In Article 5.
1.36 "ROLLOVER AMOUNT" shall mean the amount determined in accordance with
Section 3.10.
1.37 "SHORT-TERM PAYOUT" shall mean the payout set forth in Section 4.1.
1.38 "TERMINATION BENEFIT" shall mean the benefit set forth in Article 7.
1.39 "TERMINATION OF EMPLOYMENT" shall mean the ceasing of employment with
all Employers and Affiliates, voluntarily or involuntarily, for any
reason other than Retirement, Disability, death or an authorized leave
of absence. Despite the foregoing, a severance of a directorship
shall be treated as a Retirement in accordance with Section 1.34
above. Further, if an Affiliate ceases to be an Affiliate, the
Participant, for purposes of this Plan only, shall be treated as
having ceased employment with the Affiliate as of date that the
Affiliate ceases to be an Affiliate. However, for purposes of this
Plan only, if a Participant (i) transfers his or her employment from
an Employer to an Affiliate, or (ii) terminates his or her employment
with all Employers and is employed by an Affiliate within 30 days of
such termination, the Participant shall not be treated as having
experienced a Termination of Employment.
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1.40 "TRUST" shall mean the trust established pursuant to that certain
[Master Trust Agreement], dated as of [____________, 1997], between
the Company and the trustee named therein, as amended from time to
time.
1.41 "YEARS OF SERVICE" shall mean the total number of full years in which
a Participant has been employed by one or more Employers, plus, in the
case of a Participant who has transferred his or her employment from
all Employers to an Affiliate, or who has terminated his or her
employment with all Employers and is employed by an Affiliate within
30 days of such termination, the total number of full years in which a
Participant has been employed by one or more Affiliates. For purposes
of this definition, a year of employment shall be a 365 day period (or
366 day period in the case of a leap year) that, for the first year of
employment, commences on the Employee's date of hiring and that, for
any subsequent year, commences on an anniversary of that hiring date.
If a Participant terminates employment and later is rehired, any full
years of employment for the prior period will be added to any full
years of employment for subsequent years. Any partial year of
employment shall not be counted. With respect to Participants who
were participants in the FHP International Corporation Deferred
Compensation Plan, Years of Service include any "Years of Service"
that the Participant may have accrued under that plan.
ARTICLE 2
SELECTION, ENROLLMENT, ELIGIBILITY
2.1 SELECTION BY COMMITTEE. Participation in the Plan is voluntary.
Participation in the Plan shall be limited to Directors and a select
group of management or highly compensated Employees of the Employers,
as determined by the Committee, in its sole discretion. From that
group, the Committee shall select, in its sole discretion, Employees
and Directors to participate in the Plan.
2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each
selected Employee or Director shall complete, execute and return to
the Committee a Plan Agreement, an Election Form and a Beneficiary
Designation Form, all before the later of (i) [__________, 1997], or
(ii) the date which is 30 days after he or she is selected to
participate in the Plan. In addition, the Committee shall have the
ability to amend and/or establish from time to time such other
enrollment requirements as it determines, in its sole discretion, are
necessary.
2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee or
Director selected to participate in the Plan has met all enrollment
requirements set forth in this Plan and required by the Committee,
including returning all required documents to the Committee within the
specified time period, that
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Employee or Director shall commence participation in the Plan on the
first day of the month following the month in which the Employee or
Director completes all enrollment requirements. If an Employee or
Director fails to meet all such requirements within the required 30
day period (or, if earlier, by [___________, 1997]), that Employee or
Director shall not be eligible to participate in the Plan until the
first day of the Plan Year following the delivery to and
acknowledgement by the Committee of the required documents.
2.4 TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee
determines in good faith that a Participant no longer qualifies as a
member of a select group of management or highly compensated
employees, as membership in such group is determined in accordance
with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee
shall have the right, in its sole discretion, to (i) terminate any
deferral election the Participant has made for the Plan Year in which
the Participant's membership status changes, (ii) prevent the
Participant from making future deferral elections, and/or (iii)
immediately distribute the Participant's then Account Balance as a
Termination Benefit and terminate the Participant's participation in
the Plan. If the Committee chooses not to terminate the Participant's
participation in the Plan, the Committee may, in its sole discretion,
reinstate the Participant to full Plan participation at such time in
the future as the Participant again becomes a member of the select
group described above.
ARTICLE 3
DEFERRAL COMMITMENTS, INTEREST CREDITING, TAXES
3.1 MINIMUM DEFERRAL.
(a) MINIMUM. For each Plan Year, a Participant may elect to defer,
as his or her Annual Deferral Amount, one or more of the
following forms of compensation in the following minimum
percentages for each deferral elected:
Minimum
DEFERRAL Percentage
-------- ----------
Base Annual Salary 3%
Bonus 1%
Directors Fees 0%
If an election is made for less than the stated minimum amounts, or if
no election is made, then the amount deferred shall be zero.
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(b) SHORT PLAN YEAR. If a Participant first becomes a Participant
after the first day of a Plan Year, the minimum Base Annual
Salary deferral shall be an amount equal to the minimum set forth
above, multiplied by a fraction, the numerator of which is the
number of complete months remaining in the Plan Year and the
denominator of which is 12.
3.2 MAXIMUM DEFERRAL. For each Plan Year, a Participant may elect to
defer, as his or her Annual Deferral Amount, Base Annual Salary, Bonus
and/or Directors Fees up to the following maximum percentages for each
deferral elected:
Maximum
Deferral Percentage
-------- ----------
Base Annual Salary 50%
Bonus 100%
Directors Fees 100%
Notwithstanding the foregoing, if a Participant first becomes a
Participant after the first day of a Plan Year, the maximum Annual
Deferral Amount shall be limited to the amount of compensation not yet
earned by the Participant as of the date the Participant submits a
Plan Agreement and Election Form to the Committee for acknowledgement.
3.3 ELECTION TO DEFER, EFFECT OF ELECTION FORM.
(a) FIRST PLAN YEAR. In connection with a Participant's commencement
of participation in the Plan, the Participant shall make an
irrevocable deferral election for the Plan Year in which the
Participant commences participation in the Plan, along with such
other elections as the Committee deems necessary or desirable
under the Plan. FOR THESE ELECTIONS TO BE VALID, THE ELECTION
FORM MUST BE COMPLETED AND SIGNED BY THE PARTICIPANT, TIMELY
DELIVERED TO THE COMMITTEE (IN ACCORDANCE WITH SECTION 2.3
ABOVE), AND ACKNOWLEDGED BY THE COMMITTEE.
(b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an
irrevocable deferral election for that Plan Year, and such other
elections as the Committee deems necessary or desirable under the
Plan, shall be made by timely delivering to the Committee, in
accordance with its rules and procedures before the end of the
Plan Year preceding the Plan Year for which the election is made,
a new Election Form. If no Election Form is timely delivered for
a Plan Year, no Annual Deferral Amount shall be withheld for that
Plan Year.
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(c) PERCENTAGE ELECTED. With respect to each deferral election, the
percentage of Base Annual Salary, Bonus and/or Directors Fees
that is elected to be deferred must be a whole percentage between
the allowed minimum and maximum amounts.
3.4 WITHHOLDING OF DEFERRAL AMOUNTS. For each Plan Year, the Base Annual
Salary portion of the Annual Deferral Amount shall be withheld from
each regularly scheduled Base Annual Salary payroll, as determined by
the Committee in its sole discretion. The Bonus and/or Directors Fees
portion of the Annual Deferral Amount shall be withheld at the time
the Bonus or Directors Fees are or otherwise would be paid to the
Participant.
3.5 INTEREST CREDITING PRIOR TO DISTRIBUTION. Prior to any distribution
of benefits under Articles 4, 5, 6, 7 or 8, interest shall be credited
and compounded annually on (i) a Participant's Deferral Account as
though the Annual Deferral Amount for that Plan Year was withheld at
the beginning of the Plan Year and (ii) on a Participant's Company
Contribution Account as though the Annual Company Contribution Amount,
if any, was credited at the beginning of that Plan Year; provided,
however, that in either case, if the Plan Year is the first year of
Plan participation, the amount withheld and/or credited shall be
deemed withheld or credited on the date that the Participant commenced
participation in the Plan. The rate of interest for crediting shall
be the Preferred Rate, except as otherwise provided in this Plan,
which rate shall be treated as the nominal rate for crediting
interest. In the event of Retirement, Disability, death or
Termination of Employment prior to the end of a Plan Year, the basis
for that year's interest crediting will be a fraction of the full
year's interest, based on the number of full months that the
Participant was employed with the Employer during the Plan Year prior
to the occurrence of such event. If a distribution is made under this
Plan, for purposes of crediting interest up to the time of the
distribution, the Participant's Account Balance shall be reduced as of
the first day of the month in which the distribution is made.
3.6 INTEREST CREDITING FOR INSTALLMENT DISTRIBUTIONS. If a Participant's
benefits under this Plan are to be paid in equal monthly installments,
such payments shall be determined by amortizing the Participant's
specified benefit over the number of months elected, with payments
made at the beginning of each installment period, using the interest
rate specified below and treating the first installment payment as all
principal and each subsequent installment payment, first as interest
accrued for the preceding installment period on the unpaid Account
Balance and second as a reduction in the Account Balance. The
interest rate to be used to calculate installment payment amounts
shall be a fixed interest rate that is determined by averaging the
Preferred Rates for the Plan Year in which installment payments
commence and the four (4) preceding Plan Years. This rate shall be
treated as the nominal rate for making such
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<PAGE>
calculations. If a Participant has completed fewer than five (5) Plan
Years, this average shall be determined using the Preferred Rates for
the Plan Years during which the Participant participated in the Plan.
3.7 FICA AND OTHER TAXES.
(a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual
Deferral Amount is being withheld, the Participant's Employer(s)
shall withhold from that portion of the Participant's Base Annual
Salary and/or Bonus that is not being deferred, in a manner
determined by the Employer(s), the Participant's share of FICA
and other employment taxes. If necessary, the Committee may
reduce the Annual Deferral Amount in order to comply with this
Section 3.7.
(b) COMPANY CONTRIBUTION ACCOUNT. When a Participant becomes vested
in a portion of his or her Company Contribution Account, and,
after vesting, when allocations are made of Annual Company
Contribution Amounts, the Participant's Employer(s) shall
withhold from the Participant's Base Annual Salary and/or Bonus
that is not deferred, in a manner determined by the Employer(s),
the Participant's share of FICA and other employment taxes. If
necessary, the Committee may reduce the vested portion of the
Participant's Company Contribution Account in order to comply
with this Section 3.7.
(c) DISTRIBUTIONS. The Participant's Employer(s), or the trustee of
the Trust, shall withhold from any payments made to a Participant
under this Plan all federal, state and local income, employment
and other taxes required by law to be withheld by the
Employer(s), or the trustee of the Trust, in connection with such
payments, in amounts and in a manner as required by law.
3.8 ANNUAL COMPANY CONTRIBUTION AMOUNT. For each Plan Year, an Employer,
in its sole discretion, may, but is not required to, credit any amount
it desires to any Participant's Company Contribution Account under
this Plan, which amount shall be for that Participant the Annual
Company Contribution Amount for that Plan Year. The amount so
credited to a Participant may be smaller or larger than the amount
credited to other Participants, and the amount credited to any
Participant for a Plan Year may be zero, even though one or more other
Participants receive an Annual Company Contribution Amount for that
Plan Year.
3.9 VESTING. Except as provided in Sections 6.3 and 7.1, a Participant
shall be (i) 100% vested in his or her Deferral Account and (ii)
vested in his or her Company Contribution Account in accordance with
the following schedule:
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Years of Service on Date Vested Percentage of
of Termination of Employment Company Contribution Account
---------------------------- ----------------------------
Less than 5 years 0%
5 years or more 100%
Despite the foregoing, in the event of a Change of Control or the
Participant's death, a Participant's Company Contribution Account
shall immediately become 100% vested (if it is not so vested in
accordance with the above vesting schedule).
3.10 ROLLOVERS. If a Participant was a participant in the FHP
International Corporation Deferred Compensation Plan ("FHP Plan"), and
had a positive account balance in that plan on [___________, 1997],
that positive account balance, as determined as of that date, shall be
transferred to and added to the Participant's account balance under
this Plan, and shall be governed by the terms and conditions of this
Plan and shall be referred to as the "Rollover Amount." In addition,
any elections made by the Participant with respect to his or her
Account Balance shall apply to the Rollover Amount, except that if the
Participant Retires prior to January 1, 1999, that portion of his or
her Account Balance that represents an amount equal to the
Participant's positive account balance under the FHP Plan as of
[__________, 1997] (including earnings on that amount) shall be paid
in a lump sum in accordance with Article 5 below, regardless of
whether the Participant may have elected to receive his or her Account
Balance in installments.
ARTICLE 4
SHORT-TERM PAYOUT, WITHDRAWAL ELECTION
4.1 SHORT-TERM PAYOUT. In connection with each election to defer an
Annual Deferral Amount, a Participant may elect to receive a future
"Short-Term Payout" from the Plan with respect to that Annual Deferral
Amount. Subject to the Deduction Limitation, the Short-Term Payout
shall be a lump sum payment in an amount that is equal to the Annual
Deferral Amount plus interest credited in the manner provided in
Section 3.5 above on that amount, but using the applicable interest
rate set forth in Section 7.1 below, determined at the time that the
Short-Term Payout becomes payable (rather than the date of a
Termination of Employment). Subject to the other terms and conditions
of this Plan, each Short-Term Payout elected shall be paid, subject to
the Deduction Limitation, within 90 days of the first day of the Plan
Year that is at least 5 years after the first day of the Plan Year in
which the Annual Deferral Amount is actually deferred.
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<PAGE>
4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM PAYOUT. Should an
event occur that triggers a benefit under Article 5, 6, 7 or 8, any
Annual Deferral Amount, plus interest thereon, that is subject to a
Short-Term Payout election under Section 4.1 shall not be paid in
accordance with Section 4.1, but shall be paid in accordance with the
other applicable Article.
4.3 WITHDRAWAL ELECTION. A Participant may elect, at any time, to
withdraw all of his or her Account Balance, calculated as if there had
occurred a Termination of Employment as of the day of the election,
less a withdrawal penalty equal to 10% of such amount (the net amount
shall be referred to as the "Withdrawal Amount"). This election can
be made at any time before or after Retirement, Disability, death or
Termination of Employment, and whether or not the Participant (or
Beneficiary) is in the process of being paid pursuant to an
installment payment schedule. No partial withdrawals of the
Withdrawal Amount shall be allowed. The Participant shall make this
election by giving the Committee advance written notice of the
election in a form determined from time to time by the Committee. The
Participant shall be paid the Withdrawal Amount within 90 days of his
or her election. Once the Withdrawal Amount is paid, the
Participant's participation in the Plan shall terminate and the
Participant shall not be eligible to participate in the Plan in the
future. The payment of this Withdrawal Amount shall not be subject to
the Deduction Limitation.
ARTICLE 5
RETIREMENT BENEFIT
5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a
Participant who Retires shall receive, as a Retirement Benefit, his or
her Account Balance.
5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his
or her commencement of participation in the Plan, shall elect on an
Election Form to receive the Retirement Benefit in a lump sum or, if
the Participant's Account Balance is at least $25,000 at the time of
his or her Retirement, in equal monthly payments (the latter
determined in accordance with Section 3.6 above) over a period of 60,
120 or 180 months. The Participant may annually change his or her
election to an allowable alternative payout period by submitting a new
Election Form to the Committee, provided that any such Election Form
is submitted at least 3 years prior to the Participant's Retirement
and is acknowledged by the Committee in its sole discretion. The
Election Form most recently acknowledged by the Committee shall govern
the payout of the Retirement Benefit (provided it was submitted at
least 3 years prior to the Participant's Retirement). If a
Participant does not make any election with respect to the payment of
the Retirement Benefit, then such benefit shall be payable in a lump
sum. The lump sum payment shall be made, or installment
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<PAGE>
payments shall commence, no later than 90 days after the date the
Participant Retires. Any payment made shall be subject to the
Deduction Limitation.
5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant
dies after Retirement but before the Retirement Benefit is paid in
full, the Participant's unpaid Retirement Benefit payments shall
continue and shall be paid to the Participant's Beneficiary (i) over
the remaining number of months and in the same amounts as that benefit
would have been paid to the Participant had the Participant survived,
or (ii) in a lump sum, if requested by the Beneficiary and allowed in
the sole discretion of the Committee, that is equal to the
Participant's unpaid remaining Account Balance.
ARTICLE 6
PRE-RETIREMENT SURVIVOR BENEFIT
6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation,
and except as provided in Section 6.3 below, the Participant's
Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to
the Participant's Account Balance, if the Participant dies before he
or she Retires, experiences a Termination of Employment or suffers a
Disability.
6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in
connection with his or her commencement of participation in the Plan,
shall elect on an Election Form whether the Pre-Retirement Survivor
Benefit shall be received by his or her Beneficiary in a lump sum or
in equal monthly payments (the latter determined in accordance
with Section 3.6 above) over a period of 60, 120 or 180 months. The
Participant may annually change this election to an allowable
alternative payout period by submitting a new Election Form to the
Committee, which form must be acknowledged by the Committee in its
sole discretion. The Election Form most recently acknowledged by the
Committee prior to the Participant's death shall govern the payout of
the Participant's Pre-Retirement Survivor Benefit. If a Participant
does not make any election with respect to the payment of the
Pre-Retirement Survivor Benefit, then such benefit shall be paid in a
lump sum. Despite the foregoing, if the Participant's Account Balance
at the time of his or her death is less than $25,000, payment of the
Pre-Retirement Survivor Benefit may be made, in the sole discretion of
the Committee, in a lump sum or in monthly installment payments that
do not exceed five years in duration. The lump sum payment shall be
made, or installment payments shall commence, no later than 90 days
after the date the Committee is provided with proof that is
satisfactory to the Committee of the Participant's death. Any payment
made shall be subject to the Deduction Limitation.
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<PAGE>
6.3 RESTRICTION IN THE EVENT OF SUICIDE OR FALSELY PROVIDED INFORMATION.
In the event of a Participant's suicide within 2 years after the
Participant first becomes a Participant, or in the event the
Participant's death is determined to be from a bodily or mental cause
or causes, the information about which was withheld, knowingly
concealed, or falsely provided by the Participant if requested to
furnish evidence of good health, the Pre-Retirement Survivor Benefit
shall be equal to the sum of the Participant's Annual Deferral
Amounts, without interest, all determined as of his or her date of
death and payable in accordance with the provisions of Section 6.2
above.
ARTICLE 7
TERMINATION BENEFIT
7.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, the
Participant shall receive a Termination Benefit, which shall be equal
to the Participant's Account Balance, with interest credited in
the manner provided in Section 3.5 above, but using the applicable
interest rate set forth in the following schedule, if a Participant
experiences a Termination of Employment prior to his or her
Retirement, death or Disability:
Years of Service on Date
of Termination of Employment Applicable Rate
---------------------------- ---------------
Less than 5 years Crediting Rate
5 or more years Preferred Rate
7.2 PAYMENT OF TERMINATION BENEFIT. The Termination Benefit shall be paid
in a lump sum within 90 days of the Termination of Employment. Any
payment made shall be subject to the Deduction Limitation.
ARTICLE 8
DISABILITY BENEFIT
8.1 DISABILITY.
(a) NO WAIVER OF DEFERRAL. A Participant who is determined by the
Committee to be suffering from a Disability shall be required to
fulfill that portion of the Annual Deferral Amount commitment
that occurs after his or her Disability to the extent of his or
her Base Annual Salary, Bonus and/or Directors Fees paid after
such Disability.
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<PAGE>
(b) RETURN TO WORK. If a Participant returns to employment, or
service as a Director, with an Employer after a Disability
ceases, the Participant may elect to defer an Annual Deferral
Amount for the Plan Year following his or her return to
employment or service and for every Plan Year thereafter while a
Participant in the Plan; provided such deferral elections are
otherwise allowed and an Election Form is delivered to and
acknowledged by the Committee for each such election in
accordance with Section 3.3 above.
8.2 CONTINUED ELIGIBILITY, DISABILITY BENEFIT. A Participant suffering a
Disability shall, for benefit purposes under this Plan, continue to be
considered to be employed, or in the service of an Employer as a
Director, and shall be eligible for the benefits provided for in
Articles 4, 5, 6 or 7 in accordance with the provisions of those
Articles. Notwithstanding the above, the Committee shall have the
right, in its sole and absolute discretion and for purposes of this
Plan only, and must in the case of a Participant who is otherwise
eligible to Retire, to terminate a Participant's employment or service
as a Director at any time (or in the case of a Participant who is
eligible to Retire, as soon as practical) after such Participant is
determined to be suffering from a Disability. Any payment made shall
be subject to the Deduction Limitation.
ARTICLE 9
BENEFICIARY DESIGNATION
9.1 BENEFICIARY. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(ies) (both primary as well as
contingent) to receive any benefits payable under the Plan to a
beneficiary upon the death of a Participant. The Beneficiary
designated under this Plan may be the same as or different from the
Beneficiary designation under any other plan of an Employer in which
the Participant participates.
9.2 BENEFICIARY DESIGNATION, CHANGE, SPOUSAL CONSENT. A Participant shall
designate his or her Beneficiary by completing and signing the
Beneficiary Designation Form, and returning it to the Committee or its
designated agent. A Participant shall have the right to change a
Beneficiary by completing, signing and otherwise complying with the
terms of the Beneficiary Designation Form and the Committee's rules
and procedures, as in effect from time to time. If the Participant
names someone other than his or her spouse as a Beneficiary, a spousal
consent, in the form designated by the Committee, must be signed by
that Participant's spouse, notarized and returned to the Committee.
Upon the acknowledgement by the Committee of a new Beneficiary
Designation Form, all Beneficiary designations previously filed shall
be cancelled. The Committee shall be entitled to rely on the last
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<PAGE>
Beneficiary Designation Form filed by the Participant and acknowledged
by the Committee prior to his or her death.
9.3 ACKNOWLEDGEMENT. No designation or change in designation of a
Beneficiary shall be effective until received and acknowledged in
writing by the Committee
or its designated agent.
9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
designated Beneficiaries predecease the Participant or die prior
to complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be his or her
surviving spouse. If the Participant has no surviving spouse, the
benefits remaining under the Plan to be paid to a Beneficiary shall be
payable to the executor or personal representative of the
Participant's estate.
9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the
proper Beneficiary to receive payments pursuant to this Plan, the
Committee shall have the right, exercisable in its discretion, to
cause the Participant's Employer to withhold such payments until this
matter is resolved to the Committee's satisfaction.
9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a
Beneficiary shall fully and completely discharge all Employers and the
Committee from all further obligations under this Plan with respect to
the Participant, and that Participant's Plan Agreement shall terminate
upon such full payment of benefits.
ARTICLE 10
LEAVE OF ABSENCE
10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the
Participant's Employer for any reason to take a paid leave of absence
from the employment of the Employer, the Participant shall continue to
be considered employed by the Employer and the Annual Deferral Amount
shall continue to be withheld during such paid leave of absence in
accordance with Section 3.4.
10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the
Participant's Employer for any reason to take an unpaid leave of
absence from the employment of the Employer, the Participant shall
continue to be considered employed by the Employer and the Participant
shall be excused from making deferrals until the earlier of the date
the leave of absence expires or the Participant returns to a paid
employment status. Upon such expiration or return, deferrals shall
resume for the remaining portion of the Plan Year in
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which the expiration or return occurs, based on the deferral election,
if any, made for that Plan Year. If no election was made for that Plan
Year, no deferral shall be withheld.
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
11.1 TERMINATION. Although the Employers anticipate that they will
continue the Plan for an indefinite period of time, there is no
guarantee that the Committee will continue the Plan or will not
terminate the Plan at any time in the future. Accordingly, the
Committee reserves the right to discontinue any Employer's sponsorship
of the Plan and/or to terminate the Plan, at any time, with respect to
any Employer's participating Employees or Directors. Upon the
termination of the Plan with respect to any Employer, the Plan
Agreements of the affected Participants who are employed by that
Employer, or are in the service of that Employer as Directors, shall
terminate and their Account Balances, determined as if they had
experienced a Termination of Employment on the date of Plan
termination or, if Plan termination occurs after the date upon which a
Participant was eligible to Retire, then with respect to that
Participant as if he or she had Retired on the date of Plan
termination, shall be paid to the Participants as follows. Prior to a
Change of Control, the Committee shall have the right, in its sole
discretion, and notwithstanding any elections made by the Participant,
to pay such benefits in a lump sum or in equal monthly installments
for up to 15 years, with interest credited during the installment
period as provided in Section 3.6. After a Change of Control, a
Participant's benefits shall be paid in a lump sum. The termination
of the Plan shall not adversely affect any Participant or Beneficiary
who has become entitled to the payment of any benefits under the Plan
as of the date of termination; provided however, that the Committee
shall have the right to accelerate installment payments by paying the
Participant's remaining Account Balance at the time of such
acceleration.
11.2 AMENDMENT. The Committee may, at any time, amend or modify the plan
in whole or in part with respect to any Employer; provided, however,
that no amendment or modification shall be effective to decrease or
restrict the value of a Participant's Account Balance in existence at
the time the amendment or modification is made, calculated as if the
Participant had experienced a Termination of Employment as of the
effective date of the amendment or modification, or, if the amendment
or modification occurs after the date upon which the Participant was
eligible to Retire, the Participant had Retired as of the effective
date of the amendment or modification. The amendment or modification
of the Plan shall not affect any Participant or Beneficiary who has
become entitled to the payment of benefits under the Plan as of the
date of the amendment or modification; provided, however, that the
Committee shall have
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the right to accelerate installment payments by paying the
Participant's remaining Account Balance at the time of such
acceleration.
11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2
above, if a Participant's Plan Agreement contains benefits or
limitations that are not in this Plan document, the Employer may only
amend or terminate such provisions with the consent of the
Participant.
11.4 INTEREST RATE IN THE EVENT OF A CHANGE OF CONTROL. If a Change of
Control occurs, the applicable interest rate to be used in determining
a Participant's benefit in connection with a Termination of Employment
after a Change of Control, or a Plan termination, amendment or
modification under Sections 11.1 and 11.2, shall be the Preferred
Rate. However, the Crediting Rate for the applicable Plan Year, and
not the Preferred Rate, shall continue to be used as the discount rate
for determining present value
11.5 EFFECT OF PAYMENT. The full payment of the applicable benefit under
Section 4.3 or Articles 5, 6, 7 or 8 of the Plan shall completely
discharge all obligations to a Participant and his or her designated
Beneficiaries under this Plan and the Participant's Plan Agreement
shall terminate.
ARTICLE 12
ADMINISTRATION
12.1 COMMITTEE DUTIES. This Plan shall be administered by a Committee
which shall consist of the Board, or such committee as the Board shall
appoint. Members of the Committee may be Participants under this
Plan. The Committee shall also have full discretion and authority to
(i) make, amend, interpret, and enforce all appropriate rules and
regulations for the administration of this Plan, (ii) decide or
resolve any and all questions including interpretations of this Plan,
as may arise in connection with the Plan, and (iii) amend or terminate
the Plan in accordance with Sections 11.1 and 11.2 above.
12.2 AGENTS. In the administration of this Plan, the Committee may, from
time to time, employ agents and delegate to them such administrative
duties as it sees fit (including acting through a duly appointed
representative) and may from time to time consult with counsel who may
be counsel to any Employer.
12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the
rules and regulations promulgated hereunder shall be final and
conclusive and binding upon all persons having any interest in the
Plan.
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12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold
harmless the members of the Committee against any and all claims,
losses, damages, expenses or liabilities arising from any action or
failure to act with respect to this Plan, except in the case of
willful misconduct by the Committee or any of its members.
12.5 EMPLOYER INFORMATION. To enable the Committee to perform its
functions, each Employer shall supply full and timely information to
the Committee on all matters relating to the compensation of its
Participants, the date and circumstances of the Retirement,
Disability, death or Termination of Employment of its Participants,
and such other pertinent information as the Committee may reasonably
require.
ARTICLE 13
OTHER BENEFITS AND AGREEMENTS
13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a
Participant and Participant's Beneficiary under the Plan are in
addition to any other benefits available to such Participant under any
other plan or program for employees of the Participant's Employer.
The Plan shall supplement and shall not supersede, modify or amend any
other such plan or program except as may otherwise be expressly
provided.
ARTICLE 14
CLAIMS PROCEDURES
14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to below
as a "Claimant") may deliver to the Committee a written claim for a
determination with respect to the amounts distributable to such
Claimant from the Plan. If such a claim relates to the contents of a
notice received by the Claimant, the claim must be made within 60 days
after such notice was received by the Claimant.
The claim must state with particularity the determination desired by
the Claimant. All other claims must be made within 180 days of the
date on which the event that caused the claim to arise occurred.The
claim must state with particularity the determination desired by the
Claimant.
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<PAGE>
14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's
claim within a reasonable time, and shall notify the Claimant in
writing:
(a) that the Claimant's requested determination has been made, and
that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in whole or
in part, to the Claimant's requested determination, and such
notice must set forth in a manner calculated to be understood by
the Claimant:
(i) the specific reason(s) for the denial of the claim, or any
part of it;
(ii) specific reference(s) to pertinent provisions of the Plan
upon which such denial was based;
(iii) a description of any additional material or information
necessary for the Claimant to perfect the claim, and an
explanation of why such material or information is
necessary; and
(iv) an explanation of the claim review procedure set forth in
Section 14.3 below.
14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice
from the Committee that a claim has been denied, in whole or in part,
a Claimant (or the Claimant's duly authorized representative) may file
with the Committee a written request for a review of the denial of the
claim. Thereafter, but not later than 30 days after the review
procedure began, the Claimant (or the Claimant's duly authorized
representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
14.4 DECISION ON REVIEW. The Committee shall render its decision on review
promptly, and not later than 60 days after the filing of a written
request for review of the denial, unless a hearing is held or other
special circumstances require additional time, in which case the
Committee's decision must be rendered within 120 days after such date.
Such decision must be written in a manner calculated to be understood
by the Claimant, and it must contain:
(a) specific reasons for the decision;
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<PAGE>
(b) specific reference(s) to the pertinent Plan provisions upon which
the decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions
of this Article 14 is a mandatory prerequisite to a Claimant's right
to commence any legal action with respect to any claim for benefits
under this Plan.
ARTICLE 15
TRUST
15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust,
and the Employers shall at least annually transfer over to the Trust
such assets as the Employers determine, in their sole discretion, are
necessary to provide, on a present value basis, for their respective
future liabilities created with respect to the Annual Deferral
Amounts, Annual Company Contribution Amounts and interest credits on
those amounts for that year.
15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the
Plan and the Plan Agreement shall govern the rights of a Participant
to receive distributions pursuant to the Plan. The provisions of the
Trust shall govern the rights of the Employers, Participants and the
creditors of the Employers to the assets transferred to the Trust.
Each Employer shall at all times remain liable to carry out its
obligations under the Plan.
15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the
Plan may be satisfied with Trust assets distributed pursuant to the
terms of the Trust, and any such distribution shall reduce the
Employer's obligations under this Agreement.
ARTICLE 16
MISCELLANEOUS
16.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries,
heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of an Employer. For
purposes of the payment of benefits under this Plan, any and all of an
Employer's assets shall be, and remain, the general, unpledged
unrestricted assets of the Employer. An Employer's obligation under
the Plan shall be merely that of an unfunded and unsecured promise to
pay money in the future.
23
<PAGE>
16.2 EMPLOYER'S LIABILITY. An Employer's liability for the payment of
benefits shall be defined only by the Plan and the Plan Agreement, as
entered into between the Employer and a Participant. An Employer
shall have no obligation to a Participant under the Plan except as
expressly provided in the Plan and his or her Plan Agreement.
16.3 NONASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate, alienate or
convey in advance of actual receipt, the amounts, if any, payable
hereunder, or any part thereof, which are, and all rights to which are
expressly declared to be, unassignable and non-transferable, except
that the foregoing shall not apply to any court order specified in
Section 16.14 below. No part of the amounts payable shall, prior to
actual payment, be subject to seizure, attachment, garnishment or
sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or
any other person's bankruptcy or insolvency.
16.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between any
Employer and the Participant. Such employment is hereby acknowledged
to be an "at will" employment relationship that can be terminated at
any time for any reason, or no reason, with or without cause, and with
or without notice, unless expressly provided in a written employment
agreement. Nothing in this Plan shall be deemed to give a Participant
the right to be retained in the service of any Employer, either as an
Employee or a Director, or to interfere with the right of any Employer
to discipline or discharge the Participant at any time.
16.5 FURNISHING INFORMATION. A Participant or his or her Beneficiary will
cooperate with the Committee by furnishing any and all information
requested by the Committee and take such other actions as may be
requested in order to facilitate the administration of the Plan and
the payments of benefits hereunder, including but not limited to
taking such physical examinations as the Committee may deem necessary.
16.6 TERMS. Whenever any words are used herein in the masculine, they
shall be construed as though they were in the feminine in all cases
where they would so apply; and whenever any words are used herein in
the singular or in the plural, they shall be construed as though they
were used in the plural or the singular, as the case may be, in all
cases where they would so apply.
16.7 CAPTIONS. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
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<PAGE>
16.8 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be
construed and interpreted according to the laws of the State of
California without regard to its conflicts of laws principles.
16.9 NOTICE. Any notice or filing required or permitted to be given to the
Committee under this Plan shall be sufficient if in writing and either
hand-delivered or sent by registered or certified mail, to:
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, California 92626
such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification.
Any notice or filing required or permitted to be given to a
Participant under this Plan shall be sufficient if in writing and
hand-delivered, or sent by mail, to the last known address of the
Participant.
16.10 SUCCESSORS. The provisions of this Plan shall bind and inure to
the benefit of the Participant's Employer and its successors and
assigns and the Participant and the Participant's designated
Beneficiaries.
16.11 SPOUSE'S INTEREST. The interest in the benefits hereunder of a
spouse of a Participant who has predeceased the Participant shall
automatically pass to the Participant and shall not be
transferable by such spouse in any manner, including but not
limited to such spouse's will, nor shall such interest pass under
the laws of intestate succession.
16.12 VALIDITY. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidly shall not
affect the remaining parts hereof, but this Plan shall be
construed and enforced as if such illegal or invalid provision
had never been inserted herein.
16.13 INCOMPETENT. If the Committee determines in its discretion that
a Benefit under this Plan is to be paid to a minor, a person
declared incompetent or to a person incapable of handling the
disposition of that person's property, the Committee may direct
payment of such benefit to the guardian, legal representative or
person having the care and custody of such minor, incompetent or
incapable person. The Committee may require proof of minority,
incompetency, incapacity or guardianship, as it may deem
appropriate prior to distribution of the benefit. Any payment of
a benefit shall be a payment for the account of the Participant
and the Participant's Beneficiary, as the case may be, and shall
be a complete discharge of any liability under the Plan for such
payment amount.
25
<PAGE>
16.14 COURT ORDER. The committee is authorized to make any payments
directed by court order in any action in which the Plan or the
Committee has been named as a party. In addition, if a court
determines that a spouse or former spouse of a Participant has an
interest in the Plan as the result of a property settlement or
otherwise, the Committee, in its sole discretion, shall have the
right, notwithstanding any election made by a Participant to
immediately distribute the spouse's or former spouse's interest
in the Plan to that spouse or former spouse.
16.15 DISTRIBUTION IN THE EVENT OF TAXATION.
(a) GENERAL. If, for any reason, all or any portion of a
Participant's benefit under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the
Committee before a Change of Control, or the trustee of the
Trust after a Change of Control, for a distribution of that
portion of his or her benefit that has become taxable. Upon
the grant of such a petition, which grant shall not be
unreasonably withheld, a Participant's Employer shall
distribute to the Participant immediately available funds in
an amount equal to the taxable portion of his or her benefit
(which amount shall not exceed a Participant's unpaid Account
Balance under the Plan), less taxes withheld in accordance
with Section 3.7(c) above. If the petition is granted, the
tax liability distribution shall be made within 90 days of
the date when the Participant's petition is granted. Such
a distribution shall affect and reduce the benefits to be
paid under this Plan.
26
<PAGE>
(b) TRUST. If the Trust terminates in accordance with section
[3.6(e)] of the Trust Agreement and benefits are distributed from
the Trust to a Participant in accordance with that Section, the
Participant's benefits under this Plan shall be reduced to the
extent of such distributions.
IN WITNESS WHEREOF, the Company has signed this Plan document as of
____________________, 1997.
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION,
a Delaware corporation
"COMPANY"
By:
----------------------------------------------
Title:
-------------------------------------------
<PAGE>
CHIEF OF STAFF AGREEMENT
THIS AGREEMENT ("Agreement") is effective January 1, 1996, by and
between ______________________ hereinafter referred to as "Physician" and
Talbert Medical Management Corporation, hereinafter referred to as "TMMC".
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I.
ENGAGEMENT - CHIEF OF STAFF
TMMC engages Physician and Physician accepts the engagement of the
position of Chief of Staff of Talbert Medical Group, Inc. ("TMG") on the terms
and conditions set forth in this Agreement.
ARTICLE II.
TERM
The initial term of this engagement shall commence on January 1, 1996,
and shall continue until the earlier of January 1, 2001 or the date on which it
is terminated in accordance with Article V.
ARTICLE III.
COMPENSATION
TMMC will compensate Physician for the Chief of Staff duties set forth
in this Agreement at the rate of ______________________________ per annum,
payable semi-annually on the last business day of June and on the last business
day of December.
ARTICLE IV.
DUTIES
As the principal appointed official of the TMG staff, Physician shall:
A. Interact with the TMMC administration to aid in coordinating the
activities and concerns of the TMG administration and of the
patient care services furnished by the TMG staff.
1
<PAGE>
B. Communicate and represent the opinions, policies, concerns, needs
and grievances of the TMG staff to the Board of Directors of TMG
("Board") and the administration of TMMC.
C. Consult with the TMMC Medical Director on matters of special
concern to the TMG staff and maintain liaison with TMMC to assist
in settling grievances and problems of the TMG staff.
D. Provide such other advisory duties as are assigned to Physician
by the Board or TMMC.
ARTICLE V.
TERMINATION OF AGREEMENT
This Agreement may be unilaterally terminated by either TMMC or
Physician without cause upon ten (10) days written notice.
ARTICLE VI.
MISCELLANEOUS COVENANTS
A. This Agreement constitutes the entire Agreement between the
parties and supersedes all prior agreements. No changes in the
Agreement will be valid unless made in writing and signed by both
parties.
B. This Agreement shall be binding upon both parties and upon their
respective executors, administrators, successors and assigns.
C. This Agreement shall be governed by and construed in accordance
with all applicable state ("State") and federal laws. "State" is
defined to be the state in which Physician is practicing on
behalf of TMG.
D. The terms of this Agreement are confidential and shall not be
disclosed except as necessary for the performance of this
Agreement or as required by law.
E. The waiver by either party of a failure to perform as set forth
in this Agreement shall not act as a waiver of performance for a
subsequent breach of the same or any other provision in this
Agreement.
F. If any provision of this Agreement is deemed to be invalid or
unenforceable by a court of competent jurisdiction or in
arbitration, the same shall be deemed severable from the
remainder of this Agreement and shall not cause the invalidity or
unenforceability of the remainder of the Agreement.
2
<PAGE>
G. This Agreement may not be assigned by Physician; it may be
assigned by TMMC to a wholly owned subsidiary of TMMC without
consent of Physician.
TALBERT MEDICAL MANAGEMENT CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
PHYSICIAN:
--------------------------------------
______________________
3
<PAGE>
SHARE CONTROL AGREEMENT
THIS SHARE CONTROL AGREEMENT ("Agreement") is made and entered into this
7th day of December, 1995, by and among Talbert Medical Group, Ltd., a Nevada
professional corporation (the "Corporation"), [Shareholder] an individual
residing in the State of __________ (the "Shareholder"), and Talbert Medical
Management Corporation ("TMMC"), ____________ Delaware corporation.
RECITALS
A. For good and valuable consideration, the Shareholder is willing to
vote his or her shares of the Corporation's capital stock in accordance with the
terms of this Agreement. Such voting obligations shall not apply in those
cases, if any, where an issue is presented to the Shareholder of the Corporation
that applicable law or ethical provisions mandate be determined by an individual
who is duly licensed under applicable state law. In those cases, the
Shareholder may vote his or her shares in any manner that he or she deems
appropriate, and no approval by TMMC shall be necessary. The parties do not
intend that the Shareholder receive any economic benefit (whether dividends,
distributions or otherwise) from his or her respective shareholdings.
B. The Corporation, the Shareholder and TMMC desire that (i) the
Shareholder shall elect only persons approved by TMMC as directors of the
Corporation; (ii) the Shareholder shall approve or authorize any merger,
consolidation or other reorganization of the Corporation, any sale of the
Corporation's assets, any dissolution of the Corporation, or any sale of the
Corporation's capital stock only with the prior written consent of TMMC; and
(iii) the Shareholder shall give a right of purchase to a person designated by
TMMC to purchase any or all shares of the Corporation's capital stock owned by
the Shareholder if (A) the Shareholder ceases, as provided herein, to serve as
Chief of Staff of the Corporation, or (B) if the Shareholder desires to sell,
transfer, or otherwise convey any or all such shares.
IN CONSIDERATION of the mutual rights and obligations of the parties
hereto, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged by the Shareholder, and the undersigned
Shareholder being and remaining holder of the Corporation's capital stock, the
parties hereto agree as follows:
1. OBLIGATIONS CONCERNING THE VOTING OF SHARES. The Shareholder agrees
to vote each share of the Corporation's capital stock now or hereafter owned by
the Shareholder on any matter submitted for a vote to the Shareholder of such
stock, only as approved in advance and in writing by TMMC, including, but not
limited to, the matters provided for in this paragraph 1.
(a) The Shareholder shall not, without the prior written consent of
TMMC, vote his or her shares in such a manner that the Corporation may
(i) lease, sell, exchange, transfer or otherwise dispose of all or
substantially all of the Corporation's assets, (ii) be merged, consolidated
or otherwise reorganized with or into any other corporation or trade or
business, (iii) issue any shares of any class of the Corporation's capital
stock (whether from treasury or from authorized but unissued shares),
(iv) amend or otherwise modify its
1
<PAGE>
articles of incorporation, bylaws or code of regulations, if applicable,
(v) dissolve, (vi) amend or terminate the Management Services Agreement
between TMMC and the Corporation, dated as of January 1, 1996, or
(vii) enter into any agreement with any person to do any of the foregoing.
(b) The Shareholder shall not elect any person to the Board of
Directors of the Corporation without the prior approval of such person by
TMMC.
(c) Upon the prior written request of TMMC, the Shareholder shall
call a special meeting or authorize an action without a meeting for the
purpose of voting on such matters.
(d) Notwithstanding the foregoing, in the event that an issue is
presented to the Shareholder that applicable law or ethical provisions
mandate be determined by an individual who is duly licensed as a physician
under applicable state law, the Shareholder may vote his or her shares with
respect to such issue in any manner that he or she deems appropriate, and
no approval by TMMC shall be necessary.
2. OBLIGATIONS CONCERNING THE PROVISION OF PROFESSIONAL SERVICES. The
Shareholder shall ensure that the Corporation renders professional services to
patients of the Corporation only through officers, employees and agents who are
themselves duly licensed or otherwise legally authorized to render professional
services within the State of ________.
3. PURCHASE OF SHARES ON TERMINATION OF EMPLOYMENT. In the event that
the Shareholder is removed, or ceases to act, as Chief of Staff of the
Corporation for any reason, including, without limitation, termination,
disability, death, discharge or resignation, the Shareholder or the legal
successors of the Shareholder shall transfer the shares held by the Shareholder
to a person or persons designated by TMMC, which person or persons must be duly
licensed physicians in the State of ________; PROVIDED, HOWEVER, that at all
times, one of the transferees must be the Chief of Staff of the Corporation.
The closing of the purchase and sale shall take place not later than ninety (90)
days after the date of termination or appointment. The price of each such share
shall be $1.00. All certificates evidencing the shares being purchased and sold
shall be delivered in transferable form against payment of the purchase price
thereof evidenced by a check drawn on the designee of TMMC and payable in United
States dollars to the order of the Shareholder, or in the case of death, his or
her legal representative(s).
4. RIGHT OF FIRST PURCHASE. The Shareholder shall not transfer,
encumber, or otherwise dispose of (by sale, pledge, gift, devise, or other
disposition) any shares of the Corporation's capital stock now or hereafter held
of record or beneficially owned by him or her unless the Shareholder shall have
complied with the following procedure:
(a) The Shareholder shall give TMMC written notice of his or her
intent to dispose of such shares, and such notice shall be deemed to be an
offer to sell such shares to a designee of TMMC subject to acceptance and
pursuant to the price and terms provided in this paragraph 4. Any such
designee of TMMC must be a duly licensed physician in the State of ______.
2
<PAGE>
(b) Any offer made pursuant to this paragraph 4 may be accepted by a
designee of TMMC by giving written notice of such acceptance to the
Shareholder not later than the ninetieth (90th) calendar day after the
offer was given. The designee of TMMC may accept the offer only as to all
of the shares offered.
(c) The price of each share offered and purchased pursuant to this
paragraph 4 shall be $1.00.
(d) The closing of the shares offered and purchased pursuant to this
paragraph 4 shall take place not later than fifteen (15) days after the
date for timely acceptance of the offer to sell. A certificate in
transferable form for the number of shares offered and purchased shall be
delivered against payment of the purchase price thereof.
5. LEGEND. The Shareholder shall deliver to the Corporation all
certificates heretofore issued representing shares of the Corporation's capital
stock held of record or beneficially owned by the Shareholder, and each
certificate hereafter issued representing any share of the Corporation's capital
stock shall, have affixed to the back of the certificate a legend substantially
as follows:
The rights of any holder of any share evidenced by this certificate,
including the right to dispose of the securities represented by this
certificate or any interest therein, are subject to and restricted by
a certain Agreement, dated December 7, 1995, among the issuer, the
holder, and Talbert Medical Management Corporation. The issuer will
mail without charge to any holder of these shares a copy of such
agreement within five (5) days of receipt by the issuer of a written
request therefor.
6. TERM, AMENDMENT, TERMINATION. The term of this Agreement shall be
into perpetuity. This Agreement may be amended or terminated at any time but
only with the written consent of each of the parties hereto.
7. NOTICES. Any and all notices, offers, acceptances, and other
communications required to be given hereunder shall be given by and be deemed
given when deposited in United States registered or certified mail addressed, in
the case of the Corporation or TMMC, to its principal office, and in the case of
the Shareholder, to the address last appearing on the books of the Corporation.
8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts. Any party may execute the Agreement by executing any such
counterpart and all of such executed counterparts shall be taken together to
constitute a single instrument.
9. SPECIFIC PERFORMANCE. If the Shareholder or the person so required
under this Agreement fails to give notice or to vote his or her shares in
accordance herewith, and if the failure continues for five (5) days after notice
by the Corporation or TMMC to the party in default, any of the parties to the
Agreement may institute and maintain a proceeding to compel the specific
performance of this Agreement by the party in default.
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<PAGE>
10. RECOGNITION. The Corporation shall not recognize any share transfer
or other action not in compliance with the terms of this Agreement.
11. BENEFIT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and the legal representatives, successors in
interest and assigns, respectively, of each such party.
12. CONSTRUCTION. This Agreement shall be governed by and construed in
accordance with the law of the State of ________.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement as of the date first written above.
TALBERT MEDICAL GROUP, LTD.
By:
----------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
TALBERT MEDICAL MANAGEMENT CORPORATION
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
--------------------------------------------------
[Shareholder]
4
<PAGE>
SHARE CONTROL AGREEMENT
THIS SHARE CONTROL AGREEMENT ("Agreement") is made and entered into this
_____ day of December, 1995, by and among Talbert Medical Group, Inc., a
California professional corporation (the "Corporation"), [Shareholder] an
individual residing in the State of California (the "Shareholder"), and
Talbert Medical Management Corporation ("TMMC"), a Delaware
corporation.
RECITALS
A. For good and valuable consideration, the Shareholder is willing to
vote his or her shares of the Corporation's capital stock in accordance with the
terms of this Agreement. The parties do not intend that the Shareholder receive
any economic benefit (whether dividends, distributions or otherwise) from his or
her respective shareholdings.
B. The Corporation, the Shareholder and TMMC desire that there be
continuity in management and control of the Corporation and that the affairs of
the Corporation be managed consistent with the terms of this Agreement.
IN CONSIDERATION of the mutual rights and obligations of the parties
hereto, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged by the Shareholder, and the undersigned
Shareholder being and remaining holder of the Corporation's capital stock, the
parties hereto agree as follows:
1. OBLIGATIONS CONCERNING THE VOTING OF SHARES. The Shareholder shall
advise TMMC, at least thirty (30) days in advance, of his or her intention to
vote the shares of the Corporation's capital stock now or hereafter owned by the
Shareholder on any matter submitted for a vote to the Shareholder:
(a) which involves the (i) lease, sale, exchange, transfer or
disposal of all or substantially all of the Corporation's assets,
(ii) merged, consolidation or reorganization of the Corporation with or
into any other corporation or trade or business, (iii) issuance any shares
of any class of the Corporation's capital stock, (iv) amendment or
modification of the articles of incorporation or bylaws of the Corporation,
(v) dissolution of the Corporation, (vi) amendment or termination of the
Management Services Agreement between TMMC and the Corporation, dated as of
January 1, 1996, or (vii) entry into any agreement with any person to do
any of the foregoing; or
(b) to elect any person to the Board of Directors of the Corporation.
Notwithstanding the foregoing, in the event that an issue is presented to the
Shareholder that applicable law or ethical provisions mandate be determined by
an individual who is duly licensed as a physician under applicable state law,
the Shareholder may vote his or her shares with respect to such issue in any
manner that he or she deems appropriate.
1
<PAGE>
2. OBLIGATIONS CONCERNING THE PROVISION OF PROFESSIONAL SERVICES. The
Shareholder shall ensure that the Corporation renders professional services to
patients of the Corporation only through officers, employees and agents who are
themselves duly licensed or otherwise legally authorized to render professional
services within the State of California.
3. PURCHASE OF SHARES ON TERMINATION OF EMPLOYMENT. In the event that
the Shareholder is removed, or ceases to act, as Chief of Staff of the
Corporation for any reason, including, without limitation, termination,
disability, death, discharge or resignation, the Shareholder or the legal
successors of the Shareholder shall transfer the shares held by the Shareholder
to a person or persons designated by TMMC, which person or persons must be duly
licensed physicians in the State of California; PROVIDED, HOWEVER, that at all
times, one of the transferees must be the Chief of Staff of the Corporation.
The closing of the purchase and sale shall take place not later than ninety (90)
days after the date of termination or appointment. The price of each such share
shall be $1.00. All certificates evidencing the shares being purchased and sold
shall be delivered in transferable form against payment of the purchase price
thereof evidenced by a check drawn on the designee of TMMC and payable in United
States dollars to the order of the Shareholder, or in the case of death, his or
her legal representative(s).
4. RIGHT OF FIRST PURCHASE. The Shareholder shall not transfer,
encumber, or otherwise dispose of (by sale, pledge, gift, devise, or other
disposition) any shares of the Corporation's capital stock now or hereafter held
of record or beneficially owned by him or her unless the Shareholder shall have
complied with the following procedure:
(a) The Shareholder shall give TMMC written notice of his or her
intent to dispose of such shares, and such notice shall be deemed to be an
offer to sell such shares to a designee of TMMC subject to acceptance and
pursuant to the price and terms provided in this paragraph 4. Any such
designee of TMMC must be a duly licensed physician in the State of
California.
(b) Any offer made pursuant to this paragraph 4 may be accepted by a
designee of TMMC by giving written notice of such acceptance to the
Shareholder not later than the ninetieth (90th) calendar day after the
offer was given. The designee of TMMC may accept the offer only as to all
of the shares offered.
(c) The price of each share offered and purchased pursuant to this
paragraph 4 shall be $1.00.
(d) The closing of the shares offered and purchased pursuant to this
paragraph 4 shall take place not later than fifteen (15) days after the
date for timely acceptance of the offer to sell. A certificate in
transferable form for the number of shares offered and purchased shall be
delivered against payment of the purchase price thereof.
5. LEGEND. The Shareholder shall deliver to the Corporation all
certificates heretofore issued representing shares of the Corporation's capital
stock held of record or beneficially owned by the Shareholder, and each
certificate hereafter issued representing any
2
<PAGE>
share of the Corporation's capital stock shall, have affixed to the back of the
certificate a legend substantially as follows:
The rights of any holder of any share evidenced by this certificate,
including the right to dispose of the securities represented by this
certificate or any interest therein, are subject to and restricted by a
certain Agreement, dated __________, 1995, among the issuer, the holder,
and Talbert Medical Management Corporation. The issuer will mail without
charge to any holder of these shares a copy of such agreement within five
(5) days of receipt by the issuer of a written request therefor.
6. TERM, AMENDMENT, TERMINATION. The term of this Agreement shall be
into perpetuity. This Agreement may be amended or terminated at any time but
only with the written consent of each of the parties hereto.
7. NOTICES. Any and all notices, offers, acceptances, and other
communications required to be given hereunder shall be given by and be deemed
given when deposited in U.S. registered or certified mail addressed, in the case
of the Corporation or TMMC, to its principal office, and in the case of the
Shareholder, to the address last appearing on the books of the Corporation.
8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts. Any party may execute the Agreement by executing any such
counterpart and all of such executed counterparts shall be taken together to
constitute a single instrument.
9. SPECIFIC PERFORMANCE. If the Shareholder or the person so required
under this Agreement fails to give notice or to vote his or her shares in
accordance herewith, and if the failure continues for five (5) days after notice
by the Corporation or TMMC to the party in default, any of the parties to the
Agreement may institute and maintain a proceeding to compel the specific
performance of this Agreement by the party in default.
10. RECOGNITION. The Corporation shall not recognize any share transfer
or other action not in compliance with the terms of this Agreement.
11. BENEFIT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and the legal representatives, successors in
interest and assigns, respectively, of each such party.
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12. CONSTRUCTION. This Agreement shall be governed by and construed in
accordance with the law of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement as of the date first written above.
TALBERT MEDICAL GROUP, INC.
By:
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Name:
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Title:
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TALBERT MEDICAL MANAGEMENT CORPORATION
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
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[Shareholder]
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AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
This AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT ("Management
Agreement") is entered into effective January 1, 1997 by and between Talbert
Medical Management Corporation, a Delaware corporation ("Manager") and Talbert
Medical Group, Ltd., a ________ professional medical corporation ("Group").
R E C I T A L S
A. Manager is a Delaware corporation which is operated, in part, for the
purposes of providing management services related to the operation of medical
groups such as Group.
B. Group is a _______ professional medical corporation which is duly
licensed and qualified through service agreements with its independent
contractors and employees ("Group Physicians"), to provide physician services to
its patients ("Patients"). The Patients include individuals to whom services
are provided under the terms of contracts with payors for health care services
("Group Agreements").
C. In connection with Group's providing physician services under
agreements with payors, negotiated by Manager, and for other valuable
consideration, Manager has agreed to provide the management services provided
for herein.
D. This Management Agreement is made in order to provide the terms upon
which Manager will provide management services to Group.
ARTICLE I
RESPONSIBILITIES OF MANAGER
Except as otherwise specifically provided herein, during the term of this
Management Agreement and any extensions and renewals hereof, Manager shall, at
its sole cost and expense, provide all management services including providing
facilities, support, non-physician personnel, billing, equipment, furnishings,
and supplies required for the operation of Group as an integral part thereof at
the premises established for such purposes. Such performance by Manager shall
be carried out in accordance with the following standards and procedures:
1.1 PRACTICE SITES. Manager shall provide certain premises set forth on
EXHIBIT 1.1 hereto, together with all appurtenances, improvements, and fixtures,
(hereinafter collectively
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referred to as the "Practice Sites") at which Group will render professional
medical services. Changes in the location of a Practice Site may be effected as
of the expiration of any lease or other arrangement under which Manager leases
or occupies any Practice Site or at any other time as may be approved by
Manager. Any additional Practice Sites will be established as may be approved
by the Joint Operating Committee.
1.2 UTILITIES, BUILDING SERVICES, AND SUPPLIES. Manager shall provide or
arrange for all utilities and building services related to the utilization by
Group of Practice Sites. Manager shall also provide telephones, reception,
secretarial and transcribing services, paging devices, postage, duplication
services, office supplies and medical supplies which Manager determines to be
necessary or appropriate for the operation of the Practice Sites.
1.3 EQUIPMENT, FURNITURE AND FURNISHINGS. Manager shall provide or
arrange for all the equipment (including computer equipment and software),
furniture, furnishings and personal property which Manager determines to be
necessary for the operation of Group ("Equipment").
1.4 REPAIR AND MAINTENANCE OF PRACTICE SITES AND EQUIPMENT. Manager shall
have the responsibility for:
1.4.1 REPAIR AND MAINTENANCE OF PRACTICE SITES. All of the lessee
maintenance and repair obligations for the Practice Sites required to be
provided pursuant to the terms of any Practice Site lease or similar agreement,
and any and all other maintenance and repairs to Practice Sites which Manager
determines to be necessary or appropriate for the efficient and proper operation
of Group.
1.4.2 REPAIR AND MAINTENANCE OF EQUIPMENT. The maintenance and
repair of all Equipment as determined by Manager to be necessary or appropriate
for the efficient and proper operation of Group.
1.5 REPLACEMENT EQUIPMENT. Should Manager determine that any then
existing Equipment utilized in the operations of Group is worn out or obsolete
and it is unreasonable, impossible, or economically impractical to repair; and
if Manager further determines that such Equipment is necessary or appropriate
for the efficient and proper operation of Group; then Manager shall procure
replacement Equipment.
1.6 SIGNS. Manager shall provide signage, including but not limited to
signage containing such name(s) as may be determined by Manager for designation
of Practice Sites.
1.7 PAYMENT OF TAXES. Manager shall have the responsibility to pay (i)
all taxes (excluding taxes measured by or based upon Group income or
professional service revenue), assessments, license fees and other charges
payable that are the responsibility of the occupant of the Practice Sites which
become payable during the term of this Management Agreement; (ii) all taxes,
assessments, license fees and other charges assessed on personal property owned
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by Manager relating to the operation of Group; and (iii) all other business
taxes, licenses, or fees other than those related to the professional licensure
of physicians. Notwithstanding the foregoing, if Group or any Group Physician
maintains personal property at any Practice Site, then Group or the Group
Physician, as applicable, shall be responsible for the payment of any taxes with
respect to such property.
1.8 INSURANCE.
1.8.1 PRACTICE SITES. Manager shall procure and maintain all
insurance coverages deemed necessary by Manager for the operation of the
Practice Sites, including without limitation the following: (i) comprehensive
general liability insurance covering activities of Group naming Manager,
Manager's employees and Group as insured, (ii) general property casualty
insurance on the Practice Sites and contents owned or leased by Manager in
amounts consistent with Manager's risk management policies and (iii) workers
compensation insurance for employees of Manager and Group.
1.8.2 PROFESSIONAL LIABILITY INSURANCE. Manager, directly or
through its affiliates, shall procure and maintain, a policy or policies of
professional liability insurance providing coverage for Group and its
professional personnel. Such policy shall cover any acts of Group for the
professional negligence of its personnel which may have occurred during the term
of this Management Agreement. These policies of insurance shall be written with
limits of liability of no less than One Million Dollars ($1,000,000) per
claim/Three Million Dollars ($3,000,000) annual aggregate. Group shall
cooperate with all reasonable requests of Manager in connection with obtaining
and maintaining this coverage.
1.8.3 DIRECTORS AND OFFICERS INSURANCE. Manager, directly or
through its affiliates, shall procure and maintain, a policy or policies of
directors and officers liability insurance providing coverage for the directors,
officers and authorized agents of Group. These policies of insurance shall be
written with limits of liability of no less than Five Million Dollars
($5,000,000) per claim annual aggregate. Group shall cooperate with all
reasonable requests of Manager in connection with obtaining and maintaining this
coverage.
1.8.4 SELF INSURANCE. Notwithstanding any other provisions of
this Section 1.8, Manager may, at any time Manager deems appropriate, choose to
self insure for any or all insurance coverages for which Manager is responsible
pursuant to this Management Agreement.
1.9 NON-PROFESSIONAL PERSONNEL.
1.9.1 MANAGER TO EMPLOY; INITIAL EMPLOYMENT DECISIONS. Manager
shall provide all non-professional personnel to Group which Manager deems
reasonable and necessary for the efficient and proper operation of Group based
upon patient volume. For purposes of this Agreement, "Professional Personnel"
shall mean individuals employed by Group as physicians, optometrists,
chiropractors, podiatrists, nurse practitioners, nurse anesthetists, nurse
midwives and physician assistants.
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1.9.2 SPECIAL PROVISIONS APPLICABLE TO ALLIED HEALTH
Professionals. Manager shall adhere to appropriate credentialing and other
professional review and qualification standards with respect to all personnel to
be employed or retained by Manager to perform services under this Management
Agreement who are licensed or certified to practice their respective health care
professions by the State of Nevada (hereinafter collectively referred to as
"Allied Health Professionals").
1.9.3 SUPERVISION OF CLERICAL AND OTHER NON-MEDICAL SUPPORT
Personnel. Manager shall supervise all clerical and other non-medical support
personnel and the non-medical functions of all Allied Health Professionals. In
addition, Manager shall provide for periodic review and evaluation, including
input from Group, of the performance of such personnel. Manager shall establish
a procedure through which Group may request reassignment of particular personnel
for express reasons relating to job qualifications, training or performance, and
Manager shall reasonably accommodate such requests by Group which conform to
this procedure.
1.9.4 DECISIONS RESERVED TO MANAGER. Manager shall make all
hiring and firing decisions and all determinations as to those wages, salaries
and compensation, including all determinations regarding the retention,
promotion, demotion, awarding of bonuses, salary adjustments, and other matters
affecting the terms and conditions of the employment of all non-physician
personnel in accordance with and subject to personnel policies as may be adopted
and modified from time to time by Manager. Staffing levels, work hours and
shifts, and employee benefit programs shall be established and implemented by
Manager in accordance with the policies and funding arrangements developed by
Manager.
1.10 BOOKKEEPING AND ACCOUNTING SERVICES. Manager shall provide Group with
all bookkeeping and accounting services Manager deems necessary or appropriate
for the efficient and proper operation of Group. Such services shall include,
without limitation, the maintenance, custody and supervision of business
records, papers, documents, ledgers, journals and reports relating to the
business operations of Group; the establishment, administration and
implementation of accounting procedures, controls, forms and systems; the
preparation of financial reports; the planning of the business operations of the
Group; the payment of accounts payable (including claims administration and
payment) and collection of accounts receivable; the preparation of necessary
Group tax returns (as opposed to the tax returns of individual Group Physicians
which shall be the responsibility of each physician); and the administration of
the compensation formula and compensation distribution system established
pursuant to the terms of this Management Agreement.
1.11 FEE-FOR-SERVICE ADMINISTRATION. For Group Agreements which are not
subject to Section 1.12, and all care provided by Group other than under Group
Agreements, Manager shall provide the following additional administrative
services:
1.11.1 FEE SCHEDULE. Development of a "chargemaster" fee schedule
for Group and determination of the appropriateness of revisions and
modifications to the fee
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schedule to reflect changed circumstances, with approval from the Joint
Operating Committee, in accordance with Section 5.2 of this Management
Agreement.
1.11.2 BILLING AND COLLECTION. Billing and collection services
that Manager determines to be necessary or appropriate in connection with
charges resulting from the rendition of professional services by Group to
Patients; such services to include, but not be limited to, collection of
payments derived from coordination of benefits, collection of payments from
third party payors, and other payments due Group. Manager shall adhere to the
then current fee schedule provisions for discounts and courtesy services to
Patients. Manager shall maintain internal accounting records of all billings to
fee-for-service Patients and third-party payors.
1.12 CAPITATION ADMINISTRATION. For Group Agreements which involve
capitated payments to Group ("Capitated Agreements"), Manager shall provide the
following additional administrative services:
1.12.1 CALCULATION OF AMOUNTS DUE. Calculation of primary care and
specialty capitation and specialty, ancillary and other payable claims of Group
based upon contracts with non-Group Physicians and to prepare checks on behalf
of Group to pay amounts due.
1.12.2 BILLING UNDER CAPITATED AGREEMENTS. Billing in Group's name
and on its behalf, (a) payors for coordination of benefits and other third party
liability payments according to the terms of the Capitated Agreements, (b)
Patients in accordance with the terms and provisions of applicable Capitated
Agreements and (c) for amounts deemed ineligible under the terms of Capitated
Agreements where permitted by such Capitated Agreements. Manager shall also
review claim and capitation expense data to monitor any other revenue receipt
programs which any of the Capitated Agreements may have or may institute, and to
seek reimbursement pursuant to Capitated Agreements.
1.12.3 RECORDS. Manager shall maintain internal accounting records
including primary care encounters and authorizations for specialist referrals
under Capitated Agreements which will identify the services provided to Patients
covered by Capitated Agreements and the compensation received therefor to enable
a determination of the fee-for-service equivalency to be made.
1.13 REVIEW AND AUDIT OF MANAGER. The annual financial statements of
Manager shall be annually audited in accordance with generally accepted
accounting standards or such other standards as may be appropriate for a
business of the size and scope of that conducted by Manager, by duly qualified
independent auditors. Copies of audited financial statements of Manager,
subject to such restrictions as may be necessary to assure the preservation of
their confidentiality, shall be made available for review by Group.
1.14 ADDITIONAL FINANCIAL AND MANAGEMENT REPORTS AND INFORMATION. Manager
shall prepare and deliver to Group, copies of the following reports:
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1.14.1 INCOME STATEMENTS AND BALANCE SHEETS. Monthly income
statements and annual balance sheets of Group relating to the operation of
Group.
1.14.2 OTHER REPORTS. Any additional financial and management
reports and information prepared by Manager which Manager determines will assist
Group in evaluating physician productivity and the efficiency or effectiveness
of the medical services provided by Group to Patients.
1.15 MANAGEMENT INFORMATION SYSTEM. Manager shall be responsible for the
development or procurement and operation of a management information system.
1.16 PHYSICIAN RECRUITMENT. Manager shall provide physician recruitment
services to Group.
1.17 HUMAN RESOURCES; CREDENTIALING. Manager shall provide any necessary
personnel and human resources services for its employees and the Group. Manager
shall provide credentialing services to the Group, in accordance with standards
established by Group.
1.18 MARKETING AND PUBLIC RELATIONS. Manager shall coordinate and provide
marketing and public relations services.
1.19 UM/QM POLICIES AND PROCEDURES; PREAUTHORIZATION. Manager shall assist
Group in the development of utilization management, quality management and risk
management policies and procedures for Group and Group Physicians. Manager
shall assist Group in the development of preauthorization protocols for the
administration of care under Capitated Agreements, other Group Agreements in
which Group is permitted to authorize care and for fee-for-service Patients.
Manager shall administer all such policies and protocols under the direction and
supervision of Group.
1.20 DISTRIBUTION OF COMPENSATION AND BONUSES TO GROUP PHYSICIANS; GROUP
BENEFITS ADMINISTRATION. Manager, on behalf of Group, shall administer the
payment of all compensation to all Group Physicians for providing services to
Patients including, without limitation, all applicable vacation pay, sick leave,
retirement benefits, social security and workers' compensation. Manager shall
also distribute to Group Physicians any bonuses or risk pool amounts from
whatever source derived, in accordance with the policies and procedures adopted
by Group. Manager shall contract for benefits on behalf of Group and administer
such benefits for Group, including any health, disability insurance and life
insurance.
1.21 ATTORNEY-IN-FACT. Group hereby constitutes and appoints Manager for
the term hereof as its true and lawful attorney-in-fact for the following
purposes:
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1.21.1 DEPOSITORY ACCOUNT. To create and maintain a depository
account in the name of Group with a banking institution selected by Manager (the
"Account"). Group agrees to designate Manager as the sole party authorized to
make withdrawals from the Account, which designation may be changed only by
written notice to said institution, executed by both Group and Manager;
withdrawals from the Account shall be made only in accordance with the terms of
Sections 1.12, 2.15 or 3.1.4 of this Management Agreement.
1.21.2 RECEIPT OF PAYMENTS. To receive and deposit on a timely
basis capitation and other payments arising from Group Agreements, take
possession of and endorse in the name of Group all cash, notes, checks, money
orders, insurance payments, and any other instruments received as payment of
accounts receivable of Group however arising. Group shall immediately forward
to Manager in full any such payments that may come into the possession of Group.
1.21.3 BILLING/CLAIMS PROCESSING. To perform the functions
described in Sections 1.11 and 1.12.
1.21.4 COLLECTION OF OTHER AMOUNTS DUE. To collect in the name of
Group and on its behalf all other charges or fees resulting from or related to
the provision of services to Patients including but not limited to any and all
hospital incentive funds and funds from shared risk pools under any risk sharing
arrangements wherein Group is or is deemed to be the provider of medical
services.
1.21.5 STOP-LOSS CLAIMS. To review claim and capitation expense
data to monitor Patients for whom patient care expenses exceed stop-loss
deductibles under Group Agreements, and to submit with the applicable Group
Agreements or other providers of stop-loss coverage orally or in writing
reimbursement requests on behalf of Group.
1.22 COMPLIANCE WITH LAW. The obligations of Manager pursuant to this
Management Agreement shall be subject to any limitations or restrictions which
may be imposed by law or regulation, and Manager may suspend any or all
obligations hereunder in the event that it reasonably determines, upon advice of
counsel, that the performance of any obligation pursuant to this Management
Agreement may contravene applicable law or regulation, the effect of which would
be to have a material adverse effect on the business, financial condition, or
operations of Manager or any affiliate.
ARTICLE II
OBLIGATIONS OF GROUP
In providing its professional services to Patients, Group shall have the
following obligations:
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2.1 GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL. Group shall notify
Manager, upon execution of this Management Agreement, of the identities of the
Group Physicians and Professional Personnel (as defined in Section 1.9),
together with a list of all such individuals and their respective areas of
practice shall be attached hereto as EXHIBIT 2.1. Group shall enter into
employment agreements or contracts with all Group Physicians and Professional
Personnel. Any new employment agreements or contracts shall be reviewed and
approved by Manager prior to execution, and Manager shall promptly be provided
with copies of the executed employment agreements and contracts and any
revisions or amendments thereto. All Group Physicians shall be licensed by the
State of Nevada and hold staff privileges at one or more hospitals designated by
Manager as participating hospitals.
2.2 PROVISION OF MEDICAL SERVICES. Group shall perform, or subcontract to
perform as necessary, all medically necessary services for Patients in
accordance with the terms of Group Agreements and subject to the utilization
review protocols. All subcontracts shall be negotiated and executed by Manager
on behalf of Group.
2.3 ADDITIONAL PHYSICIANS. Group shall use its best efforts to provide
any additional physicians required by the level of patient activity anticipated
by Manager and communicated to Group, with the specialty mix and geographical
location specified by Manager, within a reasonable period of time.
2.4 HOURS OF SERVICE. Group shall maintain Group Physicians and
Professional Personnel at Practice Sites during the following hours of service.
Hours of service at any Practice Site shall be subject to review by the Joint
Operating Committee, in accordance with Section 5.2.
2.4.1 PATIENT MEDICAL SERVICES. Group shall provide available,
accessible and medically necessary services for Patients during regular working
hours established by Manager for each Practice Site.
2.4.2 WALK-IN AND COMMUNITY SERVICES. For walk-in and community
services, which may be provided at Practice Sites, Group shall provide (or
subcontract as necessary to provide) such services at the hours, including
extended hours, established by Manager.
2.4.3 AFTER HOURS CARE. Group shall provide (or subcontract as
necessary to provide) access to after hours services in accordance with Group
protocols and community standards of care.
2.5 NON-DISCRIMINATION; COMPLIANCE WITH LAW. All employment policies,
standards and practices of Group shall be in accordance with applicable equality
provisions of state and federal law. In the event that any government contract
or regulation requires reports or disclosures of Manager and its contractors,
Group, upon Manager's request, shall make, execute and deliver such reports,
disclosures or other written information, guarantees or assurances as may be
reasonably requested by Manager to assure timely compliance.
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2.6 NON-DISCRIMINATORY PATIENT SELECTION AND SERVICES; NON-DISCRIMINATORY
PATIENT ASSIGNMENT. No Patient shall be discriminated against for any reason
prohibited by law. The Group Physicians shall also abide by the patient service
and assignment policies established from time to time by Manager or applicable
third party payors, including those relating to accepting Patients who select or
are assigned to Group under Group Agreements.
2.7 STANDARDS, ACCREDITATION, SURVEYS AND INSPECTIONS. Group shall meet
all medical practice, licensure and ethical standards, which are pertinent to
its activities or which by contract it has agreed to abide. Group shall in good
faith cooperate with inspections and on-site surveys of Practice Sites as may be
conducted by governmental agencies, accrediting organizations or payors.
Manager shall, to the extent possible, give Group advance notice of such
inspections and surveys and schedule them during reasonable business hours.
2.8 CONTRACTS. Group and the Group Physicians shall abide by the terms of
any Group Agreements entered into by or with Manager on behalf of Group,
including, without limitation, self-insured, PPO, EPO, HMO and indemnity
contracts.
2.9 COMPLIANCE WITH POLICIES AND PROCEDURES.
2.9.1 ORGANIZATION AND REVIEW OF CARE. Group shall comply with
policies and procedures pertinent to quality management, utilization management,
risk management, scheduling, billing, claims payment, claims adjudication,
reconciliation of payments or reimbursements, and other administrative matters
relating to the organization of the non-professional aspects of the delivery of
care as may be established by Manager from time to time.
2.9.2 UTILIZATION MANAGEMENT; QUALITY MANAGEMENT. Group shall
contractually bind each Group Physician to cooperate with and participate in the
applicable program and systems of quality management, grievance procedures, peer
review and utilization management. Information developed in the course of
physician quality assurance and peer review activities shall be maintained by
Manager as privileged and confidential except where its disclosure is assented
to by Group or is required by law.
2.9.3 PRIOR AUTHORIZATION. Group and each Group Physician agrees
to obtain prior authorization in accordance with any administrative procedures
developed in accordance with Section 1.19 or required pursuant to any
administrative procedures of third party payors in effect from time to time
before rendering any service requiring prior authorization.
2.10 RECORDS AND REPORTS. Group shall assist Manager in maintaining and,
where by law or legal process required, in divulging, records and information
concerning its health care services. Group shall give Manager full access to
all of its medical and financial records.
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2.11 GROUP TO PROVIDE NECESSARY BILLING AND ENCOUNTER INFORMATION. Group
agrees to provide Manager with all billing and encounter information for
Patients, including, but not limited to the name of the patient, the date of
service, the nature and extent of services provided and any supporting medical
information, necessary to obtain payment or reimbursement for services.
2.12 CONTINUING EDUCATION. Group Physicians shall maintain competence in,
and remain currently well-informed as to recent developments about, their
particular areas of medical practice, interest and specialization. Accordingly,
subject to Group at all times providing sufficient physicians to care for the
needs of Patients, the Group Physicians shall, in compliance with policies set
by Group and administered by Manager, attend seminars, keep current with
journals and take other reasonable steps to remain proficient in their
particular specialties. All seminars necessary to maintain licensure or
competence shall be the responsibility of the Group and the individual Group
Physician.
2.13 REFERRALS. Group and the Group Physicians shall make referrals to
specialists in a manner consistent with (a) pertinent policies and procedures
(which shall be developed in consultation with Manager), (b) the terms and
conditions of government programs or Group Agreements applicable to the care of
the Patient, and (c) any federal or state laws or regulations.
2.14 PHYSICIAN COMPENSATION. Group shall compensate Group Physicians in
accordance with a compensation formula developed in consultation with Manager.
Group shall make all final determinations as to the compensation paid to Group
Physicians.
2.15 GROUP EXPENSES. Payment of those expenses related to the operation of
Group which are designated on EXHIBIT 2.15 hereto ("Group Expenses") shall be
the sole responsibility of Group. To the extent that Manager pays or incurs any
Group Expenses, Group authorizes Manager to promptly reimburse Manager from
funds in the Account as soon as such funds become available.
2.16 PROVIDER NUMBERS. Group shall procure and maintain a medical group
provider number, including without limitation, Medicare and Medicaid provider
numbers, necessary or appropriate to obtain payment or reimbursement on Group's
behalf.
ARTICLE III
COMPENSATION OF MANAGER
3.1 MANAGEMENT FEE. Group and Manager agree that the compensation set
forth in this Article III is being paid to Manager in consideration of the
substantial commitment made by Manager hereunder and that such fees are fair and
reasonable. Subject to the
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provisions of Section 3.2, Manager shall be paid the following amounts
(collectively the "Management Fee"):
3.1.1 CLINIC EXPENSES. Manager shall be reimbursed the amount of
all Clinic Expenses paid by Manager.
3.1.2 ADVANCES TO GROUP. Manager shall be reimbursed any amounts
advanced to Group to fund obligations of Group, subject to the provisions of
Section 3.3.
3.1.3 OPERATIONS FEE. Manager shall receive a fee equal to
fifteen percent (15%) of the excess of Group Revenues over Clinic Expenses as a
result of Group operations.
3.1.4 ADDITIONAL MANAGED CARE PAYMENTS. Manager shall receive a
fee equal to thirty percent (30%) of Additional Managed Care Payments made to
Group.
3.1.5 MIS ALLOCATION. The Joint Operating Committee shall
determine from time to time a portion of the Management Fee which shall
reasonably represent the payment for services to Manager for the provision of
information, data and computer services in accordance with Section 1.15; other
than for transaction costs.
3.2 CALCULATION AND PAYMENT OF MANAGEMENT FEE. The Management Fee under
this Article III shall be payable monthly. The payment amounts shall be
estimated based upon the operating results of Group for the previous month.
Adjustments to the estimated payments shall be made to reconcile actual amounts
due under this Article III, by the end of the following month during each
calendar quarter. Upon preparation of quarterly financial statements, final
adjustments to the service fee for the quarter shall be made and any additional
payments owing to Manager or Group shall then be made. Any audit adjustments
shall be reflected in the calculation for the fourth quarter. Manager shall be
entitled to withdraw the Management Fee from the Account maintained by Manager
in accordance with Section 1.21.1.
3.3 ADVANCES TO GROUP. In the event that Manager and Group have entered
into an agreement which prescribes a minimum amount of compensation for
distribution by Group to Group Physicians in accordance with Section 2.14
("Minimum Group Compensation") and the payment of the Management Fee in
accordance with this Article III will leave Group with less than the amount of
the Minimum Group Compensation, Manager shall pay to Group an amount necessary
to provide Group with Minimum Group Compensation. Commencing January 1, 1997,
any such payment shall not be considered a reduction of the Management Fee, but
shall be an advance by Manager to Group, which shall be repaid from revenues
otherwise allocable to Group in the next succeeding monthly periods for which
Group receives at least Minimum Group Compensation.
3.4 ADJUSTMENT IN MANAGEMENT FEE. Manager shall periodically review and
have the right to adjust all or any components of the Management Fee, taking
into account such factors as the adequacy of compensation to Group and changes
in Manager's costs. In
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the event that Manager proposes a change in any component of the Management Fee,
Manager shall consult with the Joint Operating Committee about the proposed
change and the reasons therefor. Manager shall advise Group at least sixty (60)
days in advance of the date on which the revised Management Fee is to be
effective by a written statement which includes the basis for the change. Any
adjustments made pursuant to this Section 3.4 shall not be subject to change for
at least one year.
3.5 DEFINITIONS. For purposes of this Article III:
3.5.1 "Additional Managed Care Payments" shall mean all fees and
revenues recorded by or on behalf of Group or Manager for profits, whether from
the assumption of hospital risk funds in managed care risk assumption
arrangements or otherwise, including bonus, incentive and surplus payments from
pharmacy funds or other similar risk arrangements in effect from time to time.
3.5.2 "Clinic Expenses" shall mean all operating and non-operating
expenses of Manager incurred in the operation of Group, including, without
limitation, the items listed below.
(i) Salaries, benefits, (including contributions under
benefit plans), severance benefits and other direct costs of all
employees of Manager at each Practice Site;
(ii) Direct costs of all outside consultants retained
by Manager and approved by the Joint Operating Committee to
provide services at or in connection with Group or who actually
provide services at or in connection with Group required for
improved clinic performance; provided, however, only that portion
of such consultant's costs without mark-up by Manager that is
allocable to work performed at or for the benefit of Group will
be a Clinic Expense;
(iii) Obligations of Manager under leases or
subleases;
(iv) Personal property and intangible taxes assessed
against Manager's assets, commencing on the date of this
Agreement;
(v) Interest expense on indebtedness incurred by
Manager to finance or refinance any of its obligations hereunder
or services provided (interest expense will be charged for funds
borrowed from outside sources as well as from Manager's
affiliates; in the latter case, charges will be computed at
Manager's (or its finance subsidiary's) intracompany borrowing
rate as in effect from time to time but not to exceed the prime
rate of interest of Citibank, N.A., as published from time to
time in THE WALL STREET JOURNAL (hereinafter, "Intracompany
Borrowing Rate");
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(vi) Other expenses incurred by Manager in carrying out
its obligations under this Agreement, but not including corporate
overhead charges as described below;
(vii) In the event an opportunity arises for
additional physicians in the service area of Group to become
employed by or merge with Group, and in the event such merger is
completed, amortization of intangible asset value as a result of
each such merger; and
(viii)Management information systems transaction costs.
Clinic Expenses shall not include:
(i) Any corporate overhead charge from Manager other
than the kind of items listed above, including costs of employees
of Manager who provide services at Group;
(ii) Any federal or state income taxes;
(iii) Amounts paid for ancillary or professional
services not provided by Group Physicians or Group, but for which
Group is responsible under the applicable Group Agreement;
(iv) Any expenses which are expressly designated herein
as expenses or responsibilities of Group in accordance with
Section 2.15;
(v) Compensation to Group Physicians, in accordance
with Section 2.14, and to Allied Health Professionals;
(vi) Any expenses associated with services engaged by
Group for health administration purposes, I.E. utilization review
and quality assurance; and
(vii) Any expenses associated with procuring and
maintaining professional liability insurance in accordance with
Section 1.8.2.
3.5.3 "Group Revenue" shall consist of all fees or other
compensation actually recorded each month by or on behalf of Group as a result
of professional medical services rendered by Group (including Allied Health
Professionals) at the Practice Sites. Fee-for-service revenue of Group shall be
calculated on an accrual basis, with gross charges for services being reduced by
all allowances for bad debts, contractual adjustments, discounts, professional
courtesies and compromises or cancellations of accounts receivable of any kind
or nature. Capitated Agreement revenue of Group shall include coordination of
benefits payments, co-payment amounts, coinsurance amounts, withhold
distributions, and stop-loss insurance reimbursements.
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ARTICLE IV
EXECUTION OF GROUP AGREEMENTS
4.1 APPOINTMENT OF MANAGER AS ATTORNEY-IN-FACT. In order to facilitate
the execution of Group Agreements and other contracts, Group hereby constitutes
and appoints Manager as attorney-in-fact for Group and the Group Physicians with
the following powers:
4.1.1 Contracting Guidelines. The Joint Operating Committee shall
develop guidelines for Group Agreements, which guidelines shall include terms
minimally acceptable to Group for all such Agreements. Manager shall observe
the guidelines in the negotiation of Group Agreements, and in the event Manager
proposes entry into a Group Agreement which varies from the guidelines, Manager
shall seek approval of the Joint Operating Committee for such Group Agreement.
4.1.2 Entry Into Agreements. To negotiate and execute in the name
of Group, all contracts or other arrangements for the provision of health care
services by Group Physicians, including Capitated Agreements.
4.1.3 Administration of Agreements. To exercise such rights
respecting the administration of Group Agreements or other arrangements
negotiated by Manager pursuant to Section 4.1.2, on behalf of Group and the
Group Physicians as may reasonably be requested by the third party payor with
whom the Group Agreement is executed and as are customary in the health care
industry to facilitate the effective participation of the Group Physicians.
This Section 4.1.3 is not intended and shall not be construed to delegate any
authority to Manager to modify any term or provision of this Management
Agreement, to confess or accept any liability or obligation not authorized under
the standards respecting Group Agreements as may be established by Manager, or
to exercise any rights respecting the management of Group, the performance of
professional services by any Group Physician, or to interfere in any way with
the professional practices and prerogatives of Group or any Group Physician.
The foregoing limitation shall not, however, be construed to modify or limit any
rights or obligations of any party arising under any other provision of this
Management Agreement, or pursuant to any other contract or agreement to which
such party is bound.
4.2 RESTRICTIONS ON GROUP. Group shall not, nor shall any Group
Physician, during the term of this Management Agreement enter into any contract
or other arrangement for the provision of health care services other than those
negotiated by Manager in accordance with Section 4.1.2.
ARTICLE V
JOINT OPERATING COMMITTEE
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5.1 COMPOSITION. Manager and Group shall constitute a Joint Operating
Committee, consisting of not fewer than three (3) representatives of Group's
Board of Directors and three (3) representatives of Manager. Each party may
change its representatives on the Joint Operating Committee from time to time,
upon notice to the other.
5.2 FUNCTIONS. The Joint Operating Committee shall advise Manager on its
administration of services under this Management Agreement and Group on its
performance of professional services pursuant to this Management Agreement. The
Joint Operating Committee shall have the specific functions set forth on
Exhibit 5.2 attached hereto and incorporated herein by this reference. It is
intended that the Joint Operating Committee provide management support to
Manager as required and that Manager and Group have a duty to consult with, or
seek approval from, the Joint Operating Committee on those matters set forth in
Exhibit 5.2 or as otherwise provided in this Management Agreement.
5.3 MEETINGS. The Joint Operating Committee shall meet, upon the request
of Manager or of the representatives of Group, not less frequently than
quarterly.
5.4 RULES. The Joint Operating Committee may develop such rules and
procedures to govern its meetings and activities as its members deem necessary.
ARTICLE VI
TERM; TERMINATION
6.1 TERM; TERMINATION. The initial term of this Management Agreement
shall be twenty (20) years ("Initial Term"), commencing as of January 1, 1997
(the "Effective Date"), unless earlier terminated as hereinafter provided. At
the conclusion of the Initial Term, this Management Agreement shall be extended
for an additional ten (10) years ("First Extension"), and at the end of the
First Extension for an additional ten (10) years ("Second Extension"), unless
either Manager or Group notifies the other of its intention that the Management
Agreement terminate not later than 180 days prior to the end of (a) the Initial
Term, in the case of the First Extension or (b) the First Extension, in the case
of the Second Extension.
6.2 TERMINATION FOR CAUSE. Either party may terminate this Management
Agreement at any time for "cause", which, for purposes of this Section 6.2 shall
be defined as, and limited to, the following defaults by the other party:
6.2.1 Liquidation; Bankruptcy. The defaulting party's application
for or consent to the appointment of a receiver, trustee or liquidator of all or
a substantial part of its assets, filing of a voluntary petition in bankruptcy,
making a general assignment for the benefit of creditors, filing a petition or
answer seeking reorganization or arrangement with creditors, or taking advantage
of any insolvency, or the entry of any order, judgment or decree by any court of
competent jurisdiction on the application of a creditor or otherwise,
adjudicating such
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party bankrupt or approving a petition seeking reorganization of such party or
appointment of a receiver, trustee or liquidator of such party or of all or a
substantial part of its assets, and if such order, judgment or decree shall
continue unstayed and in effect for sixty (60) calendar days after its entry.
Termination under this Subsection 6.2.1 shall be effective automatically and
immediately upon the giving of written notice of termination by the
non-defaulting party.
6.2.2 Breach. A failure by the defaulting party to perform any
material obligation required hereunder, if such default shall continue for
thirty (30) calendar days after the giving of written notice from the
nondefaulting party specifying the nature and extent of such default, or, if the
breach cannot reasonably be cured in thirty (30) days, if the breaching party
has not acted diligently, or subsequently acted diligently, to attempt to cure
the breach within the thirty (30) day period following notice from the
nondefaulting party. If the parties disagree as to the existence of a breach,
whether the breach has been cured or whether diligent efforts have been made
towards cure, the parties shall use their good faith efforts to resolve the
dispute through negotiation. Termination under this Subsection 6.2.2 shall be
effective upon the conclusion of the thirty (30) day period.
6.3 TERMINATION FOR CERTAIN TRANSACTIONS. Manager shall have the right to
terminate this Management Agreement in the event that Group, or any successor to
Group composed of fifty percent (50%) or more of Group Physicians, become
affiliated with another medical group, medical foundation, management services
organization, hospital or health system or third party payor, any of which
Manager, in its absolute discretion, deems a competitor, or any affiliate or
agent thereof and Group does not terminate such affiliation within thirty (30)
calendar days after the giving of written notice by Manager.
6.4 EFFECT OF TERMINATION.
6.4.1 Manager to Continue to Provide Services. Upon termination
of this Management Agreement, Manager shall continue to collect and receive all
compensation, reimbursement and payments due for services provided to Patients
prior to the effective date of termination, subject to the rights of the parties
hereunder to cancel, forgive, waive and settle such payments due, and Manager
shall be entitled to receive from such amounts any compensation in accordance
with the terms of Article III for services rendered by Manager. To the extent
necessary under Section 6.4.2, Manager shall provide management services to
Group, in accordance with the terms of this Management Agreement, following
termination of this Management Agreement, and shall be entitled to compensation
in accordance with the terms of Article III.
6.4.2 Services Under Group Agreements; Care of Patients. To the
extent required by Group Agreements, the parties shall observe the following
covenants, notwithstanding termination of this Management Agreement:
6.4.2.1 Group Agreement Obligations. Each party shall continue
to perform services as required under the terms and conditions of any Group
Agreement in which
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Group and/or Manager is then participating or otherwise has existing contractual
obligations in accordance with the terms of the Group Agreement.
6.4.2.2 Care of Patients. Each party shall continue to perform
such services as may be required to assure adequate care and arrangements for
appropriate referrals for patients who are receiving hospital or other
institutional services or who are involved in an active regimen or course of
medical treatment or other services at the time of such termination.
6.4.2.3 Collections. The parties shall cooperate to pursue
collection of any payments to which they may be entitled for services rendered
after the termination of this Management Agreement.
6.5 POST TERMINATION. Upon the termination of this Management Agreement:
6.5.1 Practice Sites. Subject to continuing care obligations in
Section 6.4.2, Group shall surrender to Manager all Practice Sites and Equipment
and other appurtenances thereto, in good condition, excepting reasonable use and
wear thereof and damage by fire, act of God, or by the elements.
6.5.2 Proprietary Information. Group shall immediately
discontinue the use of and shall promptly return all proprietary information,
manuals, and other materials associated with or respecting Manager that have
been made available to Group by reason of its participation therein and shall
return all such property, together with any copies thereof in its possession, to
Manager.
6.5.3 Software. Group shall immediately cease to use all software
arranged for or provided by Manager and, within thirty (30) calendar days after
such termination, shall return to Manager the software, all related
documentation and computer programs and any copies thereof.
6.5.4 Access to Medical Records. Group shall provide to Manager
access, at reasonable times and upon reasonable request, to Group's medical
records relating to Patients for a period not shorter than the applicable
statute of limitations for any claim which may be asserted against Manager
arising from its activities pursuant to this Management Agreement.
6.5.5 Covenant Not to Compete. For a period of one (1) year
following the termination of this Agreement Group shall not, directly or
indirectly engage in the provision of medical care within a three (3) mile
radius of any of the Practice Sites, and no Group Physician shall engage in the
provision of medical care within a three (3) mile radius of the Practice Site at
which they practiced prior to termination. The parties agree that the duration,
area and scope of activities restricted hereunder are reasonable and necessary
to protect Manager's legitimate business interests. In the event that a court
or arbitrator shall determine that this covenant is unenforceable because of its
area, duration or prohibited scope
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of activities, this covenant shall be construed, in a manner consistent with
applicable law, to provide the maximum restriction on the post termination
activities of Group and Group Physicians.
ARTICLE VII
RELATIONSHIP OF THE PARTIES
7.1 NO FIDUCIARY DUTIES. None of the provisions of this Management
Agreement are intended to create, nor shall be deemed or construed to create,
any fiduciary duty between the parties or any relationship between the parties
other than that of independent parties contracting with each other hereunder
solely for the purpose of effecting the provisions of this Management Agreement.
The parties are not, and shall not be construed to be in a relationship of joint
venturers, partners or employer-employee.
7.2 EXCLUSIVITY.
7.2.1 PHYSICIAN SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall provide any medical
services except in accordance with the terms of this Management Agreement. A
Group Physician who terminates employment by Group shall be relieved of this
obligation, except that for a period of one (1) year following termination of
employment, such Group Physician shall not practice medicine or solicit any
Patient of Group served at the Practice Site for the purpose of treating such
patient at a medical facility within a three (3) mile radius of such Practice
Site. The parties agree that the duration, area and scope of activities
restricted hereunder are reasonable and necessary to protect Manager's
legitimate business interests. In the event that a court or arbitrator shall
determine that this covenant is unenforceable because of its area, duration or
prohibited scope of activities, this covenant shall be construed, in a manner
consistent with applicable law, to provide the maximum restriction on the
activities of Group and Group Physicians. Manager shall not, during the term of
this Agreement, contract with any physician or group of physicians to provide
services at a Practice Site or within a three (3) mile radius of a Practice
Site, unless Manager offers Group the opportunity to Group to provide the
services and Group declines to provide Group Physicians or hire new physicians
necessary to provide the requested services.
7.2.2 MANAGEMENT SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall contract or arrange to
receive any services described in Article I (or any services substantially
similar to them) from any entity or person other than Manager. To the extent
that Group may require any service other than those described in Article I,
Group shall request such services from Manager, and Manager shall use reasonable
efforts to provide such service to Group.
7.2.3 EXPANSION OF SERVICE AREA. In the event that Manager
determines to add Practice Sites or arrange to expand the services or service
area for which it contracts
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(an "Expansion"), it shall propose the Expansion to the Joint Operating
Committee and Group. In the event that Group declines to provide Group
Physicians or to add new physicians to provide necessary medical services for
the Expansion, then Manager may contract with other physicians or groups to
provide medical services for the Expansion.
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices to be given under this Management Agreement
shall be in writing and may be personally served upon the parties hereto or may
be served by depositing the same in the United States mail, postage prepaid, as
follows:
Manager: Talbert Medical Management Corporation
9900 Talbert Avenue
Fountain Valley, CA 92708
Group: Talbert Medical Group, Ltd.
___________________________
___________________________
___________________________
subject to the right of either party to change said address or addresses by
written notice of such new address to the other party.
8.2 PROPRIETY PROPERTY. Manager is and shall be the sole owner and holder
of all right, title and interest to the "Proprietary Property of Manager"
consisting of all copyright, service mark and trademark rights and interests in
the logo, systems, software, forms, form contracts, policy manuals, marketing
and public relations materials relating to the delivery system for the Group.
Group agrees that is shall not at any time knowingly harm, misuse or bring into
disrepute the Proprietary Property of Manager.
8.3 CONFIDENTIALITY. The terms of this Management Agreement are
confidential and shall not be disclosed except as necessary to the performance
of this Management Agreement or as required by law. Neither Group nor Group
Physicians shall disseminate or publish information developed under this
Management Agreement or contained in reports to be furnished pursuant to this
Management Agreement without prior written approval of Manager.
8.4 ENTIRE AGREEMENT. The provisions of this Management Agreement and any
exhibits hereto and any writing signed by the party to be charged
contemporaneously herewith constitute the entire agreement between the parties,
and supersede any prior negotiations, understandings or agreements.
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8.5 MODIFICATIONS. This Management Agreement may be amended, modified or
otherwise changed only upon the written consent of the parties hereto.
8.6 THIRD PARTY RIGHTS. This Management Agreement shall not be construed
as conferring upon any third party any right or benefit and any and all claims
which may arise hereunder may be enforced solely by Group or by Manager.
8.7 NO ASSIGNMENT. No party may assign its rights or delegate its
obligations under this Management Agreement without the prior written consent of
the other party; provided that Manager may assign its rights and obligations
under this Management Agreement to an affiliate, successor or a wholly-owned
subsidiary without the consent of Group.
8.8 GOVERNING LAW; ARBITRATION. This Management Agreement shall be
governed by ______ law. Any dispute between the parties shall be settled by
binding arbitration in accordance with the commercial arbitration rules of the
American Arbitration Association. No punitive damages shall be awarded in any
such arbitration. The prevailing party in any such arbitration shall be
entitled to the recovery of reasonable attorneys' fees (including charges for
in-house counsel) and costs.
8.9 DOCUMENTS; NECESSARY ACTS. Each of the parties shall execute and
deliver all documents, papers, and instruments and perform such other acts as
may be necessary or convenient to carry out the terms of this Management
Agreement.
8.10 NON-WAIVER; BREACH. Any waiver of any term and condition hereof must
be in writing and signed by the party against whom it is sought to be asserted.
A party's neglect or failure in any case or circumstance to require performance
of the other party's obligations or to enforce its rights in the event of a
breach by the other party shall not affect such party's right to enforce such
rights and obligations in any other case or circumstance. A waiver of any
individual term or condition shall not be construed as a waiver of any other
term or condition nor, unless so provided in such written waiver, of the term or
condition thereby waived in the event of a future or continuing breach by the
other party, except in the particular circumstance(s) in or for which such
waiver was provided.
8.11 SEVERABILITY; INVALIDITY OF ANY PROVISION. Nothing contained in this
Management Agreement shall be construed so as to require the commission of an
act contrary to law, and whenever there is any conflict between any provision of
this Management Agreement and any present statute, law, ordinance or regulation
contrary to which the parties have no legal right to contract, the latter shall
prevail. In such event, and in any case in which any provision of this
Management Agreement is determined by a court of competent jurisdiction to be in
violation of a statute, law, ordinance, or regulation, the affected provision(s)
shall be curtailed and limited only to the extent necessary to bring it within
the requirements of the law and, insofar as possible under the circumstances, to
carry out the purposes of this Management Agreement.
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8.12 CAPTIONS AND HEADINGS. The captions and headings in this Management
Agreement are intended for convenience only and are not to be interpreted as
part of this Agreement.
8.13 FORCE MAJEURE. Neither party shall be liable nor deemed to be in
default for any delay or failure in performance under this Management Agreement
or other interruption of service or employment deemed resulting, directly or
indirectly, from acts of God, civil or military authority, acts of public enemy,
war, accidents, fires, explosions, earthquakes, floods, failure of
transportation, machinery or supplies, vandalism, strikes or other work
interruptions beyond the reasonable control of either party. However, both
parties shall make good faith efforts to perform under this Management Agreement
in the event of any such circumstances.
8.14 MEDICARE AND MEDICAID PATIENTS. Manager and Group agree to generate
such records and make such disclosures as may be required, from time to time, by
the Medicare, Medicaid and other third party payment programs with respect to
their participation in this Management Agreement and the rendition of services
hereunder, in order to assure that both parties will be able to meet all
requirements for participation and payment associated with such programs,
including but not limited to the matters covered by Section 1861(v)(1)(I) of the
Social Security Act. If either party is requested to disclose books, documents,
or records pursuant to any provision of this Section 8.14 for an audit, it shall
notify the other party of the nature and scope of such request and each party
shall make available, upon written request of the other, all such books,
documents, or records, during such party's regular business hours.
EXECUTION
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement on the day and year first written above.
TALBERT MEDICAL MANAGEMENT CORPORATION ("Manager")
By:__________________________________________
Name: _______________________________________
Title :______________________________________
TALBERT MEDICAL GROUP, LTD. ("Group")
By: _______________________________________
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Name:_______________________________________
Title:______________________________________
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EXHIBIT 1.1
PRACTICE SITES
23
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EXHIBIT 2.1
GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL
24
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EXHIBIT 2.15
GROUP EXPENSES
1. Group Physician personal expenditures, including licensure costs,
continuing medical education allowances, sabbatical allowances and auto
allowances.
2. Group Physician personal equipment and furnishings, including beepers,
telephone equipment, white coats, and stethoscopes.
3. Meals related to Group activities and meetings.
4. Books and periodicals for Group Physicians.
5. Off-site meetings of Group Physicians.
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EXHIBIT 5.2
JOINT OPERATING COMMITTEE FUNCTIONS
1. Develop strategy for new business, network development, new Practice Sites,
capital budgeting, marketing, and Group Agreements.
2. Evaluate and monitor operational parameters for assuring ongoing success
including but not limited to financial performance, utilization trends,
medical center operations, and overall quality of care.
3. Address problem areas or opportunities which may be raised by either of the
two entities. Where problems are identified which can not be solved at the
medical center level, the Joint Operating Committee will resolve and
implement appropriate remedial action. Decisions will be made by majority
vote with a quorum present, which majority shall consist of a majority of
Group representatives and Manager representatives.
4. Ensure that all responsibilities are identified and accounted for, and any
unnecessary duplication of effort shall be avoided by both the Group and
the Manager.
5. Ensure that communication between the Group and the Manager and between the
staff of these two entities is clear and unambiguous and that a consistent
and uniform perspective is presented to the patients, employees, and
external service partners.
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TABLE OF CONTENTS
PAGE
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ARTICLE I RESPONSIBILITIES OF MANAGER. . . . . . . . . . . . . . 1
1.1 Practice Sites . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Utilities, Building Services, and Supplies . . . . . . . . . . . 2
1.3 Equipment, Furniture and Furnishings . . . . . . . . . . . . . . 2
1.4 Repair and Maintenance of Practice Sites and Equipment . . . . . 2
1.4.1 Repair and Maintenance of Practice Sites . . . . . . . 2
1.4.2 Repair and Maintenance of Equipment. . . . . . . . . . 2
1.5 Replacement Equipment. . . . . . . . . . . . . . . . . . . . . . 2
1.6 Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8.1 Practice Sites . . . . . . . . . . . . . . . . . . . . 3
1.8.2 Professional Liability Insurance . . . . . . . . . . . 3
1.8.3 Directors and Officers Insurance . . . . . . . . . . . 3
1.8.4 Self Insurance . . . . . . . . . . . . . . . . . . . . 3
1.9 Non-Professional Personnel . . . . . . . . . . . . . . . . . . . 3
1.9.1 Manager to Employ; Initial Employment Decisions. . . . 3
1.9.2 Special Provisions Applicable to
Allied Health Professionals. . . . . . . . . . . . . . 3
1.9.3 Supervision of Clerical and Other Non-Medical Support
Personnel. . . . . . . . . . . . . . . . . . . . . . . 4
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TABLE OF CONTENTS
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1.9.4 Decisions Reserved to Manager. . . . . . . . . . . . . 4
1.10 Bookkeeping and Accounting Services. . . . . . . . . . . . . . . 4
1.11 Fee-For-Service Administration . . . . . . . . . . . . . . . . . 4
1.11.1 Fee Schedule . . . . . . . . . . . . . . . . . . . . . 4
1.11.2 Billing and Collection . . . . . . . . . . . . . . . . 5
1.12 Capitation Administration. . . . . . . . . . . . . . . . . . . . 5
1.12.1 Calculation of Amounts Due . . . . . . . . . . . . . . 5
1.12.2 Billing Under Capitated Agreements . . . . . . . . . . 5
1.12.3 Records. . . . . . . . . . . . . . . . . . . . . . . . 5
1.13 Review and Audit of Manager. . . . . . . . . . . . . . . . . . . 5
1.14 Additional Financial and Management Reports and Information. . . 5
1.14.1 Income Statements and Balance Sheets . . . . . . . . . 5
1.14.2 Other Reports. . . . . . . . . . . . . . . . . . . . . 6
1.15 Management Information System. . . . . . . . . . . . . . . . . . 6
1.16 Physician Recruitment. . . . . . . . . . . . . . . . . . . . . . 6
1.17 Human Resources; Credentialing . . . . . . . . . . . . . . . . . 6
1.18 Marketing and Public Relations . . . . . . . . . . . . . . . . . 6
1.19 UM/QM Policies and Procedures; Preauthorization. . . . . . . . . 6
1.20 Distribution of Compensation and Bonuses to Group
Physicians; Group Benefits Administration. . . . . . . . . . . . 6
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1.21 Attorney-in-Fact . . . . . . . . . . . . . . . . . . . . . . . . 6
1.21.1 Depository Account . . . . . . . . . . . . . . . . . . 6
1.21.2 Receipt of Payments. . . . . . . . . . . . . . . . . . 7
1.21.3 Billing/Claims Processing. . . . . . . . . . . . . . . 7
1.21.4 Collection of Other Amounts Due. . . . . . . . . . . . 7
1.21.5 Stop-Loss Claims . . . . . . . . . . . . . . . . . . . 7
1.22 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II OBLIGATIONS OF GROUP . . . . . . . . . . . . . . . . . 7
2.1 Group Physicians and Professional Personnel. . . . . . . . . . . 7
2.2 Provision of Medical Services. . . . . . . . . . . . . . . . . . 8
2.3 Additional Physicians. . . . . . . . . . . . . . . . . . . . . . 8
2.4 Hours of Service . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4.1 Patient Medical Services . . . . . . . . . . . . . . . 8
2.4.2 Walk-In and Community Services . . . . . . . . . . . . 8
2.4.3 After Hours Care . . . . . . . . . . . . . . . . . . . 8
2.5 Non-discrimination; Compliance with Law. . . . . . . . . . . . . 8
2.6 Non-discriminatory Patient Selection and
Services; Non-discriminatory Patient Assignment. . . . . . . . . 8
2.7 Standards, Accreditation, Surveys and Inspections. . . . . . . . 8
2.8 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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2.9 Compliance with Policies and Procedures. . . . . . . . . . . . . 9
2.9.1 Organization and Review of Care. . . . . . . . . . . . 9
2.9.2 Utilization Management; Quality Management . . . . . . 9
2.9.3 Prior Authorization. . . . . . . . . . . . . . . . . . 9
2.10 Records and Reports. . . . . . . . . . . . . . . . . . . . . . . 9
2.11 Group to Provide Necessary Billing and Encounter Information . . 9
2.12 Continuing Education . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.14 Physician Compensation . . . . . . . . . . . . . . . . . . . . . 10
2.15 Group Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.16 Provider Numbers . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III COMPENSATION OF MANAGER. . . . . . . . . . . . . . . . 10
3.1 Management Fee.. . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Clinic Expenses. . . . . . . . . . . . . . . . . . . . 10
3.1.2 Advances to Group. . . . . . . . . . . . . . . . . . . 10
3.1.3 Operations Fee . . . . . . . . . . . . . . . . . . . . 10
3.1.4 Additional Managed Care Payments . . . . . . . . . . . 11
3.1.5 MIS Allocation . . . . . . . . . . . . . . . . . . . . 11
3.2 Calculation and Payment of Management Fee. . . . . . . . . . . . 11
3.3 Advances to Group. . . . . . . . . . . . . . . . . . . . . . . . 11
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3.4 Adjustment in Management Fee . . . . . . . . . . . . . . . . . . 11
3.5 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.5.1 "Additional Managed Care Payments" . . . . . . . . . . 11
3.5.2 "Clinic Expenses". . . . . . . . . . . . . . . . . . . 12
3.5.3 "Group Revenue". . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV EXECUTION OF GROUP AGREEMENTS . . . . . . . . . . . . . . . 13
4.1 Appointment of Manager as Attorney-in-Fact . . . . . . . . . . . 13
4.1.1 Contracting Guidelines . . . . . . . . . . . . . . . . 14
4.1.2 Entry Into Agreements. . . . . . . . . . . . . . . . . 14
4.1.3 Administration of Agreements . . . . . . . . . . . . . 14
4.2 Restrictions on Group. . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V JOINT OPERATING COMMITTEE. . . . . . . . . . . . . . . 14
5.1 Composition. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.2 Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.3 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.4 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI TERM; TERMINATION . . . . . . . . . . . . . . . . . . . . . 15
6.1 Term; Termination. . . . . . . . . . . . . . . . . . . . . . . . 15
6.2 Termination for Cause. . . . . . . . . . . . . . . . . . . . . . 15
6.2.1 Liquidation; Bankruptcy. . . . . . . . . . . . . . . . 15
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6.2.2 Breach . . . . . . . . . . . . . . . . . . . . . . . . 15
6.3 Termination for Certain Transactions . . . . . . . . . . . . . . 16
6.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . 16
6.4.1 Manager to Continue to Provide Services. . . . . . . . 16
6.4.2 Services Under Group Agreements; Care of Patients. . . 16
6.4.2.1 Group Agreement Obligations . . . . . . . . . 16
6.4.2.2 Care of Patients. . . . . . . . . . . . . . . 16
6.4.2.3 Collections . . . . . . . . . . . . . . . . . 17
6.5 Post Termination . . . . . . . . . . . . . . . . . . . . . . . . 17
6.5.1 Practice Sites . . . . . . . . . . . . . . . . . . . . 17
6.5.2 Proprietary Information. . . . . . . . . . . . . . . . 17
6.5.3 Software . . . . . . . . . . . . . . . . . . . . . . . 17
6.5.4 Access to Medical Records. . . . . . . . . . . . . . . 17
6.5.5 Covenant Not to Compete. . . . . . . . . . . . . . . . 17
ARTICLE VII RELATIONSHIP OF THE PARTIES . . . . . . . . . . . . . . . . 18
7.1 No Fiduciary Duties. . . . . . . . . . . . . . . . . . . . . . . 18
7.2 Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2.1 Physician Services . . . . . . . . . . . . . . . . . . 18
7.2.2 Management Services. . . . . . . . . . . . . . . . . . 18
7.2.3 Expansion of Service Area. . . . . . . . . . . . . . . 18
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ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 19
8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.2 Propriety Property . . . . . . . . . . . . . . . . . . . . . . . 19
8.3 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . 19
8.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 19
8.5 Modifications. . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.6 Third Party Rights . . . . . . . . . . . . . . . . . . . . . . . 19
8.7 No Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.8 Governing Law; Arbitration . . . . . . . . . . . . . . . . . . . 20
8.9 Documents; Necessary Acts. . . . . . . . . . . . . . . . . . . . 20
8.10 Non-Waiver; Breach . . . . . . . . . . . . . . . . . . . . . . . 20
8.11 Severability; Invalidity of Any Provision. . . . . . . . . . . . 20
8.12 Captions and Headings. . . . . . . . . . . . . . . . . . . . . . 20
8.13 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.14 Medicare and Medicaid Patients . . . . . . . . . . . . . . . . . 21
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MANAGEMENT SERVICES AGREEMENT
This Management Services Agreement ("Management Agreement") is entered into
effective January 1, 1996 by and between Talbert Medical Management Corporation,
a Delaware corporation ("Manager") and Talbert Medical Group, Inc., a ________.
professional medical corporation ("Group").
R E C I T A L S
A. Manager is a Delaware corporation which is operated, in part, for the
purposes of providing management services related to the operation of medical
groups such as Group.
B. Group is a __________ professional medical corporation which is duly
licensed and qualified through service agreements with its independent
contractors and employees ("Group Physicians"), to provide physician services to
its patients ("Patients"). The Patients include individuals to whom services
are provided under the terms of contracts with payors for health care services
("Group Agreements").
C. In connection with Group's providing physician services under
agreements with payors, negotiated by Manager, and for other valuable
consideration, Manager has agreed to provide the management services provided
for herein.
D. This Management Agreement is made in order to provide the terms upon
which Manager will provide management services to Group.
ARTICLE I
RESPONSIBILITIES OF MANAGER
Except as otherwise specifically provided herein, during the term of this
Management Agreement and any extensions and renewals hereof, Manager shall, at
its sole cost and expense, provide all management services including providing
facilities, support, non-physician personnel, billing, equipment, furnishings,
and supplies required for the operation of Group as an integral part thereof at
the premises established for such purposes. Such performance by Manager shall
be carried out in accordance with the following standards and procedures:
1.1 PRACTICE SITES. Manager shall provide certain premises set forth on
EXHIBIT 1.1 hereto, together with all appurtenances, improvements, and fixtures,
(hereinafter collectively referred to as the "Practice Sites") at which Group
will render professional medical services. Changes in the location of a
Practice Site may be effected as of the
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expiration of any lease or other arrangement under which Manager leases or
occupies any Practice Site or at any other time as may be approved by Manager.
Any additional Practice Sites will be established as may be approved by the
Joint Operating Committee.
1.2 UTILITIES, BUILDING SERVICES, AND SUPPLIES. Manager shall provide or
arrange for all utilities and building services related to the utilization by
Group of Practice Sites. Manager shall also provide telephones, reception,
secretarial and transcribing services, paging devices, postage, duplication
services, office supplies and medical supplies which Manager determines to be
necessary or appropriate for the operation of the Practice Sites.
1.3 EQUIPMENT, FURNITURE AND FURNISHINGS. Manager shall provide or
arrange for all the equipment (including computer equipment and software),
furniture, furnishings and personal property which Manager determines to be
necessary for the operation of Group ("Equipment").
1.4 REPAIR AND MAINTENANCE OF PRACTICE SITES AND EQUIPMENT. Manager shall
have the responsibility for:
1.4.1 REPAIR AND MAINTENANCE OF PRACTICE SITES. All of the lessee
maintenance and repair obligations for the Practice Sites required to be
provided pursuant to the terms of any Practice Site lease or similar agreement,
and any and all other maintenance and repairs to Practice Sites which Manager
determines to be necessary or appropriate for the efficient and proper operation
of Group.
1.4.2 REPAIR AND MAINTENANCE OF EQUIPMENT. The maintenance and
repair of all Equipment as determined by Manager to be necessary or appropriate
for the efficient and proper operation of Group.
1.5 REPLACEMENT EQUIPMENT. Should Manager determine that any then
existing Equipment utilized in the operations of Group is worn out or obsolete
and it is unreasonable, impossible, or economically impractical to repair; and
if Manager further determines that such Equipment is necessary or appropriate
for the efficient and proper operation of Group; then Manager shall procure
replacement Equipment.
1.6 SIGNS. Manager shall provide signage, including but not limited to
signage containing such name(s) as may be determined by Manager for designation
of Practice Sites.
1.7 PAYMENT OF TAXES. Manager shall have the responsibility to pay
(i) all taxes (excluding taxes measured by or based upon Group income or
professional service revenue), assessments, license fees and other charges
payable that are the responsibility of the occupant of the Practice Sites which
become payable during the term of this Management Agreement; (ii) all taxes,
assessments, license fees and other charges assessed on personal property owned
by Manager relating to the operation of Group; and (iii) all other business
taxes, licenses, or fees other than those related to the professional licensure
of physicians. Notwithstanding the foregoing, if Group or any Group Physician
maintains personal property at any Practice Site,
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then Group or the Group Physician, as applicable, shall be responsible for the
payment of any taxes with respect to such property.
1.8 INSURANCE.
1.8.1 PRACTICE SITES. Manager shall procure and maintain all
insurance coverages deemed necessary by Manager for the operation of the
Practice Sites, including without limitation the following: (i) comprehensive
general liability insurance covering activities of Group naming Manager,
Manager's employees and Group as insured, (ii) general property casualty
insurance on the Practice Sites and contents owned or leased by Manager in
amounts consistent with Manager's risk management policies and (iii) workers
compensation insurance for employees of Manager and Group.
1.8.2 PROFESSIONAL LIABILITY INSURANCE. Manager, directly or
through its affiliates, shall procure and maintain, a policy or policies of
professional liability insurance providing coverage for Group and its
professional personnel. Such policy shall cover any acts of Group for the
professional negligence of its personnel which may have occurred during the term
of this Management Agreement. These policies of insurance shall be written with
limits of liability of no less than One Million Dollars ($1,000,000) per
claim/Three Million Dollars ($3,000,000) annual aggregate. Group shall
cooperate with all reasonable requests of Manager in connection with obtaining
and maintaining this coverage.
1.8.3 DIRECTORS AND OFFICERS INSURANCE. Manager, directly or
through its affiliates, shall procure and maintain, a policy or policies of
directors and officers liability insurance providing coverage for the directors,
officers and authorized agents of Group. These policies of insurance shall be
written with limits of liability of no less than Five Million Dollars
($5,000,000) per claim annual aggregate. Group shall cooperate with all
reasonable requests of Manager in connection with obtaining and maintaining this
coverage.
1.8.4 SELF INSURANCE. Notwithstanding any other provisions of
this Section 1.8, Manager may, at any time Manager deems appropriate, choose to
self insure for any or all insurance coverages for which Manager is responsible
pursuant to this Management Agreement.
1.9 NON-PROFESSIONAL PERSONNEL.
1.9.1 MANAGER TO EMPLOY; INITIAL EMPLOYMENT DECISIONS. Manager
shall provide all non-professional personnel to Group which Manager deems
reasonable and necessary for the efficient and proper operation of Group based
upon patient volume. For purposes of this Agreement, "Professional Personnel"
shall mean individuals employed by Group as physicians, optometrists,
chiropractors, podiatrists, nurse practitioners, nurse anesthetists, nurse
midwives and physician assistants.
1.9.2 SPECIAL PROVISIONS APPLICABLE TO ALLIED HEALTH
PROFESSIONALS. Manager shall adhere to appropriate credentialing and other
professional review and
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qualification standards with respect to all personnel to be employed or retained
by Manager to perform services under this Management Agreement who are licensed
or certified to practice their respective health care professions by the State
of California (hereinafter collectively referred to as "Allied Health
Professionals").
1.9.3 SUPERVISION OF CLERICAL AND OTHER NON-MEDICAL SUPPORT
PERSONNEL. Manager shall supervise all clerical and other non-medical support
personnel and the non-medical functions of all Allied Health Professionals. In
addition, Manager shall provide for periodic review and evaluation, including
input from Group, of the performance of such personnel. Manager shall establish
a procedure through which Group may request reassignment of particular personnel
for express reasons relating to job qualifications, training or performance, and
Manager shall reasonably accommodate such requests by Group which conform to
this procedure.
1.9.4 DECISIONS RESERVED TO MANAGER. Manager shall make all
hiring and firing decisions and all determinations as to those wages, salaries
and compensation, including all determinations regarding the retention,
promotion, demotion, awarding of bonuses, salary adjustments, and other matters
affecting the terms and conditions of the employment of all non-physician
personnel in accordance with and subject to personnel policies as may be adopted
and modified from time to time by Manager. Staffing levels, work hours and
shifts, and employee benefit programs shall be established and implemented by
Manager in accordance with the policies and funding arrangements developed by
Manager.
1.10 BOOKKEEPING AND ACCOUNTING SERVICES. Manager shall provide Group with
all bookkeeping and accounting services Manager deems necessary or appropriate
for the efficient and proper operation of Group. Such services shall include,
without limitation, the maintenance, custody and supervision of business
records, papers, documents, ledgers, journals and reports relating to the
business operations of Group; the establishment, administration and
implementation of accounting procedures, controls, forms and systems; the
preparation of financial reports; the planning of the business operations of the
Group; the payment of accounts payable (including claims administration and
payment) and collection of accounts receivable; the preparation of necessary
Group tax returns (as opposed to the tax returns of individual Group Physicians
which shall be the responsibility of each physician); and the administration of
the compensation formula and compensation distribution system established
pursuant to the terms of this Management Agreement.
1.11 FEE-FOR-SERVICE ADMINISTRATION. For Group Agreements which are not
subject to Section 1.12, and all care provided by Group other than under Group
Agreements, Manager shall provide the following additional administrative
services:
1.11.1 FEE SCHEDULE. Development of a "chargemaster" fee schedule
for Group and determination of the appropriateness of revisions and
modifications to the fee schedule to reflect changed circumstances, with
approval from the Joint Operating Committee, in accordance with Section 5.2 of
this Management Agreement.
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1.11.2 BILLING AND COLLECTION. Billing and collection services
that Manager determines to be necessary or appropriate in connection with
charges resulting from the rendition of professional services by Group to
Patients; such services to include, but not be limited to, collection of
payments derived from coordination of benefits, collection of payments from
third party payors, and other payments due Group. Manager shall adhere to the
then current fee schedule provisions for discounts and courtesy services to
Patients. Manager shall maintain internal accounting records of all billings to
fee-for-service Patients and third-party payors.
1.12 CAPITATION ADMINISTRATION. For Group Agreements which involve
capitated payments to Group ("Capitated Agreements"), Manager shall provide the
following additional administrative services:
1.12.1 CALCULATION OF AMOUNTS DUE. Calculation of primary care and
specialty capitation and specialty, ancillary and other payable claims of Group
based upon contracts with non-Group Physicians and to prepare checks on behalf
of Group to pay amounts due.
1.12.2 BILLING UNDER CAPITATED AGREEMENTS. Billing in Group's name
and on its behalf, (a) payors for coordination of benefits and other third party
liability payments according to the terms of the Capitated Agreements, (b)
Patients in accordance with the terms and provisions of applicable Capitated
Agreements and (c) for amounts deemed ineligible under the terms of Capitated
Agreements where permitted by such Capitated Agreements. Manager shall also
review claim and capitation expense data to monitor any other revenue receipt
programs which any of the Capitated Agreements may have or may institute, and to
seek reimbursement pursuant to Capitated Agreements.
1.12.3 RECORDS. Manager shall maintain internal accounting records
including primary care encounters and authorizations for specialist referrals
under Capitated Agreements which will identify the services provided to Patients
covered by Capitated Agreements and the compensation received therefor to enable
a determination of the fee-for-service equivalency to be made.
1.13 REVIEW AND AUDIT OF MANAGER. The annual financial statements of
Manager shall be annually audited in accordance with generally accepted
accounting standards or such other standards as may be appropriate for a
business of the size and scope of that conducted by Manager, by duly qualified
independent auditors. Copies of audited financial statements of Manager,
subject to such restrictions as may be necessary to assure the preservation of
their confidentiality, shall be made available for review by Group.
1.14 ADDITIONAL FINANCIAL AND MANAGEMENT REPORTS AND INFORMATION. Manager
shall prepare and deliver to Group, copies of the following reports:
1.14.1 INCOME STATEMENTS AND BALANCE SHEETS. Monthly income
statements and annual balance sheets of Group relating to the operation of
Group.
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1.14.2 OTHER REPORTS. Any additional financial and management
reports and information prepared by Manager which Manager determines will assist
Group in evaluating physician productivity and the efficiency or effectiveness
of the medical services provided by Group to Patients.
1.15 MANAGEMENT INFORMATION SYSTEM. Manager shall be responsible for the
development or procurement and operation of a management information system.
1.16 PHYSICIAN RECRUITMENT. Manager shall provide physician recruitment
services to Group.
1.17 HUMAN RESOURCES; CREDENTIALING. Manager shall provide any necessary
personnel and human resources services for its employees and the Group. Manager
shall provide credentialing services to the Group, in accordance with standards
established by Group.
1.18 MARKETING AND PUBLIC RELATIONS. Manager shall coordinate and provide
marketing and public relations services.
1.19 UM/QM POLICIES AND PROCEDURES; PREAUTHORIZATION. Manager shall assist
Group in the development of utilization management, quality management and risk
management policies and procedures for Group and Group Physicians. Manager
shall assist Group in the development of preauthorization protocols for the
administration of care under Capitated Agreements, other Group Agreements in
which Group is permitted to authorize care and for fee-for-service Patients.
Manager shall administer all such policies and protocols under the direction and
supervision of Group.
1.20 DISTRIBUTION OF COMPENSATION AND BONUSES TO GROUP PHYSICIANS; GROUP
BENEFITS ADMINISTRATION. Manager, on behalf of Group, shall administer the
payment of all compensation to all Group Physicians for providing services to
Patients including, without limitation, all applicable vacation pay, sick leave,
retirement benefits, social security and workers' compensation. Manager shall
also distribute to Group Physicians any bonuses or risk pool amounts from
whatever source derived, in accordance with the policies and procedures adopted
by Group. Manager shall contract for benefits on behalf of Group and administer
such benefits for Group, including any health, disability insurance and life
insurance.
1.21 ATTORNEY-IN-FACT. Group hereby constitutes and appoints Manager for
the term hereof as its true and lawful attorney-in-fact for the following
purposes:
1.21.1 DEPOSITORY ACCOUNT. To create and maintain a depository
account in the name of Group with a banking institution selected by Manager (the
"Account"). Group agrees to designate Manager as the sole party authorized to
make withdrawals from the Account, which designation may be changed only by
written notice to said institution,
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executed by both Group and Manager; withdrawals from the Account shall be made
only in accordance with the terms of Sections 1.12, 2.15 or 3.1.4 of this
Management Agreement.
1.21.2 RECEIPT OF PAYMENTS. To receive and deposit on a timely
basis capitation and other payments arising from Group Agreements, take
possession of and endorse in the name of Group all cash, notes, checks, money
orders, insurance payments, and any other instruments received as payment of
accounts receivable of Group however arising. Group shall immediately forward
to Manager in full any such payments that may come into the possession of Group.
1.21.3 BILLING/CLAIMS PROCESSING. To perform the functions
described in Sections 1.11 and 1.12.
1.21.4 COLLECTION OF OTHER AMOUNTS DUE. To collect in the name of
Group and on its behalf all other charges or fees resulting from or related to
the provision of services to Patients including but not limited to any and all
hospital incentive funds and funds from shared risk pools under any risk sharing
arrangements wherein Group is or is deemed to be the provider of medical
services.
1.21.5 STOP-LOSS CLAIMS. To review claim and capitation expense
data to monitor Patients for whom patient care expenses exceed stop-loss
deductibles under Group Agreements, and to submit with the applicable Group
Agreements or other providers of stop-loss coverage orally or in writing
reimbursement requests on behalf of Group.
1.22 COMPLIANCE WITH LAW. The obligations of Manager pursuant to this
Management Agreement shall be subject to any limitations or restrictions which
may be imposed by law or regulation, and Manager may suspend any or all
obligations hereunder in the event that it reasonably determines, upon advice of
counsel, that the performance of any obligation pursuant to this Management
Agreement may contravene applicable law or regulation, the effect of which would
be to have a material adverse effect on the business, financial condition, or
operations of Manager or any affiliate.
ARTICLE II
OBLIGATIONS OF GROUP
In providing its professional services to Patients, Group shall have the
following obligations:
2.1 GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL. Group shall notify
Manager, upon execution of this Management Agreement, of the identities of the
Group Physicians and Professional Personnel (as defined in Section 1.9),
together with a list of all such individuals and their respective areas of
practice shall be attached hereto as EXHIBIT 2.1. Group shall enter into
employment agreements or contracts with all Group Physicians and Professional
7
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Personnel. Any new employment agreements or contracts shall be reviewed and
approved by Manager prior to execution, and Manager shall promptly be provided
with copies of the executed employment agreements and contracts and any
revisions or amendments thereto. All Group Physicians shall be licensed by the
State of California and hold staff privileges at one or more hospitals
designated by Manager as participating hospitals.
2.2 PROVISION OF MEDICAL SERVICES. Group shall perform, or subcontract to
perform as necessary, all medically necessary services for Patients in
accordance with the terms of Group Agreements and subject to the utilization
review protocols. All subcontracts shall be negotiated and executed by Manager
on behalf of Group.
2.3 ADDITIONAL PHYSICIANS. Group shall use its best efforts to provide
any additional physicians required by the level of patient activity anticipated
by Manager and communicated to Group, with the specialty mix and geographical
location specified by Manager, within a reasonable period of time.
2.4 HOURS OF SERVICE. Group shall maintain Group Physicians and
Professional Personnel at Practice Sites during the following hours of service.
Hours of service at any Practice Site shall be subject to review by the Joint
Operating Committee, in accordance with Section 5.2.
2.4.1 PATIENT MEDICAL SERVICES. Group shall provide available,
accessible and medically necessary services for Patients during regular working
hours established by Manager for each Practice Site.
2.4.2 WALK-IN AND COMMUNITY SERVICES. For walk-in and community
services, which may be provided at Practice Sites, Group shall provide (or
subcontract as necessary to provide) such services at the hours, including
extended hours, established by Manager.
2.4.3 AFTER HOURS CARE. Group shall provide (or subcontract as
necessary to provide) access to after hours services in accordance with Group
protocols and community standards of care.
2.5 NON-DISCRIMINATION; COMPLIANCE WITH LAW. All employment policies,
standards and practices of Group shall be in accordance with applicable equality
provisions of state and federal law. In the event that any government contract
or regulation requires reports or disclosures of Manager and its contractors,
Group, upon Manager's request, shall make, execute and deliver such reports,
disclosures or other written information, guarantees or assurances as may be
reasonably requested by Manager to assure timely compliance.
2.6 NON-DISCRIMINATORY PATIENT SELECTION AND SERVICES; NON-DISCRIMINATORY
PATIENT ASSIGNMENT. No Patient shall be discriminated against for any reason
prohibited by law. The Group Physicians shall also abide by the patient service
and assignment policies
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established from time to time by Manager or applicable third party payors,
including those relating to accepting Patients who select or are assigned to
Group under Group Agreements.
2.7 STANDARDS, ACCREDITATION, SURVEYS AND INSPECTIONS. Group shall meet
all medical practice, licensure and ethical standards, which are pertinent to
its activities or which by contract it has agreed to abide. Group shall in good
faith cooperate with inspections and on-site surveys of Practice Sites as may be
conducted by governmental agencies, accrediting organizations or payors.
Manager shall, to the extent possible, give Group advance notice of such
inspections and surveys and schedule them during reasonable business hours.
2.8 CONTRACTS. Group and the Group Physicians shall abide by the terms of
any Group Agreements entered into by or with Manager on behalf of Group,
including, without limitation, self-insured, PPO, EPO, HMO and indemnity
contracts.
2.9 COMPLIANCE WITH POLICIES AND PROCEDURES.
2.9.1 ORGANIZATION AND REVIEW OF CARE. Group shall comply with
policies and procedures pertinent to quality management, utilization management,
risk management, scheduling, billing, claims payment, claims adjudication,
reconciliation of payments or reimbursements, and other administrative matters
relating to the organization of the non-professional aspects of the delivery of
care as may be established by Manager from time to time.
2.9.2 UTILIZATION MANAGEMENT; QUALITY MANAGEMENT. Group shall
contractually bind each Group Physician to cooperate with and participate in the
applicable program and systems of quality management, grievance procedures, peer
review and utilization management. Information developed in the course of
physician quality assurance and peer review activities shall be maintained by
Manager as privileged and confidential except where its disclosure is assented
to by Group or is required by law.
2.9.3 PRIOR AUTHORIZATION. Group and each Group Physician agrees
to obtain prior authorization in accordance with any administrative procedures
developed in accordance with Section 1.19 or required pursuant to any
administrative procedures of third party payors in effect from time to time
before rendering any service requiring prior authorization.
2.10 RECORDS AND REPORTS. Group shall assist Manager in maintaining and,
where by law or legal process required, in divulging, records and information
concerning its health care services. Group shall give Manager full access to
all of its medical and financial records.
2.11 GROUP TO PROVIDE NECESSARY BILLING AND ENCOUNTER INFORMATION. Group
agrees to provide Manager with all billing and encounter information for
Patients, including, but not limited to the name of the patient, the date of
service, the nature and extent of services provided and any supporting medical
information, necessary to obtain payment or reimbursement for services.
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2.12 CONTINUING EDUCATION. Group Physicians shall maintain competence in,
and remain currently well-informed as to recent developments about, their
particular areas of medical practice, interest and specialization. Accordingly,
subject to Group at all times providing sufficient physicians to care for the
needs of Patients, the Group Physicians shall, in compliance with policies set
by Group and administered by Manager, attend seminars, keep current with
journals and take other reasonable steps to remain proficient in their
particular specialties. All seminars necessary to maintain licensure or
competence shall be the responsibility of the Group and the individual Group
Physician.
2.13 REFERRALS. Group and the Group Physicians shall make referrals to
specialists in a manner consistent with (a) pertinent policies and procedures
(which shall be developed in consultation with Manager), (b) the terms and
conditions of government programs or Group Agreements applicable to the care of
the Patient, and (c) any federal or state laws or regulations.
2.14 PHYSICIAN COMPENSATION. Group shall compensate Group Physicians in
accordance with a compensation formula developed in consultation with Manager.
Group shall make all final determinations as to the compensation paid to Group
Physicians.
2.15 GROUP EXPENSES. Payment of those expenses related to the operation of
Group which are designated on EXHIBIT 2.15 hereto ("Group Expenses") shall be
the sole responsibility of Group. To the extent that Manager pays or incurs any
Group Expenses, Group authorizes Manager to promptly reimburse Manager from
funds in the Account as soon as such funds become available.
2.16 PROVIDER NUMBERS. Group shall procure and maintain a medical group
provider number, including without limitation, Medicare and Medicaid provider
numbers, necessary or appropriate to obtain payment or reimbursement on Group's
behalf.
ARTICLE III
COMPENSATION OF MANAGER
3.1 MANAGEMENT FEE. For its services provided under this Management
Agreement, Manager shall be entitled to a fee (the "Management Fee"), payable
not later than ten days following the end of each calendar month during the term
of this Management Agreement, which shall be computed as the sum of the
following factors:
3.1.1 FEE FOR SERVICE REVENUES. An amount equal to 60% of all
revenues of the Group arising from the provision of services on a fee-for-
service basis (defined in accordance with Section 3.5), whether or not pursuant
to a Group Agreement.
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3.1.2 CAPITATED AGREEMENT REVENUE. An amount equal to 60% of
capitation payments or similar revenues of Group (as defined in Section 3.5)
arising from the provision of medical services pursuant to Capitated Agreements.
3.1.3 HOSPITAL RISK POOLS. An amount equal to 60% of amounts due
Group under hospital risk pool arrangements entered into by Group in accordance
with Group Agreements.
3.1.4 PAYMENT OF FEE. Manager shall be entitled to withdraw the
Management Fee from the Account maintained by Manager in accordance with Section
1.21.1. Manager shall, concurrently with any such withdrawal, provide to Group
a statement of the calculation of the Management Fee.
3.2 OVERPAYMENTS AND UNDERPAYMENTS. From time to time as necessary,
Manager shall recalculate the Management Fee if a prior payment is deemed to be
an overpayment or an underpayment due to changed circumstances impacting the
calculation of the Management Fee, such as notification by a payor under a
Capitated Agreement of prior overpayment of capitation payments.
3.3 ADVANCES TO GROUP. In the event that Manager and Group have entered
into an agreement which prescribes a minimum amount of compensation for
distribution by Group to Group Physicians in accordance with Section 2.14
("Minimum Group Compensation") and the payment of the Management Fee in
accordance with this Article III will leave Group with less than the amount of
the Minimum Group Compensation, Manager shall pay to Group an amount necessary
to provide Group with Minimum Group Compensation. Commencing January 1, 1997,
any such payment shall not be considered a reduction of the Management Fee, but
shall be an advance by Manager to Group, which shall be repaid from revenues
otherwise allocable to Group in the next succeeding monthly periods for which
Group receives at least Minimum Group Compensation.
3.4 ADJUSTMENT IN MANAGEMENT FEE. Manager shall periodically review and
have the right to adjust all or any components of the Management Fee, taking
into account such factors as the adequacy of compensation to Group and changes
in Manager's costs. In the event that Manager proposes a change in any
component of the Management Fee, Manager shall consult with the Joint Operating
Committee about the proposed change and the reasons therefor. Manager shall
advise Group at least sixty (60) days in advance of the date on which the
revised Management Fee is to be effective by a written statement which includes
the basis for the change. Any adjustments made pursuant to this Section 3.4
shall not be subject to change for at least one year.
3.5 DEFINITIONS OF GROUP REVENUE. For purposes of this Article III: (a)
fee-for-service revenue of Group shall be calculated on an accrual basis, with
gross charges for services being reduced by all allowances for bad debts,
contractual adjustments, discounts, professional courtesies and compromises or
cancellations of accounts receivable of any kind or nature, and (b) Capitated
Agreement revenue of Group shall include coordination of benefits
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payments, co-payment amounts, coinsurance amounts, withhold distributions, and
stop-loss insurance reimbursements, less amounts paid for ancillary or
professional services not provided by Group Physicians or Group, but for which
Group is responsible under the applicable Group Agreement.
ARTICLE IV
EXECUTION OF GROUP AGREEMENTS
4.1 APPOINTMENT OF MANAGER AS ATTORNEY-IN-FACT. In order to facilitate
the execution of Group Agreements and other contracts, Group hereby constitutes
and appoints Manager as attorney-in-fact for Group and the Group Physicians with
the following powers:
4.1.1 CONTRACTING GUIDELINES. The Joint Operating Committee shall
develop guidelines for Group Agreements, which guidelines shall include terms
minimally acceptable to Group for all such Agreements. Manager shall observe
the guidelines in the negotiation of Group Agreements, and in the event Manager
proposes entry into a Group Agreement which varies from the guidelines, Manager
shall seek approval of the Joint Operating Committee for such Group Agreement.
4.1.2 ENTRY INTO AGREEMENTS. To negotiate and execute in the name
of Group, all contracts or other arrangements for the provision of health care
services by Group Physicians, including Capitated Agreements.
4.1.3 ADMINISTRATION OF AGREEMENTS. To exercise such rights
respecting the administration of Group Agreements or other arrangements
negotiated by Manager pursuant to Section 4.1.2, on behalf of Group and the
Group Physicians as may reasonably be requested by the third party payor with
whom the Group Agreement is executed and as are customary in the health care
industry to facilitate the effective participation of the Group Physicians.
This Section 4.1.3 is not intended and shall not be construed to delegate any
authority to Manager to modify any term or provision of this Management
Agreement, to confess or accept any liability or obligation not authorized under
the standards respecting Group Agreements as may be established by Manager, or
to exercise any rights respecting the management of Group, the performance of
professional services by any Group Physician, or to interfere in any way with
the professional practices and prerogatives of Group or any Group Physician.
The foregoing limitation shall not, however, be construed to modify or limit any
rights or obligations of any party arising under any other provision of this
Management Agreement, or pursuant to any other contract or agreement to which
such party is bound.
4.2 RESTRICTIONS ON GROUP. Group shall not, nor shall any Group
Physician, during the term of this Management Agreement enter into any contract
or other arrangement for the provision of health care services other than those
negotiated by Manager in accordance with Section 4.1.2.
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ARTICLE V
JOINT OPERATING COMMITTEE
5.1 COMPOSITION. Manager and Group shall constitute a Joint Operating
Committee, consisting of not fewer than three (3) representatives of Group's
Board of Directors and three (3) representatives of Manager. Each party may
change its representatives on the Joint Operating Committee from time to time,
upon notice to the other.
5.2 FUNCTIONS. The Joint Operating Committee shall advise Manager on its
administration of services under this Management Agreement and Group on its
performance of professional services pursuant to this Management Agreement. The
Joint Operating Committee shall have the specific functions set forth on
EXHIBIT 5.2 attached hereto and incorporated herein by this reference. It is
intended that the Joint Operating Committee provide management support to
Manager as required and that Manager and Group have a duty to consult with, or
seek approval from, the Joint Operating Committee on those matters set forth in
EXHIBIT 5.2 or as otherwise provided in this Management Agreement.
5.3 MEETINGS. The Joint Operating Committee shall meet, upon the request
of Manager or of the representatives of Group, not less frequently than
quarterly.
5.4 RULES. The Joint Operating Committee may develop such rules and
procedures to govern its meetings and activities as its members deem necessary.
ARTICLE VI
TERM; TERMINATION
6.1 TERM; TERMINATION. The initial term of this Management Agreement
shall be twenty (20) years ("Initial Term"), commencing as of January 1, 1996
(the "Effective Date"), unless earlier terminated as hereinafter provided. At
the conclusion of the Initial Term, this Management Agreement shall be extended
for an additional ten (10) years ("First Extension"), and at the end of the
First Extension for an additional ten (10) years ("Second Extension"), unless
either Manager or Group notifies the other of its intention that the Management
Agreement terminate not later than 180 days prior to the end of (a) the Initial
Term, in the case of the First Extension or (b) the First Extension, in the case
of the Second Extension.
6.2 TERMINATION FOR CAUSE. Either party may terminate this Management
Agreement at any time for "cause", which, for purposes of this Section 6.2 shall
be defined as, and limited to, the following defaults by the other party:
6.2.1 LIQUIDATION; BANKRUPTCY. The defaulting party's application
for or consent to the appointment of a receiver, trustee or liquidator of all or
a substantial part of its
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assets, filing of a voluntary petition in bankruptcy, making a general
assignment for the benefit of creditors, filing a petition or answer seeking
reorganization or arrangement with creditors, or taking advantage of any
insolvency, or the entry of any order, judgment or decree by any court of
competent jurisdiction on the application of a creditor or otherwise,
adjudicating such party bankrupt or approving a petition seeking reorganization
of such party or appointment of a receiver, trustee or liquidator of such party
or of all or a substantial part of its assets, and if such order, judgment or
decree shall continue unstayed and in effect for sixty (60) calendar days after
its entry. Termination under this Subsection 6.2.1 shall be effective
automatically and immediately upon the giving of written notice of termination
by the non-defaulting party.
6.2.2 BREACH. A failure by the defaulting party to perform any
material obligation required hereunder, if such default shall continue for
thirty (30) calendar days after the giving of written notice from the
nondefaulting party specifying the nature and extent of such default, or, if the
breach cannot reasonably be cured in thirty (30) days, if the breaching party
has not acted diligently, or subsequently acted diligently, to attempt to cure
the breach within the thirty (30) day period following notice from the
nondefaulting party. If the parties disagree as to the existence of a breach,
whether the breach has been cured or whether diligent efforts have been made
towards cure, the parties shall use their good faith efforts to resolve the
dispute through negotiation. Termination under this Subsection 6.2.2 shall be
effective upon the conclusion of the thirty (30) day period.
6.3 TERMINATION FOR CERTAIN TRANSACTIONS. Manager shall have the right to
terminate this Management Agreement in the event that Group, or any successor to
Group composed of 50% or more of Group Physicians, become affiliated with
another medical group, medical foundation, management services organization,
hospital or health system or third party payor, any of which Manager, in its
absolute discretion, deems a competitor, or any affiliate or agent thereof and
Group does not terminate such affiliation within thirty (30) calendar days after
the giving of written notice by Manager.
6.4 EFFECT OF TERMINATION.
6.4.1 MANAGER TO CONTINUE TO PROVIDE SERVICES. Upon termination
of this Management Agreement, Manager shall continue to collect and receive all
compensation, reimbursement and payments due for services provided to Patients
prior to the effective date of termination, subject to the rights of the parties
hereunder to cancel, forgive, waive and settle such payments due, and Manager
shall be entitled to receive from such amounts any compensation in accordance
with the terms of Article III for services rendered by Manager.
To the extent necessary under Section 6.4.2, Manager shall provide management
services to Group, in accordance with the terms of this Management Agreement,
following termination of this Management Agreement, and shall be entitled to
compensation in accordance with the terms of Article III.
6.4.2 SERVICES UNDER GROUP AGREEMENTS; CARE OF PATIENTS. To the
extent required by Group Agreements, the parties shall observe the following
covenants, notwithstanding termination of this Management Agreement:
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6.4.2.1 GROUP AGREEMENT OBLIGATIONS. Each party shall continue
to perform services as required under the terms and conditions of any Group
Agreement in which Group and/or Manager is then participating or otherwise has
existing contractual obligations in accordance with the terms of the Group
Agreement.
6.4.2.2 CARE OF PATIENTS. Each party shall continue to perform
such services as may be required to assure adequate care and arrangements for
appropriate referrals for patients who are receiving hospital or other
institutional services or who are involved in an active regimen or course of
medical treatment or other services at the time of such termination.
6.4.2.3 COLLECTIONS. The parties shall cooperate to pursue
collection of any payments to which they may be entitled for services rendered
after the termination of this Management Agreement.
6.5 POST TERMINATION. Upon the termination of this Management Agreement:
6.5.1 PRACTICE SITES. Subject to continuing care obligations in
Section 6.4.2, Group shall surrender to Manager all Practice Sites and Equipment
and other appurtenances thereto, in good condition, excepting reasonable use and
wear thereof and damage by fire, act of God, or by the elements.
6.5.2 PROPRIETARY INFORMATION. Group shall immediately
discontinue the use of and shall promptly return all proprietary information,
manuals, and other materials associated with or respecting Manager that have
been made available to Group by reason of its participation therein and shall
return all such property, together with any copies thereof in its possession, to
Manager.
6.5.3 SOFTWARE. Group shall immediately cease to use all software
arranged for or provided by Manager and, within thirty (30) calendar days after
such termination, shall return to Manager the software, all related
documentation and computer programs and any copies thereof.
6.5.4 ACCESS TO MEDICAL RECORDS. Group shall provide to Manager
access, at reasonable times and upon reasonable request, to Group's medical
records relating to Patients for a period not shorter than the applicable
statute of limitations for any claim which may be asserted against Manager
arising from its activities pursuant to this Management Agreement.
6.5.5 COVENANT NOT TO COMPETE. For a period of one (1) year
following the termination of this Agreement Group shall not, directly or
indirectly engage in the provision of medical care within a three (3) mile
radius of any of the Practice Sites, and no Group Physician shall engage in the
provision of medical care within a three (3) mile radius of the Practice Site at
which they practiced prior to termination. The parties agree that the duration,
area and scope of activities restricted hereunder are reasonable and necessary
to
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protect Manager's legitimate business interests. In the event that a court or
arbitrator shall determine that this covenant is unenforceable because of its
area, duration or prohibited scope of activities, this covenant shall be
construed, in a manner consistent with applicable law, to provide the maximum
restriction on the post termination activities of Group and Group Physicians.
ARTICLE VII
RELATIONSHIP OF THE PARTIES
7.1 NO FIDUCIARY DUTIES. None of the provisions of this Management
Agreement are intended to create, nor shall be deemed or construed to create,
any fiduciary duty between the parties or any relationship between the parties
other than that of independent parties contracting with each other hereunder
solely for the purpose of effecting the provisions of this Management Agreement.
The parties are not, and shall not be construed to be in a relationship of joint
venturers, partners or employer-employee.
7.2 EXCLUSIVITY.
7.2.1 PHYSICIAN SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall provide any medical
services except in accordance with the terms of this Management Agreement. A
Group Physician who terminates employment by Group shall be relieved of this
obligation, except that for a period of one (1) year following termination of
employment, such Group Physician shall not practice medicine or solicit any
Patient of Group served at the Practice Site for the purpose of treating such
patient at a medical facility within a three (3) mile radius of such Practice
Site. The parties agree that the duration, area and scope of activities
restricted hereunder are reasonable and necessary to protect Manager's
legitimate business interests. In the event that a court or arbitrator shall
determine that this covenant is unenforceable because of its area, duration or
prohibited scope of activities, this covenant shall be construed, in a manner
consistent with applicable law, to provide the maximum restriction on the
activities of Group and Group Physicians. Manager shall not, during the term of
this Agreement, contract with any physician or group of physicians to provide
services at a Practice Site or within a three (3) mile radius of a Practice
Site, unless Manager offers Group the opportunity to Group to provide the
services and Group declines to provide Group Physicians or hire new physicians
necessary to provide the requested services.
7.2.2 MANAGEMENT SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall contract or arrange to
receive any services described in Article I (or any services substantially
similar to them) from any entity or person other than Manager. To the extent
that Group may require any service other than those described in Article I,
Group shall request such services from Manager, and Manager shall use reasonable
efforts to provide such service to Group.
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7.2.3 EXPANSION OF SERVICE AREA. In the event that Manager
determines to add Practice Sites or arrange to expand the services or service
area for which it contracts (an "Expansion"), it shall propose the Expansion to
the Joint Operating Committee and Group. In the event that Group declines to
provide Group Physicians or to add new physicians to provide necessary medical
services for the Expansion, then Manager may contract with other physicians or
groups to provide medical services for the Expansion.
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices to be given under this Management Agreement
shall be in writing and may be personally served upon the parties hereto or may
be served by depositing the same in the United States mail, postage prepaid, as
follows:
Manager: Talbert Medical Management Corporation
9900 Talbert Avenue
Fountain Valley, CA 92708
Attn:__________________________
Group: Talbert Medical Group, Inc.
___________________________
___________________________
Attn:___________________________
subject to the right of either party to change said address or addresses by
written notice of such new address to the other party.
8.2 PROPRIETY PROPERTY. Manager is and shall be the sole owner and holder
of all right, title and interest to the "Proprietary Property of Manager"
consisting of all copyright, service mark and trademark rights and interests in
the logo, systems, software, forms, form contracts, policy manuals, marketing
and public relations materials relating to the delivery system for the Group.
Group agrees that is shall not at any time knowingly harm, misuse or bring into
disrepute the Proprietary Property of Manager.
8.3 CONFIDENTIALITY. The terms of this Management Agreement are
confidential and shall not be disclosed except as necessary to the performance
of this Management Agreement or as required by law. Neither Group nor Group
Physicians shall disseminate or publish information developed under this
Management Agreement or contained in reports to be furnished pursuant to this
Management Agreement without prior written approval of Manager.
8.4 ENTIRE AGREEMENT. The provisions of this Management Agreement and any
exhibits hereto and any writing signed by the party to be charged
contemporaneously herewith
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constitute the entire agreement between the parties, and supersede any prior
negotiations, understandings or agreements.
8.5 MODIFICATIONS. This Management Agreement may be amended, modified or
otherwise changed only upon the written consent of the parties hereto.
8.6 THIRD PARTY RIGHTS. This Management Agreement shall not be construed
as conferring upon any third party any right or benefit and any and all claims
which may arise hereunder may be enforced solely by Group or by Manager.
8.7 NO ASSIGNMENT. No party may assign its rights or delegate its
obligations under this Management Agreement without the prior written consent of
the other party; provided that Manager may assign its rights and obligations
under this Management Agreement to an affiliate, successor or a wholly-owned
subsidiary without the consent of Group.
8.8 GOVERNING LAW; ARBITRATION. This Management Agreement shall be
governed by ________ law. Any dispute between the parties shall be settled by
binding arbitration in accordance with the commercial arbitration rules of the
American Arbitration Association. No punitive damages shall be awarded in any
such arbitration. The prevailing party in any such arbitration shall be
entitled to the recovery of reasonable attorneys' fees (including charges for
in-house counsel) and costs.
8.9 DOCUMENTS; NECESSARY ACTS. Each of the parties shall execute and
deliver all documents, papers, and instruments and perform such other acts as
may be necessary or convenient to carry out the terms of this Management
Agreement.
8.10 NON-WAIVER; BREACH. Any waiver of any term and condition hereof must
be in writing and signed by the party against whom it is sought to be asserted.
A party's neglect or failure in any case or circumstance to require performance
of the other party's obligations or to enforce its rights in the event of a
breach by the other party shall not affect such party's right to enforce such
rights and obligations in any other case or circumstance. A waiver of any
individual term or condition shall not be construed as a waiver of any other
term or condition nor, unless so provided in such written waiver, of the term or
condition thereby waived in the event of a future or continuing breach by the
other party, except in the particular circumstance(s) in or for which such
waiver was provided.
8.11 SEVERABILITY; INVALIDITY OF ANY PROVISION. Nothing contained in this
Management Agreement shall be construed so as to require the commission of an
act contrary to law, and whenever there is any conflict between any provision of
this Management Agreement and any present statute, law, ordinance or regulation
contrary to which the parties have no legal right to contract, the latter shall
prevail. In such event, and in any case in which any provision of this
Management Agreement is determined by a court of competent jurisdiction to be in
violation of a statute, law, ordinance, or regulation, the affected provision(s)
shall be curtailed and limited only to the extent necessary to bring it within
the
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requirements of the law and, insofar as possible under the circumstances, to
carry out the purposes of this Management Agreement.
8.12 CAPTIONS AND HEADINGS. The captions and headings in this Management
Agreement are intended for convenience only and are not to be interpreted as
part of this Agreement.
8.13 FORCE MAJEURE. Neither party shall be liable nor deemed to be in
default for any delay or failure in performance under this Management Agreement
or other interruption of service or employment deemed resulting, directly or
indirectly, from acts of God, civil or military authority, acts of public enemy,
war, accidents, fires, explosions, earthquakes, floods, failure of
transportation, machinery or supplies, vandalism, strikes or other work
interruptions beyond the reasonable control of either party. However, both
parties shall make good faith efforts to perform under this Management Agreement
in the event of any such circumstances.
8.14 MEDICARE AND MEDICAID PATIENTS. Manager and Group agree to generate
such records and make such disclosures as may be required, from time to time, by
the Medicare, Medicaid and other third party payment programs with respect to
their participation in this Management Agreement and the rendition of services
hereunder, in order to assure that both parties will be able to meet all
requirements for participation and payment associated with such programs,
including but not limited to the matters covered by Section 1861(v)(1)(I) of the
Social Security Act. If either party is requested to disclose books, documents,
or records pursuant to any provision of this Section 8.14 for an audit, it shall
notify the other party of the nature and scope of such request and each party
shall make available, upon written request of the other, all such books,
documents, or records, during such party's regular business hours.
EXECUTION
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement on the day and year first written above.
TALBERT MEDICAL MANAGEMENT
CORPORATION ("Manager")
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
TALBERT MEDICAL GROUP, INC. ("Group")
By:
----------------------------------
Name:
---------------------------------
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Title:
--------------------------------
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EXHIBIT 1.1
PRACTICE SITES
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EXHIBIT 2.1
GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL
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EXHIBIT 2.15
GROUP EXPENSES
1. Group Physician personal expenditures, including licensure costs,
continuing medical education allowances, sabbatical allowances and auto
allowances.
2. Group Physician personal equipment and furnishings, including beepers,
telephone equipment, white coats, and stethoscopes.
3. Meals related to Group activities and meetings.
4. Books and periodicals for Group Physicians.
5. Off-site meetings of Group Physicians.
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EXHIBIT 5.2
JOINT OPERATING COMMITTEE FUNCTIONS
1. Develop strategy for new business, network development, new Practice Sites,
capital budgeting, marketing, and Group Agreements.
2. Evaluate and monitor operational parameters for assuring ongoing success
including but not limited to financial performance, utilization trends,
medical center operations, and overall quality of care.
3. Address problem areas or opportunities which may be raised by either of the
two entities. Where problems are identified which can not be solved at the
medical center level, the Joint Operating Committee will resolve and
implement appropriate remedial action. Decisions will be made by majority
vote with a quorum present, which majority shall consist of a majority of
Group representatives and Manager representatives.
4. Ensure that all responsibilities are identified and accounted for, and any
unnecessary duplication of effort shall be avoided by both the Group and
the Manager.
5. Ensure that communication between the Group and the Manager and between the
staff of these two entities is clear and unambiguous and that a consistent
and uniform perspective is presented to the patients, employees, and
external service partners.
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TABLE OF CONTENTS
PAGE
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ARTICLE I RESPONSIBILITIES OF MANAGER . . . . . . . . . . . . . . . . . 1
1.1 Practice Sites . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Utilities, Building Services, and Supplies . . . . . . . . . . . . 2
1.3 Equipment, Furniture and Furnishings . . . . . . . . . . . . . . . 2
1.4 Repair and Maintenance of Practice Sites and Equipment . . . . . . 2
1.4.1 Repair and Maintenance of Practice Sites . . . . . . . . 2
1.4.2 Repair and Maintenance of Equipment. . . . . . . . . . . 2
1.5 Replacement Equipment. . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Signs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8.1 Practice Sites . . . . . . . . . . . . . . . . . . . . . 3
1.8.2 Professional Liability Insurance . . . . . . . . . . . . 3
1.8.3 Directors and Officers Insurance . . . . . . . . . . . . 3
1.8.4 Self Insurance . . . . . . . . . . . . . . . . . . . . . 3
1.9 Non-Professional Personnel . . . . . . . . . . . . . . . . . . . . 3
1.9.1 Manager to Employ; Initial Employment Decisions. . . . . 3
1.9.2 Special Provisions Applicable to Allied Health
Professionals. . . . . . . . . . . . . . . . . . . . . . 3
1.9.3 Supervision of Clerical and Other Non-Medical Support
Personnel. . . . . . . . . . . . . . . . . . . . . . . . 4
1.9.4 Decisions Reserved to Manager. . . . . . . . . . . . . . 4
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TABLE OF CONTENTS
PAGE
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1.10 Bookkeeping and Accounting Services. . . . . . . . . . . . . . . . 4
1.11 Fee-For-Service Administration . . . . . . . . . . . . . . . . . . 4
1.11.1 Fee Schedule . . . . . . . . . . . . . . . . . . . . . . 4
1.11.2 Billing and Collection . . . . . . . . . . . . . . . . . 4
1.12 Capitation Administration. . . . . . . . . . . . . . . . . . . . . 5
1.12.1 Calculation of Amounts Due . . . . . . . . . . . . . . . 5
1.12.2 Billing Under Capitated Agreements . . . . . . . . . . . 5
1.12.3 Records. . . . . . . . . . . . . . . . . . . . . . . . . 5
1.13 Review and Audit of Manager. . . . . . . . . . . . . . . . . . . . 5
1.14 Additional Financial and Management Reports and Information. . . . 5
1.14.1 Income Statements and Balance Sheets . . . . . . . . . . 5
1.14.2 Other Reports. . . . . . . . . . . . . . . . . . . . . . 5
1.15 Management Information System. . . . . . . . . . . . . . . . . . . 6
1.16 Physician Recruitment. . . . . . . . . . . . . . . . . . . . . . . 6
1.17 Human Resources; Credentialing . . . . . . . . . . . . . . . . . . 6
1.18 Marketing and Public Relations . . . . . . . . . . . . . . . . . . 6
1.19 UM/QM Policies and Procedures; Preauthorization. . . . . . . . . . 6
1.20 Distribution of Compensation and Bonuses to Group Physicians; Group
Benefits Administration. . . . . . . . . . . . . . . . . . . . . . 6
1.21 Attorney-in-Fact . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.21.1 Depository Account . . . . . . . . . . . . . . . . . . . 6
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TABLE OF CONTENTS
PAGE
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1.21.2 Receipt of Payments. . . . . . . . . . . . . . . . . . . 6
1.21.3 Billing/Claims Processing. . . . . . . . . . . . . . . . 7
1.21.4 Collection of Other Amounts Due. . . . . . . . . . . . . 7
1.21.5 Stop-Loss Claims . . . . . . . . . . . . . . . . . . . . 7
1.22 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II OBLIGATIONS OF GROUP . . . . . . . . . . . . . . . . . . 7
2.1 Group Physicians and Professional Personnel. . . . . . . . . . . . 7
2.2 Provision of Medical Services. . . . . . . . . . . . . . . . . . . 8
2.3 Additional Physicians. . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Hours of Service . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4.1 Patient Medical Services . . . . . . . . . . . . . . . . 8
2.4.2 Walk-In and Community Services . . . . . . . . . . . . . 8
2.4.3 After Hours Care . . . . . . . . . . . . . . . . . . . . 8
2.5 Non-discrimination; Compliance with Law. . . . . . . . . . . . . . 8
2.6 Non-discriminatory Patient Selection and Services; Non-discriminatory
Patient Assignment . . . . . . . . . . . . . . . . . . . . . . . . 8
2.7 Standards, Accreditation, Surveys and Inspections. . . . . . . . . 8
2.8 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.9 Compliance with Policies and Procedures. . . . . . . . . . . . . . 9
2.9.1 Organization and Review of Care. . . . . . . . . . . . . 9
2.9.2 Utilization Management; Quality Management . . . . . . . 9
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2.9.3 Prior Authorization. . . . . . . . . . . . . . . . . . . 9
2.10 Records and Reports. . . . . . . . . . . . . . . . . . . . . . . . 9
2.11 Group to Provide Necessary Billing and Encounter Information . . . 9
2.12 Continuing Education . . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Referrals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.14 Physician Compensation . . . . . . . . . . . . . . . . . . . . . . 10
2.15 Group Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.16 Provider Numbers . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III COMPENSATION OF MANAGER . . . . . . . . . . . . . . . . . . . 10
3.1 Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Fee for Service Revenues . . . . . . . . . . . . . . . . 10
3.1.2 Capitated Agreement Revenue. . . . . . . . . . . . . . . 10
3.1.3 Hospital Risk Pools. . . . . . . . . . . . . . . . . . . 10
3.1.4 Payment of Fee . . . . . . . . . . . . . . . . . . . . . 11
3.2 Overpayments and Underpayments . . . . . . . . . . . . . . . . . . 11
3.3 Advances to Group. . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Adjustment in Management Fee . . . . . . . . . . . . . . . . . . . 11
3.5 Definitions of Group Revenue . . . . . . . . . . . . . . . . . . . 11
ARTICLE IV EXECUTION OF GROUP AGREEMENTS . . . . . . . . . . . . . . . . 12
4.1 Appointment of Manager as Attorney-in-Fact . . . . . . . . . . . . 12
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PAGE
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4.1.1 Contracting Guidelines.. . . . . . . . . . . . . . . . . 12
4.1.2 Entry Into Agreements. . . . . . . . . . . . . . . . . . 12
4.1.3 Administration of Agreements . . . . . . . . . . . . . . 12
4.2 Restrictions on Group. . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V JOINT OPERATING COMMITTEE . . . . . . . . . . . . . . . . . . 13
5.1 Composition. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VI TERM; TERMINATION . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Term; Termination. . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Termination for Cause. . . . . . . . . . . . . . . . . . . . . . . 13
6.2.1 Liquidation; Bankruptcy. . . . . . . . . . . . . . . . . 13
6.2.2 Breach . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Termination for Certain Transactions . . . . . . . . . . . . . . . 14
6.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . 14
6.4.1 Manager to Continue to Provide Services. . . . . . . . . 14
6.4.2 Services Under Group Agreements; Care of Patients. . . . 14
6.4.2.1 Group Agreement Obligations . . . . . . . . . . 15
6.4.2.2 Care of Patients. . . . . . . . . . . . . . . . 15
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PAGE
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6.4.2.3 Collections . . . . . . . . . . . . . . . . . . 15
6.5 Post Termination . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5.1 Practice Sites . . . . . . . . . . . . . . . . . . . . . 15
6.5.2 Proprietary Information. . . . . . . . . . . . . . . . . 15
6.5.3 Software . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5.4 Access to Medical Records. . . . . . . . . . . . . . . . 15
6.5.5 Covenant Not to Compete. . . . . . . . . . . . . . . . . 15
ARTICLE VII RELATIONSHIP OF THE PARTIES . . . . . . . . . . . . . . . . . 16
7.1 No Fiduciary Duties. . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2.1 Physician Services.. . . . . . . . . . . . . . . . . . . 16
7.2.2 Management Services. . . . . . . . . . . . . . . . . . . 16
7.2.3 Expansion of Service Area. . . . . . . . . . . . . . . . 16
ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 Propriety Property . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.5 Modifications. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 Third Party Rights . . . . . . . . . . . . . . . . . . . . . . . . 18
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PAGE
----
8.7 No Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.8 Governing Law; Arbitration . . . . . . . . . . . . . . . . . . . . 18
8.9 Documents; Necessary Acts. . . . . . . . . . . . . . . . . . . . . 18
8.10 Non-Waiver; Breach . . . . . . . . . . . . . . . . . . . . . . . . 18
8.11 Severability; Invalidity of Any Provision. . . . . . . . . . . . . 18
8.12 Captions and Headings. . . . . . . . . . . . . . . . . . . . . . . 19
8.13 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.14 Medicare and Medicaid Patients . . . . . . . . . . . . . . . . . . 19
Exhibit 1.1 PRACTICE SITES . . . . . . . . . . . . . . . . . . . . . 20
Exhibit 2.1 GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL. . . . . . . 21
Exhibit 2.15 GROUP EXPENSES . . . . . . . . . . . . . . . . . . . . . 22
Exhibit 5.2 JOINT OPERATING COMMITTEE FUNCTIONS. . . . . . . . . . . 23
vii
<PAGE>
TALBERT MEDICAL GROUP
PHYSICIAN EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is effective January 1, 1996, by and between
____________________________________________, hereinafter referred to as
"Physician" and Talbert Medical Group, hereinafter referred to as "Medical
Group".
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
I. EMPLOYMENT
Medical Group employs the Physician and Physician accepts employment on the
terms and conditions set forth in this Agreement.
The Physician shall observe and abide by all Medical Group policies and
procedures such as, but not limited to, those that relate to coverage, patient
care, scheduling and professional group activities.
II. TERM
The initial term of employment shall commence on January 1, 1996, and terminate
on ____________________. This Agreement shall then automatically renew under
the same terms and conditions for a one (1) year term, with the exception that
the base salary shall be renegotiated. The initial and renewal terms of this
Agreement may be terminated on an earlier date, as set forth in Section V.
After the one year automatic renewal, this Agreement shall not automatically
renew and any further renewals must be agreed to by both Medical Group and
Physician and documented by either an executed amendment to this Agreement or by
the execution of a new agreement.
III. COMPENSATION
A. A base salary of $_________ per month shall be paid to the Physician for
all professional and administrative services performed during the initial
term of this Agreement. Any stipend will be paid in accordance with the
Medical Group's policies and procedures. The base salary shall be
renegotiated between the Physician and the Medical Group for the one (1)
year automatic renewal term and any succeeding terms.
B. Payment shall be made in accordance with the Medical Group payroll policy
which is incorporated by reference herein. Payment for any services that
are not part of this Agreement provided by the Physician pursuant to an
Medical Group request and subject to Medical Group policy, will be paid in
accordance with the Medical Group payroll policy.
C. The Physician will receive indirect benefits, which includes professional
liability ("malpractice") insurance, as set forth in the "Schedule of
Benefits" which is attached hereto as Attachment A and incorporated herein.
Indirect benefits are subject to change.
1
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D. If the Physician requests, and the Medical Group approves in writing, a
less than full-time work schedule, or if Medical Group, in its sole
discretion, determines the need for the Physician's work is less than full
time, Physician shall then be considered a regular part-time employee and
all compensation and benefits as described herein, shall be prorated
according to current Medical Group policies and procedures which are
incorporated by reference herein.
E. Any incentive or additional compensation for which the Physician may be
eligible shall be determined in accordance with the applicable Medical
Group physician incentive programs.
F. The Physician understands and agrees that the compensation and payments
made by Medical Group as set forth in this Agreement will be the total
compensation due and owing and will be considered payment in full for all
services performed by the Physician for Medical Group.
IV. DUTIES
A. The Physician is employed as a/an _______________________________, licensed
to practice in the State. The Physician will work according to the Medical
Group's assigned department or other work location schedule, patient
service and assignment policies, in compliance with the terms and
conditions of any contracts Medical Group has entered into (including
management service agreements) and in accordance with the hours of work
assigned by Medical Group. This schedule shall provide for hospital,
clinic duties, home health services and administrative tasks, when
applicable. The schedule may require the Physician to be available for
call back duties, telephone requests for consultation and other assigned
duties. The Physician understands that the professional services required
by Medical Group and for which the Physician is employed are of such a
nature that the Physician's time rendering patient care may vary from time
to time and that schedules may be changed to better meet the needs of the
professional staff and to provide quality professional care to all patients
of Medical Group. The Physician agrees that he/she will render care to all
patients of Medical Group, under the terms of this Agreement and will not
make any separate or independent charge for this care.
The Physician understands and agrees this employment requires a full
commitment of the Physician's professional services to Medical Group for
the term of this Agreement. The Physician agrees that if on his/her non
Medical Group working time, he/she elects to provide health care services
outside Medical Group, this will not interfere with departmental, hospital
or medical center obligations or other duties within Medical Group and
these services will not compete with Medical Group. The Physician will
immediately cease any such services or activities if so requested by
Medical Group.
B. The Physician shall adhere to the professional and ethical responsibilities
of a physician and the professional and committee responsibilities, as well
as the policies and procedures, of the Medical Group and those required in
the hospitals at which Physician practices, when applicable. This
includes, but is not limited to, participation in quality
assessment/management, grievance procedures, peer review, risk management
and utilization management activities (including prior authorization
requirements), referral activities, committees and attending and complying
with all Medical Group credentialing and risk management programs. In
addition, Physician shall cooperate and participate in any reviews,
accreditation surveys, audits or the like, as required by the Medical
Group.
2
<PAGE>
C. The Physician agrees that prior to the execution of this Agreement, he/she
will furnish Medical Group with a copy of his/her current narcotic license
and license to practice medicine in the State and any certificates,
diplomas or other documents which may be required by Medical Group. The
Physician shall keep these licenses and other applicable documents current
and in full force and will notify Medical Group within twenty-four (24)
hours if any of these licenses, certificates, diplomas or other applicable
documents are revoked, revised or limited. In addition, as part of the
Physician's duties, the Physician must obtain and maintain the necessary
privileges at hospitals designated by Medical Group and will so advise the
Medical Group within twenty-four (24) hours if these privileges are
revoked, revised or limited.
D. Both Medical Group and the Physician acknowledge and agree that the
Physician shall have the sole and exclusive right to prescribe for,
diagnose and treat patients within the limits of his/her license, while
practicing at or from Medical Group offices or practice sites or for
Medical Group and that he/she will observe all Medical Group policies and
procedures including, but not limited to, those relating to charges, office
hours and administrative procedures.
E. The Physician agrees to obtain at least the minimum number of hours of
approved continuing education per year as required for the maintenance of
his/her applicable State license.
V. TERMINATION OF AGREEMENT
A. In the event Medical Group and the Physician mutually agree in writing to
the termination of this Agreement, no damages, payments or other sums will
be owed by one to the other as a result of the termination, unless
otherwise agreed to in writing by both parties.
B. This Agreement may be unilaterally terminated by either Medical Group or
the Physician without cause upon sixty (60) days written notice or by the
terminating party paying an amount equal to two (2) months of Physician's
base salary in lieu of giving the sixty (60) days notice. This payment
shall be considered liquidated damages and not a penalty for, but not
limited to, any and all inconvenience, expenses incurred for credentialing,
licensing, orientation or loss of service or notice which may result.
Medical Group reserves the right and the Physician understands and agrees
Medical Group may unilaterally terminate this Agreement as set forth in
this paragraph if the Physician is or has been repeatedly named in multiple
lawsuits that Medical Group believes, in its absolute and sole discretion,
to be excessive. In addition, if the Physician terminates the Agreement,
the Physician shall repay to Medical Group any vacation time taken but not
yet earned as well as any sums paid by Medical Group for the Physician's
postgraduate training and time. Medical Group will pay the Physician for
any earned but not used vacation time. No other monies are payable in the
event of a unilateral termination.
C. Medical Group may terminate this Agreement for cause by giving one (1)
week's notice or by paying one (1) week's salary in lieu of notice. Notice
of termination, if not personally given, will be presumed received by the
Physician within three (3) days after mailing the notice to the Physician's
residence. For the purpose of this Agreement, "cause" shall include, but
not be limited to, the following:
1. Abuse of a controlled substance.
2. Falsification of the application for employment.
3
<PAGE>
3. Any physical or emotional disability, including alcoholism, which
prohibits Physician from performing essential job functions
notwithstanding reasonable accommodations.
4. Conviction of a felony.
5. Conviction of a misdemeanor which involves moral turpitude.
6. Professional incompetency.
7. Non-performance of professional and/or administrative duties.
8. Repeated incomplete, inadequate and/or substandard medical
charting.
9. Failure to comply with Medical Group policies and procedures,
including, but not limited to, quality assurance and utilization
review procedures.
10. Unprofessional conduct, as determined by Medical Group.
11. Loss or suspension of the license, certificates or other criteria
required to perform the services set forth in this Agreement.
12. Failure to maintain current clinical or surgical privileges in a
hospital if the privileges are required by Medical Group.
13. Failure to maintain malpractice or general liability insurance,
if required by Medical Group.
A termination "for cause" for a medical disciplinary cause or reason shall
entitle the Physician to request the Medical Group Judicial Review Hearing
Plan, which is incorporated by reference herein. Once the Physician has
requested this hearing, it shall then be the sole remedy for the Physician
and he/she is not entitled to any other hearing or relief on this issue.
D. In the event the Physician requests a hearing under paragraph C. above and
the Medical Group Board of Directors reverses the termination for cause
decision and recommends the Physician not be terminated, the Physician
shall not be terminated.
VI. COVENANT NOT TO COMPETE
A. PROVISION OF MEDICAL CARE. During the term of this Agreement and for a
period of one (1) year following the termination of this Agreement, or if
the Physician ceases to be employed by Medical Group, Physician shall not,
directly or indirectly, practice medicine within a three (3) mile radius of
the Physician's Medical Group office or practice site at which he/she
practiced prior to the termination or leaving the employ of Medical Group.
The parties agree that the duration, area and scope of activities
restricted hereunder are reasonable and necessary to protect Medical
Group's legitimate business interests. In the event that a court or
arbitrator shall determine that this covenant is unenforceable because of
its area, duration or prohibited scope of activities, this covenant shall
be construed, in a manner consistent with applicable law, to provide the
maximum restriction on the post termination/employment activities of
Physician.
B. SOLICITATION. During the term of this Agreement and for a period of one
(1) year following the termination of this Agreement, or if the Physician
ceases to be employed by the Medical Group, Physician shall not solicit any
patient of the Physician's Medical Group office or practice site at which
he/she practiced prior to the termination or leaving the employ of Medical
Group for the purpose of treating such patient at a medical facility which
is within a three (3) mile radius of this office or practice site. The
parties agree that the duration, area and scope of activities restricted
4
<PAGE>
hereunder are reasonable and necessary to protect Medical Group's
legitimate business interests. The parties further agree if any court or
arbitrator determines that this provision or any portion of this provision
is unenforceable because of the duration, area or scope of activities
restricted hereunder, such court or arbitrator shall have the power to
reduce such duration, area or scope to the maximum allowed by applicable
law and, in its reduced form, such provisions shall then be enforced and
Physician shall abide by such provision as altered.
VII. MISCELLANEOUS COVENANTS
A. This Agreement constitutes the entire Agreement between the parties and
supersedes all prior agreements. No changes in the Agreement will be valid
unless made in writing and signed by both parties.
B. This Agreement shall be binding upon both parties and upon their respective
executors, administrators, successors and assigns.
C. This Agreement shall be governed by and construed in accordance with all
applicable state ("State") and federal laws. "State" is defined to be the
state in which the Physician is practicing on behalf of the Medical Group.
D. Notwithstanding any other provision in this Agreement, this Agreement is
contingent upon the Physician having submitted and Medical Group having
reviewed and found satisfactory, all referencing, credentialing and other
materials required by Medical Group in determining the Physician's
qualifications for employment by Medical Group.
E. Physician agrees to render the services contemplated herein without regard
to race, age, sex, religion, creed, color, national origin, ancestry or
sexual orientation of any patient.
F. The terms of this Agreement and in particular the provisions regarding
compensation, are confidential and shall not be disclosed except as
necessary for the performance of this Agreement or as required by law.
G. If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to payment
by the other party of reasonable attorneys' fees, costs and necessary
disbursement and expenses in addition to any other relief to which such
party may be entitled.
H. The Physician understands and agrees this is not an exclusive agreement as
to the Medical Group in that Medical Group may contract with others to
serve in the same capacity as the Physician.
I. The waiver by either party of a failure to perform as set forth in this
Agreement shall not act as a waiver of performance for a subsequent breach
of the same or any other provision in this Agreement.
5
<PAGE>
J. If any provision of this Agreement is deemed to be invalid or unenforceable
by a court of competent jurisdiction or in arbitration, the same shall be
deemed severable from the remainder of this Agreement and shall not cause
the invalidity or unenforceability of the remainder of the Agreement.
K. This Agreement may not be assigned by the Physician without the written
consent of Medical Group.
L. As part of the consideration for Medical Group to enter into this
Agreement, Physician agrees that he/she shall not use, or divulge to
anyone, Medical Group's or Talbert Medical Management Corporation's
proprietary information (including but not limited to copyright, service
marks, trademark rights and interests in the logos, systems, software,
forms, form contracts, policy manuals, marketing public relations materials
and trade secrets). A trade secret means information, including but not
limited to programs, methods, techniques and processes, that has
independent economic value from not being generally known to either the
public or to other persons who can obtain economic value from its
disclosure or use. Examples of Medical Group trade secrets include, but
are not limited to, actual and potential patient lists, compiled
information concerning its patients, key provider agreements, billing
rates, and operations manuals. This paragraph shall not be applicable to
information that is already in the public domain or that has been made
available to the public by Medical Group or Talbert Medical Management
Corporation.
M. The Physician acknowledges the Medical Group will be contracting with third
party payors, insurers and other similar entities in regard to the
provision of medical services to be rendered by the Physician, and that the
Medical Group and such entities will engage in credentialing activities
concerning the Physicians with whom they have contracted. Understanding
this, the Physician hereby authorizes the Medical Group and any third party
payor, insurer or similar entity with whom the Medical Group will contract
for the provision of medical services, to consult with and obtain from, any
and all individuals and organizations who can provide information
concerning the Physician's professional liability coverage and claims,
information on the Physician's professional competence, ability to perform
services and procedures, character, ethical qualifications and ability to
work cooperatively with others, and the Physician releases from liability
those individuals and organizations who have provided and used this
information.
N. Physician understands some payors and entities with whom Medical Group will
contract require proof of a signed contract between Medical Group and
Physician. Therefore, Physician agrees Medical Group may provide a copy of
this Agreement's signature page to such payors and other entities as proof
of its contractual relationship with Physician.
O. The Physician's failure to execute this Agreement within seven (7) days
after receipt renders the offer of employment by Medical Group void and
non-binding upon Medical Group.
This Agreement shall not be binding until executed by a person authorized to do
so by Medical Group and an executed copy thereof is delivered to the Physician.
PRESIDENT
PHYSICIAN MEDICAL GROUP
6
<PAGE>
BY: BY:
-------------------------------- --------------------------------
DATE: DATE:
------------------------------ ------------------------------
7
<PAGE>
TALBERT MEDICAL GROUP, INC.
PHYSICIAN EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is effective January 1, 1996, by and between
________________________________________, hereinafter referred to as "Physician"
and Talbert Medical Group, Inc., hereinafter referred to as "Medical Group".
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
I. EMPLOYMENT
Medical Group employs the Physician and Physician accepts employment on the
terms and conditions set forth in this Agreement.
The Physician shall observe and abide by all Medical Group policies and
procedures such as, but not limited to, those that relate to coverage, patient
care, scheduling and professional group activities.
II. TERM
The initial term of employment shall commence on January 1, 1996, and terminate
on ____________________. This Agreement shall then automatically renew under
the same terms and conditions for a one (1) year term, with the exception that
the base salary shall be renegotiated. The initial and renewal terms of this
Agreement may be terminated on an earlier date, as set forth in Section V.
After the one year automatic renewal, this Agreement shall not automatically
renew and any further renewals must be agreed to by both Medical Group and
Physician and documented by either an executed amendment to this Agreement or by
the execution of a new agreement.
III. COMPENSATION
A. A base salary of $______________ per month shall be paid to the Physician
for all professional and administrative services performed during the
initial term of this Agreement. Any stipend will be paid in accordance
with the Medical Group's policies and procedures. The base salary shall be
renegotiated between the Physician and the Medical Group for the one (1)
year automatic renewal term and any succeeding terms.
B. Payment shall be made in accordance with the Medical Group payroll policy
which is incorporated by reference herein. Payment for any services that
are not part of this Agreement provided by the Physician pursuant to an
Medical Group request and subject to Medical Group policy, will be paid in
accordance with the Medical Group payroll policy.
C. The Physician will receive indirect benefits, which includes professional
liability ("malpractice") insurance, as set forth in the "Schedule of
Benefits" which is attached hereto as Attachment A and incorporated herein.
Indirect benefits are subject to change.
1
<PAGE>
D. If the Physician requests, and the Medical Group approves in writing, a
less than full-time work schedule, or if Medical Group, in its sole
discretion, determines the need for the Physician's work is less than full
time, Physician shall then be considered a regular part-time employee and
all compensation and benefits as described herein, shall be prorated
according to current Medical Group policies and procedures which are
incorporated by reference herein.
E. Any incentive or additional compensation for which the Physician may be
eligible shall be determined in accordance with the applicable Medical
Group physician incentive programs.
F. The Physician understands and agrees that the compensation and payments
made by Medical Group as set forth in this Agreement will be the total
compensation due and owing and will be considered payment in full for all
services performed by the Physician for Medical Group.
IV. DUTIES
A. The Physician is employed as a/an __________________________, licensed to
practice in the State. The Physician will work according to the Medical
Group's assigned department or other work location schedule, patient
service and assignment policies, in compliance with the terms and
conditions of any contracts Medical Group has entered into (including
management service agreements) and in accordance with the hours of work
assigned by Medical Group. This schedule shall provide for hospital,
clinic duties, home health services and administrative tasks, when
applicable. The schedule may require the Physician to be available for
call back duties, telephone requests for consultation and other assigned
duties. The Physician understands that the professional services required
by Medical Group and for which the Physician is employed are of such a
nature that the Physician's time rendering patient care may vary from time
to time and that schedules may be changed to better meet the needs of the
professional staff and to provide quality professional care to all patients
of Medical Group. The Physician agrees that he/she will render care to all
patients of Medical Group, under the terms of this Agreement and will not
make any separate or independent charge for this care.
The Physician understands and agrees this employment requires a full
commitment of the Physician's professional services to Medical Group for
the term of this Agreement. The Physician agrees that if on his/her non
Medical Group working time, he/she elects to provide health care services
outside Medical Group, this will not interfere with departmental, hospital
or medical center obligations or other duties within Medical Group and
these services will not compete with Medical Group. The Physician will
immediately cease any such services or activities if so requested by
Medical Group.
B. The Physician shall adhere to the professional and ethical responsibilities
of a physician and the professional and committee responsibilities, as well
as the policies and procedures, of the Medical Group and those required in
the hospitals at which Physician practices, when applicable. This
includes, but is not limited to, participation in quality
assessment/management, grievance procedures, peer review, risk management
and utilization management activities (including prior authorization
requirements), referral activities, committees and attending and complying
with all Medical Group credentialing and risk management programs. In
addition, Physician shall cooperate and participate in any reviews,
accreditation surveys, audits or the like, as required by the Medical
Group.
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C. The Physician agrees that prior to the execution of this Agreement, he/she
will furnish Medical Group with a copy of his/her current narcotic license
and license to practice medicine in the State and any certificates,
diplomas or other documents which may be required by Medical Group. The
Physician shall keep these licenses and other applicable documents current
and in full force and will notify Medical Group within twenty-four (24)
hours if any of these licenses, certificates, diplomas or other applicable
documents are revoked, revised or limited. In addition, as part of the
Physician's duties, the Physician must obtain and maintain the necessary
privileges at hospitals designated by Medical Group and will so advise the
Medical Group within twenty-four (24) hours if these privileges are
revoked, revised or limited.
D. Both Medical Group and the Physician acknowledge and agree that the
Physician shall have the sole and exclusive right to prescribe for,
diagnose and treat patients within the limits of his/her license, while
practicing at or from Medical Group offices or practice sites or for
Medical Group and that he/she will observe all Medical Group policies and
procedures including, but not limited to, those relating to charges, office
hours and administrative procedures.
E. The Physician agrees to obtain at least the minimum number of hours of
approved continuing education per year as required for the maintenance of
his/her applicable State license.
V. TERMINATION OF AGREEMENT
A. In the event Medical Group and the Physician mutually agree in writing to
the termination of this Agreement, no damages, payments or other sums will
be owed by one to the other as a result of the termination, unless
otherwise agreed to in writing by both parties.
B. This Agreement may be unilaterally terminated by either Medical Group or
the Physician without cause upon sixty (60) days written notice or by the
terminating party paying an amount equal to two (2) months of Physician's
base salary in lieu of giving the sixty (60) days notice. This payment
shall be considered liquidated damages and not a penalty for, but not
limited to, any and all inconvenience, expenses incurred for credentialing,
licensing, orientation or loss of service or notice which may result.
Medical Group reserves the right and the Physician understands and agrees
Medical Group may unilaterally terminate this Agreement as set forth in
this paragraph if the Physician is or has been repeatedly named in multiple
lawsuits that Medical Group believes, in its absolute and sole discretion,
to be excessive. In addition, if the Physician terminates the Agreement,
the Physician shall repay to Medical Group any vacation time taken but not
yet earned as well as any sums paid by Medical Group for the Physician's
postgraduate training and time. Medical Group will pay the Physician for
any earned but not used vacation time. No other monies are payable in the
event of a unilateral termination.
C. Medical Group may terminate this Agreement for cause by giving one (1)
week's notice or by paying one (1) week's salary in lieu of notice. Notice
of termination, if not personally given, will be presumed received by the
Physician within three (3) days after mailing the notice to the Physician's
residence. For the purpose of this Agreement, "cause" shall include, but
not be limited to, the following:
1. Abuse of a controlled substance.
2. Falsification of the application for employment.
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3. Any physical or emotional disability, including alcoholism, which
prohibits Physician from performing essential job functions
notwithstanding reasonable accommodations.
4. Conviction of a felony.
5. Conviction of a misdemeanor which involves moral turpitude.
6. Professional incompetency.
7. Non-performance of professional and/or administrative duties.
8. Repeated incomplete, inadequate and/or substandard medical
charting.
9. Failure to comply with Medical Group policies and procedures,
including, but not limited to, quality assurance and utilization
review procedures.
10. Unprofessional conduct, as determined by Medical Group.
11. Loss or suspension of the license, certificates or other criteria
required to perform the services set forth in this Agreement.
12. Failure to maintain current clinical or surgical privileges in a
hospital if the privileges are required by Medical Group.
13. Failure to maintain malpractice or general liability insurance,
if required by Medical Group.
A termination "for cause" for a medical disciplinary cause or reason shall
entitle the Physician to request the Medical Group Judicial Review Hearing
Plan, which is incorporated by reference herein. Once the Physician has
requested this hearing, it shall then be the sole remedy for the Physician
and he/she is not entitled to any other hearing or relief on this issue.
D. In the event the Physician requests a hearing under paragraph C. above and
the Medical Group Board of Directors reverses the termination for cause
decision and recommends the Physician not be terminated, the Physician
shall not be terminated.
VI. COVENANT NOT TO COMPETE
A. PROVISION OF MEDICAL CARE. During the term of this Agreement and for a
period of one (1) year following the termination of this Agreement, or if
the Physician ceases to be employed by Medical Group, Physician shall not,
directly or indirectly, practice medicine within a three (3) mile radius of
the Physician's Medical Group office or practice site at which he/she
practiced prior to the termination or leaving the employ of Medical Group.
The parties agree that the duration, area and scope of activities
restricted hereunder are reasonable and necessary to protect Medical
Group's legitimate business interests. In the event that a court or
arbitrator shall determine that this covenant is unenforceable because of
its area, duration or prohibited scope of activities, this covenant shall
be construed, in a manner consistent with applicable law, to provide the
maximum restriction on the post termination/employment activities of
Physician.
B. SOLICITATION. During the term of this Agreement and for a period of one
(1) year following the termination of this Agreement, or if the Physician
ceases to be employed by the Medical Group, Physician shall not solicit any
patient of the Physician's Medical Group office or practice site at which
he/she practiced prior to the termination or leaving the employ of Medical
Group for the purpose of treating such patient at a medical facility which
is within a three (3) mile radius of this office or practice site. The
parties agree that the duration, area and scope of activities restricted
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hereunder are reasonable and necessary to protect Medical Group's
legitimate business interests. The parties further agree if any court or
arbitrator determines that this provision or any portion of this provision
is unenforceable because of the duration, area or scope of activities
restricted hereunder, such court or arbitrator shall have the power to
reduce such duration, area or scope to the maximum allowed by applicable
law and, in its reduced form, such provisions shall then be enforced and
Physician shall abide by such provision as altered.
VII. MISCELLANEOUS COVENANTS
A. This Agreement constitutes the entire Agreement between the parties and
supersedes all prior agreements. No changes in the Agreement will be valid
unless made in writing and signed by both parties.
B. This Agreement shall be binding upon both parties and upon their respective
executors, administrators, successors and assigns.
C. This Agreement shall be governed by and construed in accordance with all
applicable state ("State") and federal laws. "State" is defined to be the
state in which the Physician is practicing on behalf of the Medical Group.
D. Notwithstanding any other provision in this Agreement, this Agreement is
contingent upon the Physician having submitted and Medical Group having
reviewed and found satisfactory, all referencing, credentialing and other
materials required by Medical Group in determining the Physician's
qualifications for employment by Medical Group.
E. Physician agrees to render the services contemplated herein without regard
to race, age, sex, religion, creed, color, national origin, ancestry or
sexual orientation of any patient.
F. The terms of this Agreement and in particular the provisions regarding
compensation, are confidential and shall not be disclosed except as
necessary for the performance of this Agreement or as required by law.
G. If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to payment
by the other party of reasonable attorneys' fees, costs and necessary
disbursement and expenses in addition to any other relief to which such
party may be entitled.
H. The Physician understands and agrees this is not an exclusive agreement as
to the Medical Group in that Medical Group may contract with others to
serve in the same capacity as the Physician.
I. The waiver by either party of a failure to perform as set forth in this
Agreement shall not act as a waiver of performance for a subsequent breach
of the same or any other provision in this Agreement.
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J. If any provision of this Agreement is deemed to be invalid or unenforceable
by a court of competent jurisdiction or in arbitration, the same shall be
deemed severable from the remainder of this Agreement and shall not cause
the invalidity or unenforceability of the remainder of the Agreement.
K. This Agreement may not be assigned by the Physician without the written
consent of Medical Group.
L. As part of the consideration for Medical Group to enter into this
Agreement, Physician agrees that he/she shall not use, or divulge to
anyone, Medical Group's or Talbert Medical Management Corporation's
proprietary information (including but not limited to copyright, service
marks, trademark rights and interests in the logos, systems, software,
forms, form contracts, policy manuals, marketing public relations materials
and trade secrets). A trade secret means information, including but not
limited to programs, methods, techniques and processes, that has
independent economic value from not being generally known to either the
public or to other persons who can obtain economic value from its
disclosure or use. Examples of Medical Group trade secrets include, but
are not limited to, actual and potential patient lists, compiled
information concerning its patients, key provider agreements, billing
rates, and operations manuals. This paragraph shall not be applicable to
information that is already in the public domain or that has been made
available to the public by Medical Group or Talbert Medical Management
Corporation.
M. The Physician acknowledges the Medical Group will be contracting with third
party payors, insurers and other similar entities in regard to the
provision of medical services to be rendered by the Physician, and that the
Medical Group and such entities will engage in credentialing activities
concerning the Physicians with whom they have contracted. Understanding
this, the Physician hereby authorizes the Medical Group and any third party
payor, insurer or similar entity with whom the Medical Group will contract
for the provision of medical services, to consult with and obtain from, any
and all individuals and organizations who can provide information
concerning the Physician's professional liability coverage and claims,
information on the Physician's professional competence, ability to perform
services and procedures, character, ethical qualifications and ability to
work cooperatively with others, and the Physician releases from liability
those individuals and organizations who have provided and used this
information.
N. Physician understands some payors and entities with whom Medical Group will
contract require proof of a signed contract between Medical Group and
Physician. Therefore, Physician agrees Medical Group may provide a copy of
this Agreement's signature page to such payors and other entities as proof
of its contractual relationship with Physician.
O. The Physician's failure to execute this Agreement within seven (7) days
after receipt renders the offer of employment by Medical Group void and
non-binding upon Medical Group.
This Agreement shall not be binding until executed by a person authorized to do
so by Medical Group and an executed copy thereof is delivered to the Physician.
PRESIDENT
PHYSICIAN MEDICAL GROUP
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BY: BY:
-------------------------------- --------------------------------
DATE: DATE:
------------------------------ ------------------------------
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ADDENDUM TO
TALBERT MEDICAL GROUP, INC.
PHYSICIAN EMPLOYMENT AGREEMENT
This Addendum is to the above referenced Agreement dated ______________, 19__,
between Talbert Medical Group, Inc. and Physician.
If the Physician is a specialist and does not have Medical
Group assigned patients and must have practice sites in
close proximity to hospitals (as determined by the Medical
Group), Section VI. Covenant Not to Compete, shall not be
enforced. Should the Physician cease practicing as a
specialist or if the Medical Group determines the
Physician's practice site requirements have changed, Section
VI. shall then be enforced.
PHYSICIAN: PRESIDENT:
MEDICAL GROUP:
_________________________________ ___________________________________
Name (Please Print) Name (Please Print)
_________________________________ ___________________________________
Signature Signature
<PAGE>
ADDENDUM TO
TALBERT MEDICAL GROUP, INC.
PHYSICIAN EMPLOYMENT AGREEMENT
This Addendum is to the above referenced Agreement dated ______________, 19__,
between Talbert Medical Group, Inc. and Physician.
For the Physician who is practicing at the Parkway, Davis or
Ogden Medical Group Center at the time of his/her ceasing to
be employed by the Medical Group or at the time of the
termination of this Agreement, the following modification
shall apply:
In Section VI. Covenant Not To Compete, Paragraphs
A. PROVISION OF MEDICAL CARE and B. SOLICITATION
are modified by deleting the word "three" and the
number "3" in the first sentence in each Paragraph
and replacing them with the word "two" and number
"2", respectively.
PHYSICIAN: PRESIDENT:
MEDICAL GROUP:
_________________________________ ___________________________________
Name (Please Print) Name (Please Print)
_________________________________ ___________________________________
Signature Signature
<PAGE>
EXHIBIT 11.1
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------
(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Primary and fully diluted earnings per
common and common equivalent share:
Net loss............................................... $ (13,434) $ (19,580) $ (28,608) $ (23,176) $ (3,770)
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Weighted average number of common shares and common
share equivalents:
Common stock......................................... 3,000 3,000 3,000 3,000 3,000
Assumed exercise of options.......................... -- -- -- -- --
---------- ---------- ---------- ---------- ---------
Total shares....................................... 3,000 3,000 3,000 3,000 3,000
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Primary and fully diluted loss per
common and common equivalent share.................... $ (4.48) $ (6.53) $ (9.54) $ (7.73) $ (1.26)
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
<PAGE>
EXHIBIT 21.1
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
SUBSIDIARIES
Talbert Medical Management Corporation
Talbert Health Services Corporation
