<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
REGISTRATION NO. 333-17679
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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)
------------------------------
COPY 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>
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
was on February , 1997. FHP stockholders will receive one Right for
every 21.40635 shares of FHP Common Stock and one Right for every 26.54228
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. If fully subscribed, the proceeds of the
Offering will be approximately $59.5 million. Proceeds of the Offering will be
used to repay indebtedness to FHP of approximately $59.5 million incurred in the
Company's acquisition of FHP's equity interest in Talbert Medical Management
Corporation and Talbert Health Services Corporation. The Company will sell to
FHP any shares of Common Stock unsubscribed for in the Offering in exchange for
the cancellation of any remaining such indebtedness. The Company and FHP have
entered into an agreement with respect to certain aspects of FHP's ownership of
any Common Stock it acquires. See "Relationship with FHP and PacifiCare
Following the Offering--Standstill Agreement."
The Rights will be exercisable only during the subscription period, which
will expire at 5:00 P.M., Eastern Standard Time, on March , 1997 (the
"Expiration Date"). The Rights will be valueless thereafter. Rights may not be
exercised to the extent that the holder would become the beneficial owner of
more than 8% of the Common Stock outstanding or the holder's FHP Ownership
Percentage (as defined herein), whichever is greater. See "The
Offering--Exercise Cap." 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, including the recognition of short-term loss equal to the basis in
the Rights. See "The Offering--Certain Federal Income Tax Consequences."
The Rights and the Common Stock have been 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 February , 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 employed the physicians in 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).
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 between a Talbert Medical Group and an HMO, 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.
See "Business--The Company." TMMC and THSC facilitate the provision of such care
by providing practice management and ancillary clinical services, respectively,
to the Talbert Medical Groups. Capitation payments, copayments and
fee-for-service payments provide revenues to the Talbert Medical Groups and
provide the basis for TMMC's management fees. The Talbert Medical Groups and
TMMC currently have a total of 11 provider agreements with FHP, which accounted
for nearly 100% of the
3
<PAGE>
Company's revenues for the nine months ended September 30, 1996. The financial
results of the Talbert 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). Provider agreements with
other payors do not currently constitute a significant source of revenue. See
"Business--The Company-- Payor Relationships."
The Company, through its other wholly-owned subsidiary, Talbert Health
Services Corporation, a Delaware corporation ("THSC"), provides ancillary
clinical services (including pharmacy, radiology, optometry, laboratory, home
health, hospice, rehabilitation and physicial therapy) that are entirely
dependent upon, and largely integrated with, the business of TMMC.
The following table sets forth the number of Medical Centers, affiliated
physicians, and capitated enrollees for each of the states in which the Company
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 has agreed to sell to
FHP any shares of Common Stock unsubscribed in the Offering in exchange for
cancellation of any remaining indebtedness under the Talbert Note. See
"Relationship with FHP and PacifiCare Following the Offering--Acquisition
Agreement." A diagram and timeline describing these transactions is provided
under "The Company--Separation from FHP."
4
<PAGE>
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")). Depending upon the number of shares of Common Stock
subscribed for in the Offering, FHP could acquire in excess of 20% of the
outstanding Common Stock. The Company and FHP have entered into an 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. See "Description of Capital Stock--Registration
Rights."
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 received, in connection with the FHP Merger,
a capital contribution of approximately $68 million, sufficient to increase its
net worth to approximately $59 million (the "Capital Contribution").
RISK FACTORS
An investment in the Common Stock is subject to substantial risk of loss.
See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Subscription Price................ $21.50 per share of Common Stock.
Basic Subscription Privilege...... FHP stockholders will receive one Right for every
21.40635 shares of FHP Common Stock and one Right for
every 26.54228 shares of FHP Preferred Stock held of
record at the Effective Time. 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.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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.
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................... March , 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........................... The Rights and the Common Stock have been 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.
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.
Information Agent................. Georgeson & Company Inc. will serve as Information Agent
for the Offering. Any questions or requests for
assistance concerning the method of subscribing for
Common Stock or additional copies of this Prospectus can
be directed to the Information Agent. The Information
Agent's telephone number is (800) 223-2064.
</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)..............
Capitation................ $ 322,233 $ 366,911 $ 425,141 $ 450,964 $ 437,493 $ 339,070 $ 293,085
Copayments,
fee-for-service and
other................... 30,320 35,688 45,742 52,374 55,206 40,295 58,150
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue........... 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) $ (6.54) $ (9.55) $ (7.74) $ (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 2,996,104
common equivalent shares outstanding for all periods presented. Equivalent
shares of Common Stock include the effect of options to purchase 70,350
shares of Common Stock granted in September 1996 and options to purchase
39,636 shares of Common Stock granted in November 1996.
Pursuant to the Commission Staff Account Bulletin Topic 4:D, stock options
granted during the twelve-month period prior to the date of the initial
filing of the Registration Statement have been included in the calculation
of common equivalent shares using the treasury stock method (considering the
assumed proceeds from the stock options and the number of shares that could
have been repurchased using the estimated initial public price) as if the
shares were outstanding for all periods presented, even if the impact of the
incremental shares is anti-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. As management and others who own 7.75% of the outstanding shares
of the Company will not be making a capital contribution, the Company will
recognize stock compensation expense representing the portion of the
contribution made by FHP that could be deemed to accrue to those investors.
Total compensation expense of $5.3 million (7.75% of the total Capital
Contribution of $68 million) 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
Capitation................... $ 437,493 $ (36,258)(4a) $ 401,235 $ 293,085 $ (26,284)(4a) $ 266,801
Copayments, fee-for-service
and other.................... 58,206 58,206 58,150 58,150
-------------- ------------ ----------- ----------- ------------ -----------
Total revenue.............. 495,699 459,441 351,235 324,951
Expenses
Affiliated medical
services................... 173,417 -- 173,417 103,504 -- 103,504
Purchased medical services... 121,570 6,887(4b) 128,457 85,851 5,287(4b) 91,138
Dental services.............. 31,379 -- 31,379 20,443 -- 20,443
Optometry, pharmacy and other
primary health care
services................... 102,412 10(4b) 102,422 80,181 6(4b) 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 1,318(5)
administrative................ 29,698 304(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).......... $ (9.55) $ (20.91) $ (30.46) $ (1.26) $ (11.74) $ (13.00)
-------------- ------------ ----------- ----------- ------------ -----------
-------------- ------------ ----------- ----------- ------------ -----------
</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) 61,970 58,300
</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) Adjusted to eliminate the historical tax benefit of the Company that was
utilized in FHP's consolidated return. No pro forma tax benefit has been
provided because it is not likely that the Company will generate sufficient
taxable income to realize its deferred tax assets. Assuming the Company were
separated from FHP as of January 1, 1996, its pro forma deferred tax assets
would have been $19,754,000 and $22,358,000, as of December 31, 1995 and
September 30, 1996, respectively, with a corresponding valuation allowance
of the same amount.
(3) Loss per common and common equivalent share is computed based on 2,996,104
common equivalent shares for all periods presented. Equivalent common shares
include the effect of options to purchase 70,350 shares of Common Stock
granted in September 1996 and options to purchase 39,636 shares of Common
Stock granted in November 1996.
Pursuant to the Commission Staff Account Bulletin Topic 4:D, stock options
granted during the twelve-month period prior to the date of the initial
filing of the Registration Statement have been included in the calculation
of
10
<PAGE>
common equivalent shares using the treasury stock method (considering the
assumed proceeds from the stock options and the number of shares that could
have been repurchased using the estimated initial public price) as if the
shares were outstanding for all periods presented, even if the impact of the
incremental shares is anti-dilutive.
(4) Adjusted to reflect the effect of the New FHP Provider Agreements:
a. Revenue. The New FHP Provider Agreements reduce the Company's monthly
capitation fee for each member enrolled with the Talbert Medical Groups.
The effective rate decrease is estimated to yield an aggregate 7.3%
reduction in the monthly capitation received by the Company for each of
the periods presented. The revenue adjustment was calculated by
multiplying the actual enrollees served within each of the periods
reported by the 7.3% net monthly capitation fee reduction.
b. Health care expense. Adjustments reflect the estimated costs
attributable to specific additional medical services that the Talbert
Medical Groups have agreed to provide with the capitation fee. Expense
adjustment is based upon each added health care service multiplied by the
actual per enrollee cost for the service multiplied by the actual number
of enrollees served within the periods presented. Costs of these added
health care services were formerly paid by FHP.
(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 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. Accordingly, stock compensation expense of
approximately $1,318,000 (25% of the total stock compensation expense of
$5,270,000) was recognized on a pro forma basis for the year ended December
31, 1995 and stock compensation expense of $988,000 (representing nine
months amortization of the annual expense of $1,318,000) was recognized on a
pro forma basis during the nine months ended September 30, 1996.
(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 determined by the
Board of Directors 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. Also adjusted to
reflect the assumed impact of compensation expense arising from the grant of
options to acquire 39,636 shares of Common Stock in November 1996 at an
exercise price of $10.00 per share. Based on an assumed fair market value of
$29.17 per share on the date of grant, compensation expense of approximately
$760,000 will be recognized, of which 40% or $304,000 is deemed recognized
as of September 30, 1996 and the remaining $456,000 will be recognized as
the remaining options vest beginning in 2000.
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."
12
<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. On a pro forma basis, the New FHP Provider Agreements would have resulted
in an additional operating loss of approximately $31.6 million for the nine
months ended September 30, 1996, and approximately $43.1 million for the year
ended December 31, 1995. 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 a significant portion of the Company's revenue is derived from these
fees, and because the Company has in certain cases guaranteed the ability of the
Talbert Medical Groups to perform their contractual obligations, 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. Although in the past the Company has relied nearly
exclusively on FHP to generate revenues, the Company anticipates that its future
operating results will be dependent upon additional sources of revenue. See
"Business--The Company--Payor Relationships." There can be no assurance that the
Company will be able to address these challenges successfully.
13
<PAGE>
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."
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 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." Although
physicians in the Talbert Medical Groups enter into employment agreements that
include non-competition provisions, there can be no assurance that physicians
who leave a Talbert Medical Group will not attempt to compete with that group.
See "Business--The Company--Contractual Relationships."
OPEN ENROLLMENT PERIODS; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results are subject to seasonal fluctuations. HMOs
typically have annual "open enrollment" periods 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.
14
<PAGE>
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 have received 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." The Company has entered into transactions with certain of its
executives with respect to the purchase of Common Stock, the grant of options to
purchase Common Stock, and employment agreements in the event of a change of
control of the Company. See "Certain Transactions," "Management--Stock Incentive
Plan," and "--Change of Control Employment Agreements."
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 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.
15
<PAGE>
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 and in certain geographic markets in which the Company
operates. 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.
CORPORATE PRACTICE OF MEDICINE; INSURANCE. 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 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." Laws of all states regulate the business of
insurance, and certain of the risk arrangements entered into by the Talbert
Medical Groups could, in the future, possibly be characterized by some states as
the business of insurance. 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 or the business of insurance 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.
LIMITATIONS ON REFERRALS. 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 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."
16
<PAGE>
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 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.
Rights may not be exercised to the extent that the holder would become the
beneficial holder of more than 8% of the Common Stock outstanding or the
holder's FHP Ownership Percentage (as defined herein), whichever is greater. See
"The Offering--Exercise Cap." Following the completion of the Offering, the
Company's Stockholder Rights Agreement may delay or prevent a change in control
of the Company by giving holders of such rights the opportunity to purchase
Common Stock at a discount. See "Description of Capital Stock--Certain
Anti-Takeover Effects." 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 unreasonably be withheld. See "Relationship with FHP and
PacifiCare Following the Offering--Provider Agreements."
17
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
FHP has certain registration rights with respect to any Common Stock it may
acquire as a result of an undersubscription of the Offering. The number of
shares subject to such rights, if any, will depend on the extent to which the
Offering is undersubscribed. Certain members of management also have
registration rights with respect to their restricted shares of Common Stock.
Approximately 232,500 shares of Common Stock are subject to such rights. See
"Description of Capital Stock--Registration Rights."
18
<PAGE>
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 through the transactions described
below:
[CHART]
19
<PAGE>
Concurrent with the FHP Merger:
(1) TMMC received the Capital Contribution of approximately $68 million to
increase its net worth to approximately $59 million.
(2) The management and other investors ("MIs") exchanged their aggregate
7.75% equity interests in TMMC and THSC for an equivalent interest in the
Company.
(3) The Company purchased 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.
(4) In connection with the FHP Merger, FHP transferred the Rights to
PacifiCare Holdings.
(5) By virtue of the FHP Merger, shares of FHP Common Stock and FHP
Preferred Stock were converted, in part, into the Rights, which confer
upon FHP's stockholders ("FHP SHs"), collectively, the right to purchase
92.25% of the Company's Common Stock.
During the Offering:
(6) The Rights holders may, through the exercise of their Rights, purchase
the Company's Common Stock in the Offering.
Immediately After the Offering:
(7) 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."
20
<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. FHP stockholders will receive one Right for every 21.40635 shares of FHP
Common Stock and one Right for every 26.54228 shares of FHP Preferred Stock held
at the Effective Time. 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.
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: Reorganization Department
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.
21
<PAGE>
INFORMATION AGENT
Georgeson & Company Inc. will serve as Information Agent for the Offering.
Any questions or requests for assistance concerning the method of subscribing
for Common Stock or additional copies of this Prospectus can be directed to the
Information Agent. The Information Agent's telephone number is (800) 223-2064.
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 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
22
<PAGE>
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 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
23
<PAGE>
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.
O'Melveny & Myers LLP has provided an opinion to the effect that, under
current law, the exercise, sale or lapse of the Rights will have the tax
consequences set forth above. This opinion has been filed as an exhibit to the
Registration Statement, and is subject to the conditions, qualifications and
assumptions set forth therein. 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.
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."
24
<PAGE>
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.
25
<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) (5,596)
Deferred stock compensation expense (1)........................ -- (3,623)
--------- -------
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 $1,647,000 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.
26
<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)
Capitation................ $ 322,233 $ 366,911 $ 425,141 $ 450,964 $ 437,493 $ 339,070 $ 293,085
Copayments,
fee-for-service and
other................... 30,320 35,688 45,742 52,374 58,206 40,295 58,150
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue........... 352,553 402,599 470,883 503,338 495,299 379,365 351,235
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) $ (6.54) $ (9.55) $ (7.74) $ (1.26)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
27
<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 2,996,104
common equivalent shares for all periods presented. Equivalent common shares
include the effect of options to purchase 70,350 shares of Common Stock
granted in September 1996 and options to purchase 39,636 shares of Common
Stock granted in November 1996.
Pursuant to the Commission Staff Account Bulletin Topic 4:D, stock options
granted during the twelve-month period prior to the date of the initial
filing of the Registration Statement have been included in the calculation
of common equivalent shares using the treasury stock method (considering the
assumed proceeds from the stock options and the number of shares that could
have been repurchased using the estimated initial public price) as if the
shares were outstanding for all periods presented, even if the impact of the
incremental shares is anti-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.
28
<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
Capitation................................. 90.3% 89.6% 88.3% 89.4% 83.4
Copayments, fee-for-service and other...... 9.7 10.4 11.7 10.6 16.6
Total 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>
29
<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. See "Business--The Company--Contractual Relationships." 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.
Because a significant portion of the Company's revenue is derived from
capitated payments, and because the Company has in certain cases guaranteed the
obligations of the Talbert Medical Groups, 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 decrease in premiums could result in lower capitation fees being paid
to the Talbert Medical Groups. 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 their effects, such costs may periodically affect the Company's results
of operations.
A typical payor contract includes a direct professional capitation payment
to the Talbert Medical Group as well as a shared risk/incentive program. The
hospital shared risk incentive program is based on actual bed-day utilization
against a negotiated bed-day budget. If the actual bed-day utilization is
favorable to the bed-day budget, a predetermined dollar amount per day is
contributed to the hospital incentive fund. The residual in the fund typically
is shared equally between the hospital and the Company. When the Talbert Medical
Group assumes risk for over-utilization, the Talbert Medical Group's exposure is
usually limited to no more than a maximum of 10% of the deficit in the fund. In
the future, the Company may take additional hospital risk under certain
circumstances when the Company believes it can make sufficient improvements in
bed-day utilization to warrant such risk.
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
therefore 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
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<PAGE>
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, fee-for-service
revenue and other. 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.
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
31
<PAGE>
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
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.
32
<PAGE>
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 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
33
<PAGE>
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.
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's prepaid monthly capitation fees are based on a percentage of
premiums received by the HMO payors, and any decrease in premiums could result
in lower capitation fees paid to the Talbert Medical Groups. 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
New Provider Agreements do not contain any subsidies from FHP, and therefore
will result in lower revenues and higher health care costs per enrollee to the
Company.
In addition, HMO's typically have annual "open enrollment" periods for
commercial customers, during which new members may enroll or existing members
may renew or leave the HMO. Fluctuations in capitated enrollment levels directly
impact the Company's recognized capitated revenue. A substantial portion of
FHP's current commercial membership is subject to open enrollment programs
occurring in January 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 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.
34
<PAGE>
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. See "Relationship with
FHP and PacifiCare Following the Offering--Provider Agreements."
The Company's liquidity requirements are generated principally by its need
to fund future operating losses, projected capital expenditures and anticipated
expansion. 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. 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 revenue
enhancement plans focus on attracting new capitated Medicare and commercial
enrollees by entering into provider agreements with payors other than FHP. To
date, the Company has obtained 13 other provider agreements and in excess of 20
preferred provider organization ("PPO") contracts on behalf of one or more of
the Talbert Medical Groups. See "Business--The Company--Payor Relationships."
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
implemented a new physician compensation program designed to be competitive with
compensation programs in effect in other independent physician group practices.
Physicians no longer receive only fixed salaries. Instead, approximately 20% of
each physician's salary (based on current salary levels) has been placed at
risk. Funds derived from hospital incentives, as well as from reductions in
purchased medical services, are included in an incentive pool. The incentive
pool will be distributed to physicians based on their individual performance as
determined by the Company. Performance criteria include quality of care, patient
satisfaction, cost-effectiveness and other factors. Management believes the
revised physician compensation program will improve the Company's operating
results and align physician incentives with the provision of quality medical
care. The Company expects to further reduce costs by converting to
self-insurance for employees' health insurance as well as converting the
Company's annual contribution under its employee stock ownership plan
(equivalent to two percent of salary) from a fixed basis to a performance basis.
Contributions will be made only if the Company meets its financial goals. The
Company also intends to further reduce its cost of health care by improving its
use of outside specialists and by renegotiating its specialty provider
contracts.
The Company's health care costs fluctuate quarterly based on the overall
health of its patient population. Enrollees, particularly seniors, typically
require more care during the winter months. Quarterly results also may be
affected by significant differences between actual and estimated amounts
receivable or payable for payor "shared risk" arrangements and certain estimated
medical specialty claims liabilities that are adjusted periodically to reflect
actual claims adjustments as they occur.
The Company's facilities costs are primarily governed by the Master Lease
Agreement (as defined herein) with FHP. The Master Lease Agreement will expire
on December 31, 2000, at which time it will be extended at prevailing market
rates 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. See "Relationship with FHP and PacifiCare
following the Offering--Master Lease Agreement." The Company's consolidated
financial statements reflect the Master Lease Agreement as an operating lease.
See "Consolidated Financial Statements--Note 5."
At September 30, 1996, the Company had cash balances of $14.3 million and a
stockholders' deficit of approximately $3.7 million. Prior to the Acquisition,
the Company will receive a Capital Contribution of
35
<PAGE>
approximately $68 million. However, the Company will be required to settle
amounts due to FHP to reimburse FHP for medical service costs paid on behalf of
the Company. This balance will be paid off in its entirety prior to the
Acquisition.
The Company's current liabilities consist of amounts for accrued medical
claims payable attributable to services provided by specialty care physicians
and ancillary provider services. This accrued liability includes claims received
by the Company that have not yet been paid as well as an estimate of costs for
covered medical benefits incurred by enrollees but not yet reported by the
providers. These amounts are not due and payable until after the provider has
presented a claim and are typically paid within 30 to 45 business days after
their receipt. The Company estimates its medical claims liability based upon the
anticipated cost for actual out-of-clinic referrals to the provider specialist
authorized by the Company's utilization management program, plus an estimate of
unknown provider specialty occurrences based upon historical utilization
patterns of the Company's enrollees. See "Risk Factors--Open Enrollment Periods;
Fluctuations in Quarterly Results."
Prior to the Acquisition, TMMC received, in connection with the FHP Merger,
the Capital Contribution of approximately $68 million to increase its net worth
to approximately $59 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.
CAPITAL REQUIREMENTS
The Company has budgeted approximately $5.0 million for information systems
capital expenditures and related activities in 1997. The Company's expansion
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 has not entered into any
agreements, understandings, or arrangements with respect to such acquisitions or
development. As a result, the amount of any funds required to accomplish such
acquisitions or development cannot be accurately predicted. 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. 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."
36
<PAGE>
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
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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 pools 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 pools also provide 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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<PAGE>
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)
- CIGNA (California)
- Foundation Health Corporation (California)
- HMO California (California)
- Health Net (California)
- Maxicare (California)
- PacifiCare California (California)
- Blue Cross (New Mexico)
- AMIL International of Nevada (Nevada)
- Humana (Nevada)
- Blue Cross/Blue Shield of Utah (Utah)
- United Health Plan (Utah)
In addition, TMMC is currently negotiating contracts with a number of other
payors. TMMC has negotiated in excess of 20 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.
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<PAGE>
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 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
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<PAGE>
includes training and support programs to encourage the application of
identified "best medical practices." 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.
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<PAGE>
A typical payor contract includes a direct professional capitation payment
to the Talbert Medical Group as well as a shared risk/incentive program. The
hospital shared risk incentive program is based on actual bed-day utilization
against a negotiated bed-day budget. If the actual bed-day utilization is
favorable to the bed-day budget, a predetermined dollar amount per day is
contributed to the hospital incentive fund. The residual in the fund is
typically shared equally between the hospital and the Company. When the Talbert
Medical Group assumes risk for over-utilization, the Talbert Medical Group's
exposure is usually limited to no more than a maximum of 10% of the deficit in
the fund. In the future, the Company may take additional hospital risk under
certain circumstances when the Company believes it can make sufficent
improvements in bed-day utilization to warrant such risk.
TMMC typically identifies potential payors for the Talbert Medical Groups,
and negotiates and agrees to provider agreements. In certain cases, TMMC has
also guaranteed the obligations of the Talbert Medical Groups under provider
agreements.
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
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. During
the term of the Physician Employment Agreement and for a period of one year
following termination, physicians agree not to practice medicine within a
three-mile radius of their Medical Center. However, there can be no assurance
that such physicians will not attempt to compete with 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 AND CHIEF OF STAFF 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. TMMC and the sole shareholder of each Talbert Medical Group
have entered into agreements appointing the chief of staff of each Talbert
Medical Group (the "Chief of Staff Agreements") that may be unilaterally
terminated by either party upon 10 days notice. The sole shareholder of each
Talbert Medical Group is required to serve as chief of staff, and if terminated,
is obligated to sell his or her shares to a
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designee of TMMC. The Share Control Agreements and Chief of Staff Agreements
therefore allow TMMC to replace unilaterally the sole shareholder/chief of staff
of a Talbert Medical Group.
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 in the geographic markets in which
the Company operates. Among the PPMCs with which the Company competes are
MedPartners/Mullikin, Inc. in California, FPA Medical Management, Inc. in
California and Arizona, and Phycor, Inc. in Utah and Arizona. 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,
including physician practice groups not affiliated with PPMCs and HMOs with
staff model operations. 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 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
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<PAGE>
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 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
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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.
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 for each
of the Talbert Medical Groups. 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.
46
<PAGE>
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,
sub-leased or assigned under an 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.
47
<PAGE>
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................................ 44 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................................. 46 Vice President, Finance, Treasurer and Secretary
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.
48
<PAGE>
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, Treasurer and Secretary 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
49
<PAGE>
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.
KENNETH S. ORD will become a consultant to the Company shortly after the
Effective Time of the FHP Merger. Shortly after completion of the Offering, the
Company anticipates that Mr. Ord will assume the position of Executive Vice
President and Chief Financial Officer of the Company. He is 50 and has been
Senior Vice President and Chief Financial Officer of FHP since 1994. From 1982
to 1994, Mr. Ord was employed by Kelly Services, Inc. in Troy, Michigan, most
recently as Vice President of Finance, Controller and Treasurer.
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.
50
<PAGE>
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 budget, capital resources and financing needs.
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. See "Certain Transactions."
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, 1996, 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 November 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 during the year ended December 31, 1996.
51
<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............................................. 1996 $ 350,000 $ 591,700 $
President and Chief Executive Officer 1995 411,925(6) -- 13,560
Gloria L. Austin.............................................. 1996 210,001 645,280
Senior Vice President 1995 205,502 20,000 12,263
Walter R. Stone............................................... 1996 151,382 258,833
Vice President, Finance, Treasurer and Secretary 1995 148,627 -- 12,074
Jennifer M. Gutzmore, M.D..................................... 1996 200,273 188,578
Vice President, Health Care Services 1995 175,036 3,000 12,325
Gary E. Goldstein, M.D. (5)................................... 1996 191,334 --
Former Senior Vice President 1995 249,995 1,549 13,050
</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) 1995 figures include 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.
(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:
1996--$662, 1995--$1,560; Ms. Austin: 1996-- $386, 1995--$263; Mr. Stone:
1996--$966, 1995--$183; Dr. Gutzmore: 1996--$463, 1995--$325; and Dr.
Goldstein: 1996--$281, 1995--$1,050. Also includes FHP contributions under
the FHP Money Purchase Plan as follows: Mr. Massimino: 1995--$9,000; Ms.
Austin: 1995--$9,000; Mr. Stone: 1995-- $8,918; Dr. Gutzmore: 1995--$9,000;
and Dr. Goldstein: 1995--$9,000 (the FHP Money Purchase Plan was
discontinued as of December 31, 1995, thus no contributions were made after
that date). Also includes FHP contributions under the FHP ESOP as follows:
Mr. Massimino: 1996--$ , 1995--$3,000; Ms. Austin: 1996-- ,
1995--$3,000; Mr. Stone: 1996--$ , 1995--$2,973; Dr. Gutzmore:
1996-- , 1995--$3,000; and Dr. Goldstein: 1996--0, 1995--$3,000. Also
includes FHP contributions under the 401(k) portion of the FHP ESOP Plan as
follows: Mr. Massimino: 1996--$ ; Ms. Austin: 1996-- ; Mr. Stone:
1996-- ; 1995--$500; Dr. Gutzmore: 1996-- ; and Dr. Goldstein:
1996-- , 1995--$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.
The Company anticipates that Kenneth Ord will assume the position of
Executive Vice President and Chief Financial Officer shortly after completion of
the Offering. See "Recent Developments." Mr. Ord served as Senior Vice President
and Chief Financial Officer of FHP during 1996, and received from FHP salary of
$336,265 (see footnote 2 above); bonus of $59,170 (see footnote 3 above); and
other compensation in the amount of $97,724 (representing $95,756 of loan
forgiveness by FHP and $1,968 in dollar value of taxable income from group term
life insurance coverage in excess of $50,000 purchased by FHP);
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<PAGE>
$ in FHP contributions under the FHP ESOP; and $ in FHP
Contributions under the 401(k) portion of the FHP ESOP.
OPTION GRANTS
OPTION GRANTS IN FISCAL YEAR 1996. The following table sets forth the
options granted with respect to the fiscal year ended December 31, 1996 to the
Named Executive Officers. The Company has not granted any stock appreciation
rights.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------------- ------------- --------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jack D. Massimino............... 26,082(2) 33.9% $ 10.00 11/21/2006 $ 979,303 $ 1,709,683
Gloria L. Austin................ 5,353(2) 7.0% 10.00 11/21/2006 200,990 350,891
Walter R. Stone................. 5,353(2) 7.0% 10.00 11/21/2006 200,990 350,891
Jennifer M. Gutzmore, M.D....... 7,500(3) 9.7% 29.17 09/17/2006 137,828 347,852
Gary E. Goldstein, M.D.......... 0 -- -- -- -- --
</TABLE>
- ------------------------
(1) Stock options were granted under the Stock Incentive Plan (see "--Stock
Incentive Plan").
(2) The options vest at the rate of (a) 40% on the date of commencement of
trading of the Common Stock on Nasdaq and (b) 15% per year on each January 1
of the years 2000 through 2003.
(3) The options vest at the rate of (a) 20% on the later of September 17, 1997
or the date of commencement of trading of the Common Stock on Nasdaq and (b)
20% per year on each September 17 of the years 1998 through 2001.
(4) This column shows the hypothetical gains or "option spreads" of the options
granted based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the full 10-year term of the options. The 5% and
10% assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The gains shown are
net of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period, and the date
on which the options are exercised.
53
<PAGE>
OPTION EXERCISES AND YEAR-END HOLDINGS. None of the options held by the
Named Executive Officers were exercisable in 1996. The following table sets
forth information regarding the number and value of options held at the end of
1996 by the Named Executive Officers.
FISCAL YEAR-END 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Jack D. Massimino......................................... 0 26,082 0 $ 499,992
Gloria L. Austin.......................................... 0 5,353 0 102,617
Walter R. Stone........................................... 0 5,353 0 102,617
Jennifer M. Gutzmore, M.D................................. 0 7,500 0 0
Gary E. Goldstein, M.D.................................... 0 0 0 0
</TABLE>
- ------------------------
(1) The amounts set forth represent solely the difference between the estimated
fair value of $29.17 per share of the Common Stock underlying those
unexercised options that had an exercise price below such price (i.e.,
"in-the-money options") and the respective exercise prices of the options.
No assumptions or representations regarding the "value" of such options are
made or intended.
CHANGE IN CONTROL EMPLOYMENT AGREEMENTS
The Company has entered 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
54
<PAGE>
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 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 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
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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 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
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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 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.
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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.
GRANTS TO DATE. As of December 31, 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 (or the date on which the Common Stock begins
trading on a national securities exchange or quotation system) 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
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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).
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
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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 has entered 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 exchanged 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.
The Management Investors will not make capital contributions to the Company
equivalent to the Capital Contribution by FHP. The Company therefore will
recognize stock compensation expense of approximately $5.3 million. See
"Prospectus Summary--Unaudited Pro Forma Condensed Consolidated Financial Data."
The Company has also entered into certain transactions with FHP. See
"Relationship with FHP and PacifiCare Following the Offering."
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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 have entered 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 became effective upon the completion of
the FHP Merger. 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 involve several significant differences from
previous provider agreements with FHP. The New FHP Provider Agreements do not
contain any subsidies from FHP, and therefore will result in lower revenues per
enrollee to the Company. See "Risk Factors--Contracted Rate Decrease." They also
require the Talbert Medical Group to provide additional physician services,
increasing costs per enrollee. See "Prospectus Summary--Unaudited Pro Forma
Condensed Consolidated Financial Data." The New FHP Provider Agreements also
provide for TMMC, as manager of the Talbert Medical Groups, to guarantee the
performance of each of the Talbert Medical Groups. The New FHP Provider
Agreements further 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.
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.
ACQUISITION AGREEMENT
The Company and FHP have entered into a Stock Purchase Agreement pursuant to
which the Company acquired FHP's interest in TMMC and THSC (the "Acquisition
Agreement"). Under the Acquisition Agreement, the Company agreed to 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
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cancellation of any remaining indebtedness under the Talbert Note. As a
condition precedent to the Company's obligations under the Acquisition
Agreement, FHP made the Capital Contribution to TMMC.
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 agreed to
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 a Real Estate and Equipment Master
Transfer Agreement (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 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, provides that the parties will enter into individual
leases with respect to the real estate and equipment subject to the Master Lease
Agreement. The Master Lease Agreement, as amended, also provides for (i) an
original term of the individual leases ending 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)
lease payments at prevailing market rates; (iii) two five-year extension options
at prevailing market rates, exercisable solely at the Company's discretion; (iv)
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
entered into a separate lease agreement with respect to FF&E that will expire in
December 31, 2000.
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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.
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 transfer to the
Company of all assets and liabilities (approximately $6.3 million as of November
30, 1996) 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
(approximately $69 million as of November 30, 1996) 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
(approximately $69.6 million as of November 30, 1996) 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
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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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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of December 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% -- 166,601(7)(8) 5.5%
Gloria L. Austin................... 17,141(4)(6) * -- 18,512(7)(8) *
Walter R. Stone.................... 8,141(4)(6) * -- 10,458(7)(8) *
Jennifer M. Gutzmore, M.D.......... -- * -- 186(7)(8) *
Gary E. Goldstein, M.D............. 3,750(4) * -- 6,573 *
Heine Securities Corporation ...... -- -- -- 283,592(9) 9.5%
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Neuberger & Berman ................ -- -- -- 174,311(10) 6.6%
605 Third Avenue
New York, New York 10158
Jack R. Anderson................... -- -- -- 143,180(7)(11) 4.8%
Richard M. Burdge, Sr.............. -- -- -- 41,396(7)(12) 1.4%
Warner Heineman.................... -- -- -- 1,163(7)(13) *
Van B. Honeycutt................... -- -- -- -- --
Robert W. Jamplis, M.D............. -- -- -- 234(7)(14) *
Robert C. Maxson, Ed.D............. -- -- -- -- --
Joseph F. Prevratil................ -- -- -- 1,728(7)(15) *
Westcott W. Price III.............. 20,250(4) * -- 44,924(7)(16) 1.5%
All executive officers and
directors as
a group (15 persons)............. 205,965(4) 6.8% -- 428,528(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.
(6) Based on beneficial ownership of Common Stock that includes stock options
exercisable within 60 days after December 31, 1996.
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(7) Based on beneficial ownership of FHP Common Stock that includes stock
options exercisable 60 days after December 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; Mr. Stone--2,784; and Dr.
Gutzmore--2,313.
(9) Based on beneficial ownership of 5,678,226 shares of FHP Common Stock and
486,592 shares of FHP Preferred Stock, as reported on Schedule 13F for the
period ended September 30, 1996.
(10) Based on beneficial ownership of a total of 3,529,746 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 has shared investment discretion and no voting authority with respect
to 558,046 shares of FHP Common Stock; (ii) Neuberger & Berman Institutional
Asset Management Division has shared investment discretion and no voting
authority with respect to 613,800 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 829,518 shares of FHP Common Stock and
2,771,794 shares of FHP Preferred Stock as of December 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.
(12) Based on beneficial ownership of 287,630 shares of FHP Common Stock and
742,104 shares of FHP Preferred Stock as of December 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.
(13) Based on beneficial ownership of 24,900 shares of FHP Common Stock as of
December 31, 1996.
(14) Based on beneficial ownership of 5,000 shares of FHP Common Stock as of
December 31, 1996.
(15) Based on beneficial ownership of 37,000 shares of FHP Common Stock as of
December 31, 1996.
(16) Based on beneficial ownership of 528,166 shares of FHP Common Stock as of
December 31, 1996, including shares held under a revocable trust controlled
by Mr. Price.
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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."
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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.
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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
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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.
Approximately 232,500 shares of Common Stock are subject to such rights.
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. The number of shares of Common Stock subject to FHP's
registration rights will depend on the number of shares not subscribed for in
the Offering.
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 and the related financial statement schedule included elsewhere in
the Registration Statement 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
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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 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.
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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. Our audits also included the financial
statement schedule listed in the Index at Item 16(b). These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule 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. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
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 (February , 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 February 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 January 30, 1997 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
January 30, 1997
F-2
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1994 1995 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 5,604
Receivables from FHP........................................ -- -- 4,504
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):
Capitation...................................... $ 425,141 $ 450,964 $ 437,493 $ 339,070 $ 293,085
Copayments, fee-for-service and other........... 45,742 52,374 58,206 40,295 58,150
Total revenue............................... 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) $ (6.54) $ (9.55) $ (7.74) $ (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. In New Mexico, TMMC
directly employs physicians and effectively acts as the Talbert Medical Group
for that state. 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 February 1997
(the "Effective Time").
F-7
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 TMMHC in exchange for
transferable rights to acquire 92.25% 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 21.40635 shares of FHP common stock and one right for every
26.54228 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. In connection with the creation
of TMMC and THSC, twelve individuals, then all FHP or TMMC executives (the
"Management Investors"), purchased, at fair market value, 7.75% of the
outstanding shares of TMMC's common stock and 7.75% of the outstanding shares of
THSC's common stock (the "Management Shares") for an aggregate consideration of
$8,000 pursuant to a Stock Purchase Agreement among FHP, TMMC, THSC and the
Management Investors (the "Management Stock Purchase Agreement"). The Management
Investors have subsequently agreed to exchange their Management Shares in TMMC
and THSC for 7.75% of the common shares of TMMHC, in connection with TMMHC's
acquisition of 92.25% of the common stock of TMMC and THSC from FHP. As a result
of these transactions TMMC and THSC will become wholly-owned subsidiaries of
TMMHC.
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
F-8
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 in
accordance with the Management Stock Purchase Agreement. Also, in accordance
with the Management Stock Purchase Agreement, 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.
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 83%
(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
F-9
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
remaining revenues are largely derived from co-payments and fee-for-service from
such capitated enrollees.
Revenues from hospital incentive funds are included in the Statement of
Operations under "Copayments, fee-for-service and other." Hospital shared risk
incentive programs are based on actual bed-day utilization against a negotiated
bed-day budget. If the actual bed-day utilization is favorable to the bed-day
budget, a predetermined dollar amount per day is contributed by the hospital to
the hospital incentive fund. The residual in the incentive fund typically is
shared equally between the hospital and the Company.
Net revenue includes reserves for uncollectable accounts and professional
fee adjustments and is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. Non-capitated
revenue under certain third-party payor agreements, which is not material in
relation to the Company's statement of operations, 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.
Management believes its reserves for final third-party payor settlements are
adequate.
Health care costs are recorded in the period when services are provided to
HMO members, including the recognition of costs for accrued medical claims
attributable to services provided by specialty care physicians and ancillary
provider services. The accrued medical claims costs include referrals for
outside medical services not provided within the Medical Centers that have been
authorized by the Talbert Medical Group's physicians and have not yet been paid,
as well as an estimate of costs for covered medical benefits incurred by
enrollees but not yet reported by the providers. Medical claims are not due and
payable until the outside provider has presented the claim, which may take 30 to
60 business days from the date of service. Upon receipt of the claim the Company
typically pays the claim within 30 to 45 business days. Until the actual claim
is received and paid, the Company estimates its medical claims liability based
upon the anticipated cost for actual out of clinic referrals to the provider
specialist authorized by the Company's utilization management program, plus an
estimate of unknown provider specialty occurrences based upon historical
utilization patterns of the Company's enrollees. The methods of making such
estimates and for establishing the resulting reserves are continually reviewed
and updated, and any resulting adjustments 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
(Note 4). 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 for each of the Talbert Medical
Groups.
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.
F-10
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
$4,504,000 (unaudited) due from FHP for health care services provided and
estimated accrued incentives.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Hospital incentives............................................................ $ 2,344,000
Earned capitation payments..................................................... 2,160,000
-------------
Total due from FHP........................................................... $ 4,504,000
-------------
-------------
</TABLE>
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>
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
F-11
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-12
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PER SHARE CALCULATIONS
The per share calculations have been computed by dividing net loss by the
weighted average number of common shares and common share equivalents
outstanding during the periods. Common share equivalents included in determining
loss per share include shares issuable upon exercise of stock options.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
Topic 4:D, stock options granted during the twelve-month period prior to the
date of the initial filing of the Registration Statement have been included in
the calculation of common equivalent shares using the treasury stock method
(considering the assumed proceeds from the stock options and the number of
shares that could have been repurchased using the estimated initial public
offering price) as if the shares were outstanding for all periods presented,
even if the impact of the incremental shares is anti-dilutive.
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. Declining enrollment has created excess health care service capacity
and the Company believes additional revenue opportunities can be achieved with
relatively lower allocated incremental cost. Management anticipates that
independence from FHP will make the Talbert Medical Groups more accessible to
other payers and new capitaled enrollers. In addition, management intends to
continue its efforts to reduce operating and overhead costs. The Company's cost
reduction efforts focus primarily on continuing improvements in the cost of
health care and controlling general and administrative costs, including through
the implementation of a new physician compensation system. Management believes
that these plans will provide sufficient additional cash flow to maintain the
Company's operations for the next several years.
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:
F-13
<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)
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.
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, as follows:
a. Revenue -- Actual revenue was applied for California, Utah and
Nevada. For Arizona and New Mexico, the average number of enrollees
per physician multiplied by the actual number of physicians
multiplied by the average capitation rate per enrollee received by
each region respectively was applied to determine the revenue.
b. Expenses -- Actual staff model expenses are applied for California,
Utah and Nevada. Arizona and New Mexico's actual affiliated services
are utilized. Purchased service costs for Arizona and New Mexico are
based upon the historical average percentage of revenues for each
region.
Management believes the amounts allocated to the Company have been
computed on a reasonable and consistent basis.
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. The Company bears no expense for the cost of services related to the
hospitalization of members, which risk is retained by FHP. Accordingly,
the Company's financial statements include only physician-related costs,
for which it has been and continues to be responsible.
6. The historical financial statements include the Company's best estimates
of management information services and certain administrative and
overhead activities provided to the Company by FHP. Management believes
that such amounts approximate the cost of similar services obtained from
an independent party.
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 include the Company's best estimate
of the cost of using the Talbert Medical Centers and related equipment,
furniture and fixtures owned or leased by FHP during all periods
presented. Management believes such usage cost is a reasonable
approximation of the cost of renting similar facilities, equipment,
furniture and fixtures from an independent party.
F-14
<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)
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 2,996,104 common shares outstanding for each of the
periods presented.
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, sublease or
assignment by FHP to 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
F-15
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LEASES (CONTINUED)
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 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>
F-16
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAX BENEFIT (CONTINUED)
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>
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
F-17
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFITS (CONTINUED)
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).
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 90
days after the award date or 60 days after the listing of the Common Stock on a
national security exchange or quotation system, and 25% on each anniversary of
the grant date for the first three
F-18
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFITS (CONTINUED)
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 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 and operating results 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.
F-19
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' DEFICIT (CONTINUED)
Management and other investors (the "Management Investors") own 7.75% of the
Company's 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, FHP
has an option, but not the obligation, to repurchase the restricted shares from
the Management Investor 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 by FHP 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 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.
F-20
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
In the opinion of management, all adjustments necessary to fairly present
the unaudited quarterly information are included for all quarters presented.
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-21
<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............................................................... 19
The Offering.............................................................. 21
Financial Statements...................................................... 24
Use of Proceeds........................................................... 25
Dividend Policy........................................................... 25
Capitalization............................................................ 26
Selected Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 30
Business.................................................................. 37
Management................................................................ 48
Certain Transactions...................................................... 61
Relationship with FHP and PacifiCare Following the Offering............... 62
Principal Stockholders.................................................... 66
Description of Capital Stock.............................................. 68
Legal Matters............................................................. 71
Experts................................................................... 71
Additional Information.................................................... 71
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.......................................... $ 18,031
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."
In connection with the formation of TMMC and THSC, FHP purchased 9,187,500
shares of Common Stock of TMMC for $91,875 and 510 shares of Common Stock of
THSC for $1,010.
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 Rights Agreement dated as of , 1997 between Talbert Medical Management Holdings
Corporation and American Stock Transfer & Trust Company.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
+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.
*4.3 Specimen form of Subscription Certificate.
*4.4 Specimen form of Common Stock Certificate.
++5.1 Opinion of O'Melveny & Myers LLP.
+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 Stock Purchase Agreement dated as of , 1997 between Talbert Medical Management Holdings
Corporation and FHP International Corporation.
+10.4 Standstill Agreement dated as of , 1997 between Talbert Medical Management Holdings
Corporation and FHP International Corporation.
+10.5 Amended and Restated Real Estate and Equipment Master Transfer Agreement dated as of ,
1997 among Talbert Medical Management Corporation, Inc., FHP, Inc., FHP of Utah, Inc. and FHP of New
Mexico, Inc.
+10.6 Letter Agreement among Talbert Medical Management Corporation and FHP, Inc., FHP of Utah, Inc. and FHP
of New Mexico, Inc.
+10.7 Administrative Services Agreement dated as of , 1997 between Talbert Medical Management
Corporation and FHP International Corporation.
+10.8 Employee Benefits and Compensation Allocation Agreement dated as of , 1997 between
Talbert Medical Management Holdings Corporation and FHP International Corporation.
+10.9 Tax Allocation Agreement dated as of , 1997 among Talbert Medical Management Holdings
Corporation, Talbert Medical Management Corporation, Talbert Health Services Corporation and FHP
International Corporation.
+10.10 Allocation of Liabilities and Indemnification Agreement dated as of , 1997 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 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
+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.
*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>
- ------------------------
* Filed herewith.
+ Filed previously.
++ To be filed by amendment.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED 1993, 1994, AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts:
Accounts Receivable............................................ $ 1,994 $ 3,524 $ (500) $ 5,018
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts:
Accounts Receivable............................................ $ 5,018 $ 1,500 $ (1,132) $ 5,386
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts:
Accounts Receivable............................................ $ 5,386 $ 952 $ (860) $ 5,478
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Allowance for doubtful accounts:
Accounts Receivable............................................ $ 5,478 $ 4,119 $ (1,557) $ 8,040
</TABLE>
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
II-4
<PAGE>
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 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.
II-5
<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 30th day of
January, 1997.
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 January 30, 1997 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, Treasurer and Secretary
Walter R. Stone (Principal Financial and Accounting Officer)
*
------------------------------------------- Director
Jack R. Anderson
------------------------------------------- Director
Richard M. Burdge, Sr.
*
------------------------------------------- Director
Warner Heineman
------------------------------------------- Director
Van B. Honeycutt
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
*
------------------------------------------- Director
Robert W. Jamplis, M.D.
*
------------------------------------------- Director
Robert C. Maxson
*
------------------------------------------- Director
Joseph F. Prevratil
*
------------------------------------------- Director
Westcott W. Price III
*By: /s/ JACK D. MASSIMINO
-------------------------------------------
Jack D. Massimino
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
+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 Rights Agreement dated as of , 1997 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.
*4.3 Specimen form of Subscription Certificate.
*4.4 Specimen form of Common Stock Certificate.
++5.1 Opinion of O'Melveny & Myers LLP.
+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 Stock Purchase Agreement dated as of , 1997 between Talbert Medical Management
Holdings Corporation and FHP International Corporation.
+10.4 Standstill Agreement dated as of , 1997 between Talbert Medical Management
Holdings Corporation and FHP International Corporation.
+10.5 Amended and Restated Real Estate and Equipment Master Transfer Agreement dated as of
, 1997 among Talbert Medical Management Corporation, Inc., FHP, Inc., FHP of
Utah, Inc. and FHP of New Mexico, Inc.
+10.6 Letter Agreement among Talbert Medical Management Corporation and FHP, Inc., FHP of Utah, Inc.
and FHP of New Mexico, Inc.
+10.7 Administrative Services Agreement dated as of , 1997 between Talbert Medical
Management Corporation and FHP International Corporation.
+10.8 Employee Benefits and Compensation Allocation Agreement dated as of , 1996
between Talbert Medical Management Holdings Corporation and FHP International Corporation.
+10.9 Tax Allocation Agreement dated as of , 1997 among Talbert Medical Management
Holdings Corporation, Talbert Medical Management Corporation, Talbert Health Services
Corporation and FHP International Corporation.
+10.10 Allocation of Liabilities and Indemnification Agreement dated as of , 1997 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
+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.
*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>
- ------------------------
* Filed herewith.
+ Filed previously.
++ To be filed by amendment.
<PAGE>
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
SUBSCRIPTION CERTIFICATE REPRESENTING RIGHTS TO PURCHASE SHARES OF COMMON STOCK,
$.01 PAR VALUE, OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION ("COMMON
STOCK"). VOID IF NOT VALIDLY EXERCISED BEFORE 5:00 P.M. EASTERN STANDARD TIME ON
FEBRUARY ___, 1997.
THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED
(BUT ONLY INTO CERTIFICATES EVIDENCING A WHOLE NUMBER OF RIGHTS) AT THE OFFICE
OF THE SUBSCRIPTION AGENT.
CONTROL NUMBER
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE COMPANY'S
PROSPECTUS DATED JANUARY ___, 1997 (THE "PROSPECTUS") AND ARE INCORPORATED
HEREIN BY REFERENCE. CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN HAVE THE
MEANINGS ASSIGNED TO THEM IN THE PROSPECTUS. COPIES OF THE PROSPECTUS ARE
AVAILABLE UPON REQUEST FROM AMERICAN STOCK TRANSFER & TRUST COMPANY, THE
SUBSCRIPTION AGENT.
REGISTERED OWNER:
SUBSCRIPTION CERTIFICATE FOR
SHARES
SUBSCRIPTION PRICE: U.S. $21.50 PER SHARE
CUSIP 874121 11 4
The registered owner whose name is inserted hereon, or assigns, is entitled to
subscribe for shares of Common Stock upon the terms and subject to the
conditions set forth in the Prospectus and instructions relating thereto. The
Rights represented by this Subscription Certificate may be exercised by duly
completing Form 1; may be transferred, assigned, exercised or sold through a
bank or broker by completing Form 2; and may be sold through the Subscription
Agent by duly completing Form 3. Special delivery instructions may be specified
by completing Form 4. THE RIGHTS EVIDENCED BY THIS SUBSCRIPTION CERTIFICATE MAY
NOT BE EXERCISED, TRANSFERRED, ASSIGNED OR SOLD UNLESS THE REVERSE SIDE HEREOF
IS SIGNED, WITH A SIGNATURE GUARANTEE, IF APPLICABLE, AND THE APPROPRIATE FORM
IS COMPLETED.
Date:
SECRETARY [SEAL] PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
SUBSCRIPTION AGENT
BY
AUTHORIZED SIGNATURE
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
RIGHTS HOLDERS SHOULD BE AWARE THAT IF THEY CHOOSE TO EXERCISE OR TRANSFER LESS
THAN ALL OF THE RIGHTS EVIDENCED HEREBY, THEY MAY NOT RECEIVE A NEW SUBSCRIPTION
CERTIFICATE IN SUFFICIENT TIME TO EXERCISE THE REMAINING RIGHTS EVIDENCED
THEREBY.
FORM 1 - EXERCISE AND SUBSCRIPTION. The undersigned hereby irrevocably
exercises one or more Rights to subscribe for shares of Common Stock as
indicated below, on the terms and subject to the conditions specified in the
Prospectus, receipt of which is hereby acknowledged. Rights may only be
exercised in whole numbers.
(a) Number of shares subscribed for pursuant to the Basic Subscription
Privilege (one Right needed to subscribe for each full share):
(b) Number of shares subscribed for pursuant to the Additional
Subscription Privilege:
(c) Total Subscription Price (total number of shares subscribed for
pursuant to both the Basic Subscription Privilege and the Additional
Subscription
Privilege - times the Subscription Price of $21.50):
If the amount enclosed or transmitted is not sufficient to pay the
Subscription Price for all shares that are stated to be subscribed for, or if
the number of shares being subscribed for is not specified, the number of shares
subscribed for will be assumed to be the maximum number of whole shares that
could be subscribed for upon payment of such amount. If the number of shares to
be subscribed for pursuant to the Additional Subscription Privilege is not
specified and the amount enclosed or transmitted exceeds the Subscription Price
for all shares represented by this Subscription Certificate (the "Subscription
Excess"), the person subscribing pursuant hereto shall be deemed to have
exercised the Additional Subscription Privilege to purchase, to the extent
available, that number of whole shares of Common Stock equal to the quotient
obtained by dividing the Subscription Excess by $21.50. Any amount remaining
after such division shall be returned to the subscriber without interest or
deduction.
METHOD OF PAYMENT (CHECK ONE)
/ / CHECK, BANK DRAFT OR MONEY ORDER PAYABLE TO AMERICAN STOCK TRANSFER & TRUST
COMPANY, AS SUBSCRIPTION AGENT.
/ / WIRE TRANSFER DIRECT TO AMERICAN STOCK TRANSFER & TRUST COMPANY, ACCOUNT
NO. 323053793, ABA NO. 021 000 121.
(d) If the number of Rights being exercised pursuant to the Basic
Subscription Privilege is less than all of the Rights represented by this
Subscription Certificate (check only one):
/ / DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE
REMAINING RIGHTS TO WHICH I AM ENTITLED.
/ / DELIVER A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING
RIGHTS IN ACCORDANCE WITH MY FORM 2
INSTRUCTIONS (which include any required signature guarantees).
/ / SELL THE REMAINING UNEXERCISED RIGHTS IN ACCORDANCE WITH MY FORM
3 INSTRUCTIONS.
Any request to sell shares in accordance with Form 3 instructions must
be received by the Subscription Agent by 11:00 a.m. 3 business days
prior to the Expiration Date.
/ / CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY DELIVERED TO THE
SUBSCRIPTION AGENT PRIOR TO THE DATE HEREOF AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s) ____________________________________________
Window Ticket Number (if any) _____________________________________________
Date of Execution of Notice of Guaranteed Delivery ________________________
Name of Institution that Guaranteed Delivery ______________________________
FORM 2 - TO TRANSFER YOUR SUBSCRIPTION CERTIFICATE OR SOME OR ALL OF YOUR
RIGHTS OR TO EXERCISE OR SELL RIGHTS THROUGH YOUR BANK OR BROKER: For value
received __________________ Rights represented by this Subscription
Certificate are hereby assigned to (please print name and address and Social
Security No. or Taxpayer ID No. of transferee in full):
Name: ________________________________________________________________________
Address: _____________________________________________________________________
____________________________________________________________ PROVIDE GUARANTEE
____________________________________________________________ OF SIGNATURE(S)
____________________________________________________________ BELOW IF TRANSFEREE
IS NOT A BANK OR
BROKER
Social Security or Taxpayer ID No.: ____________________________________________
/ / FORM 3 - CHECK HERE TO SELL YOUR UNEXERCISED RIGHTS THROUGH SUBSCRIPTION
AGENT: Check box if the undersigned hereby authorizes the Subscription Agent to
sell any Rights represented by this Subscription Certificate but not exercised
hereby and to deliver to the undersigned a check for the net proceeds.
/ / FORM 4 - DELIVERY INSTRUCTIONS: Name and/or address for mailing any stock,
new Subscription Certificate or cash payment if other than shown on the reverse
hereof:
Name: _____________________________________________________ PROVIDE GUARANTEE
Address: _________________________________________________ OF SIGNATURE(S)
___________________________________________________________ BELOW
___________________________________________________________
(Including Zip Code)
- -------------------------------------------------------------------------------
IMPORTANT
RIGHTS HOLDER SIGN HERE
AND, IF RIGHTS ARE BEING SOLD OR EXERCISED,
COMPLETE SUBSTITUTE FORM W-9
_______________________________________________________________________________
_______________________________________________________________________________
signature(s) of Holder(s)
Dated: ________________________________________________________________________
Must be signed by the registered holder(s) exactly as name(s) appear(s) on the
Subscription Certificate. If signature by trustee(s), executor(s),
administrator(s), guardian(s), attorney(s)-in-fact, officer(s) of a corporation
or another acting in a fiduciary or representative capacity, please provide the
following information. See instructions for Forms 1-3.
Name(s)________________________________________________________________________
_______________________________________________________________________________
(Please Print)
Capacity ______________________________________________________________________
Address
______________________________________________________________________________
______________________________________________________________________________
(including zip code)
Area Code and
Telephone Number: ___________________________________________________________
(Home)
_______________________________________________________________________________
(Business)
Tax Identification or
Social Security No. _________________________________________________________
(Complete Substitute Form W-9)
GUARANTEE OF SIGNATURE(S)
See instructions for Forms 2 and 4
Authorized Signature __________________________________________________________
Name: _________________________________________________________________________
Title: _______________________________________________________________________
Name of Firm: _________________________________________________________________
Address: ______________________________________________________________________
Area Code and Telephone Number: ______________________________________________
Dated: ________________________________________________________________________
THE RIGHTS EVIDENCED BY THIS CERTIFICATE EXPIRE AT 5:00 P.M. EASTERN STANDARD
TIME ON FEBRUARY ______________, 1997.
<PAGE>
COMMON STOCK COMMON STOCK
TM
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 874121 10 6
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY PRESIDENT
[SEAL]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ............... Custodian .................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.......................................
in common (State)
UNIF TRF MIN ACT -- ............ Custodian (until age .........)
(Cust)
................... under Uniform Transfers
(Minor)
to Minors Act ............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
______________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________________________
X_________________________________
X_________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By _______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
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
i
<PAGE>
6. OTHER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . 13
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.
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5.2 SPECIAL PERFORMANCE-BASED SHARE AWARDS.
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
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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.
(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.
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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, restrictions 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
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event shall any Award be accelerated as to any Section 16 Person to a date less
than six months after the Award 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
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Corporation as the Corporation may deem necessary or desirable to assure
compliance with all applicable legal requirements.
6.5 TAX WITHHOLDING.
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
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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 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.
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(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 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.
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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.
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.
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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.
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 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
(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 two
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
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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; 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
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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.
(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
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<PAGE>
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 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.
23
<PAGE>
(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.
(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
24
<PAGE>
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
(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.
(ab) "OTHER ELIGIBLE PERSON" shall mean any Non-Employee Director or
any individual consultant or advisor who renders or has rendered
25
<PAGE>
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.
(ac) "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.
(ad) "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.
(ae) "PERFORMANCE GOALS" shall mean EPS or ROE or Cash Flow or Total
Stockholder Return, and "Performance Goals" means any combination thereof.
(af) "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.
(ag) "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.
(ah) "PLAN" shall mean this 1996 Stock Incentive Plan.
(ai) "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.
(aj) "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.
26
<PAGE>
(ak) "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.
(al) "ROE" shall mean consolidated net income of the Corporation (less
preferred dividends), divided by the average consolidated common shareholders
equity.
(am) "RULE 16b-3" shall mean Rule 16b-3 as promulgated by the
Commission pursuant to the Exchange Act, as amended from time to time.
(an) "SECTION 16 PERSON" shall mean a person subject to Section 16(a)
of the Exchange Act.
(ao) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended from time to time.
(ap) "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
change in the Fair Market Value of the Common Stock that is authorized under
this Plan.
(aq) "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.
(ar) "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.
(as) "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.
(at) "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
27
<PAGE>
is adjusted for any changes in equity structure, including but not limited to
stock splits and stock dividends.
28
<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: ______________,
A-1
<PAGE>
199_, __________, 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 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").
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
1
<PAGE>
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. 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 or quotation system and (ii) at the rate of 20% per
annum commencing on the second anniversary of the 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 or quotation system.
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 to 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 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
2
<PAGE>
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 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 Mesa, 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
3
<PAGE>
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 or quotation system. In the
event that the Corporation's Common Stock does not commence trading on a
national securities exchange or quotation system within twelve (12) months from
the Award Date, this Option shall be null and void.
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: President and Chief Executive Officer
EMPLOYEE
____________________________________
(Signature)
____________________________________
(Print Name)
____________________________________
(Address)
____________________________________
(City, State, Zip Code)
4
<PAGE>
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: ______________________, 1997.
____________________________________
Signature of Spouse
5
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
1996 STOCK INCENTIVE PLAN
ELIGIBLE DIRECTOR
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT 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 "Award 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 Award 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 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 (ii) at the rate of
25% per annum commencing on the first anniversary of the Initial Award Date and
each of the next 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.
<PAGE>
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 or quotation system. In the
event that the Corporation's Common Stock does not commence trading on a
national securities or quotation system exchange within twelve (12) months from
the Award 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.
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: President and Chief Executive Officer
DIRECTOR
____________________________________
(Signature)
____________________________________
(Print Name)
____________________________________
(Address)
<PAGE>
____________________________________
(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: ______________________, 1997.
____________________________________
Signature of Spouse
<PAGE>
INDEMNIFICATION AGREEMENT
AGREEMENT, dated as of November 21, 1996, by and between Talbert Medical
Management Holdings Corporation, a Delaware corporation (the "Company"), and
________________ (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available; and
WHEREAS, the Indemnitee is an officer and/or director of the Company; and
WHEREAS, both the Company and the Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors and officers of
public companies in today's environment; and
WHEREAS, the Bylaws of the Company require the Company to indemnify and
advance expenses to its directors and officers and to persons who serve at the
request of the Company as directors and officers of another corporation to the
full extent permitted by law and the Indemnitee has been serving and continues
to serve at the request of the Company, as a director and/or officer of the
Company in part in reliance on such Bylaws; and
WHEREAS, in recognition of the Indemnitee's need for substantial protection
against personal liability in order to enhance the Indemnitee's continued
service to the Company in an effective manner, the increasing difficulty in
obtaining satisfactory director and officer liability insurance coverage and the
Indemnitee's reliance on the aforesaid Bylaws, and in part to provide the
Indemnitee with specific contractual assurance that the protection promised by
such Bylaws will be available to the Indemnitee (regardless of, among other
things, any amendment to or revocation of such Bylaws or any change in the
composition of the Company's Board of Directors or acquisition transaction
relating to the Company), the Company wishes to provide in this Agreement for
the indemnification of and the advancing of expenses to the Indemnitee to the
fullest extent (whether partial or complete) permitted by law and as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of the Indemnitee under the Company's directors' and officers'
liability insurance policies.
NOW, THEREFORE, in consideration of the premises and of the Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
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1. CERTAIN DEFINITIONS:
(a) "CHANGE IN CONTROL" shall be deemed to have occurred if (1) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, (ii) a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
or (iii) FHP International Corporation ("FHP"), if FHP as a result of the rights
offering to purchase the Company's Common Stock being made in connection with
PacifiCare Health Systems, Inc.'s acquisition of FHP and more fully described in
the Form S-1 Registration Statement filed with the Securities and Exchange
Commission on December 11, 1996, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 20% or more of the total voting power represented by
the Company's then outstanding Voting Securities; (2) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period of whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or (3) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all the Company's assets.
(b) "CLAIM" shall mean any threatened, pending or completed action,
suit or proceeding, or any inquiry or investigation, whether instituted by the
Company or any other party, that the Indemnitee in good faith believes might
lead to the institution of any such action, suit or proceeding, whether civil,
criminal, administrative, investigative or other.
(c) "EXPENSES" shall include attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in, any Claim relating to
any Indemnifiable Event.
(d) "INDEMNIFIABLE EVENT" shall mean any event or occurrence related
to the fact that the Indemnitee is or was a director, officer, employee, agent
or fiduciary of the Company, or is or was serving at the request of the Company
as a director, officer, employee, trustee, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise, or by reason of anything done or not done by the Indemnitee in any
such capacity.
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<PAGE>
(e) "INDEPENDENT LEGAL COUNSEL" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or the Indemnitee within
the last five years (other than with respect to matters concerning the rights of
the Indemnitee under this Agreement, or of other indemnities under similar
indemnity agreements).
(f) "POTENTIAL CHANGE IN CONTROL" shall be deemed to have occurred if
(1) the Company enters into an agreement, the consummation of which would result
in the occurrence of a Change in Control; (2) any person (including the Company)
publicly announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control; (3) any person, other than (i)
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company, (ii) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, (iii) FHP, if FHP as a result of the rights
offering to purchase the Company's Common Stock being made in connection with
PacifiCare Health Systems, Inc.'s acquisition of FHP and more fully described in
the Form S-1 Registration Statement filed with the Securities and Exchange
Commission on December 11, 1996, is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 15% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases by three percentage points (3%) or more over the percentage so owned
by such person; or (4) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
(g) "REVIEWING PARTY" shall mean any appropriate person or body
consisting of a member or members of the Company's Board of Directors or any
other person or body appointed by the Board who is not a party to the particular
Claim for which the Indemnitee is seeking indemnification, or Independent Legal
Counsel.
(h) "VOTING SECURITIES" shall mean any securities of the Company
which vote generally in the election of directors.
2. BASIC INDEMNIFICATION ARRANGEMENT. (a) In the event the indemnitee
was, is or becomes a party to or witness or other participant in, or is
threatened to be made a party to or witness or other participant in, a Claim by
reason of (or arising in part out of) an Indemnifiable Event, the Company shall
indemnify the Indemnitee to the fullest extent permitted by law as soon as
practicable but in any event no later than thirty days after written demand is
presented to the Company, against any and all Expenses, judgments, fines,
penalties and amounts paid in settlement (including all interest, assessments
and other charges paid or payable in connection with or in respect of such
Expenses, judgments, fines, penalties or amounts paid in settlement) of such
Claim, except that no indemnification shall be made pursuant to this Agreement
for any Claim by reason of the Indemnitee's liability under Section 16(b) of the
Exchange Act or under federal or state securities laws for "insider trading,"
conduct that is finally adjudged as constituting active or deliberate dishonesty
or willful fraud or illegality, or conduct that is finally adjudged as producing
an unlawful personal benefit. Notwithstanding anything in this Agreement to the
contrary, prior to a Change in Control, the Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by the Indemnitee (other than pursuant to
3
<PAGE>
Section 5 hereof) against the Company or any director or officer of the Company
unless the Board of Directors has authorized or consented to the initiation of
such Claim. If so requested by the Indemnitee, the Company shall advance
(within ten (10) business days of such request) any and all Expenses to the
Indemnitee (an "Expense Advance").
(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that the
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that the Indemnitee would not be permitted
to be so indemnified under applicable law, the Company shall be entitled to be
reimbursed by the Indemnitee (who hereby agrees to reimburse the Company) for
all such amounts theretofore paid; provided, however, that if the Indemnitee has
commenced or thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that the Indemnitee should be indemnified
under applicable law, any determination made by the Reviewing Party that the
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and the Indemnitee shall not be required to reimburse the Company
for any Expense Advance until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed). If there has not been a Change in Control, the Reviewing Party
shall be selected by the Board of Directors, and if there has been such a Change
in Control (other than a Change in Control which has been approved by a majority
of the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 3 hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that the Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, the Indemnitee shall have the right to commence litigation in
any court in the States of California or Delaware having subject matter
jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall
be conclusive and binding on the Company and the Indemnitee.
3. CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), then with respect to all matters thereafter
arising concerning the rights of the Indemnitee to indemnity payments and
Expense Advances under this Agreement or any other agreement or Company Bylaw
now or hereafter in effect relating to Claims for Indemnifiable Events, the
Company shall seek legal advice only from Independent Legal Counsel selected by
the Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and the Indemnitee as to whether and to what
extent the Indemnitee would be permitted to be indemnified under applicable law.
The Company agrees to pay the reasonable fees of the Independent Legal Counsel
referred to
4
<PAGE>
above and to fully indemnify such counsel against any and all expenses
(including attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant thereto.
4. ESTABLISHMENT OF TRUST. In the event of a Potential Change in
Control, the Company shall, upon written request by the Indemnitee, create a
trust for the benefit of the Indemnitee and from time to time upon written
request of the Indemnitee shall fund such trust in an amount sufficient to
satisfy any and all Expenses reasonably anticipated at the time of each such
request to be incurred in connection with investigating, preparing for and
defending any Claim relating to an Indemnifiable Event, and any and all
judgments, fines, penalties and settlement amounts of any and all Claims
relating to an Indemnifiable Event from time to time actually paid or claimed,
reasonably anticipated or proposed to be paid. The amount or amounts to be
deposited in the trust pursuant to the foregoing funding obligation shall be
determined by the Reviewing Party in any case in which the Independent Legal
Counsel referred to above is involved. The terms of the trust shall provide
that upon a Change in Control (i) the trust shall not be revoked or the
principal thereof invaded, without the written consent of the Indemnitee, (ii)
the trustee shall advance, within ten business days of a request by the
Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby
agrees to reimburse the trust under the circumstances under which the Indemnitee
would be required to reimburse the Company under Section 2(b) of this
Agreement), (iii) the trust shall continue to be funded by the Company in
accordance with the funding obligation set forth above, (iv) the trustee shall
promptly pay to the Indemnitee all amounts for which the Indemnitee shall be
entitled to indemnification pursuant to this Agreement or otherwise, and (v) all
unexpended funds in such trust shall revert to the Company upon a final
determination by the Reviewing Party or a court of competent jurisdiction, as
the case may be, that the Indemnitee has been fully indemnified under the terms
of this Agreement. The trustee shall be chosen by the Indemnitee; PROVIDED THAT
neither the Company nor any of its directors or officers may serve as the
trustee. Nothing in this Section 4 shall relieve the Company of any of its
obligations under this Agreement.
5. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify
the Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by the Indemnitee, shall (within ten business days of such request)
advance such expenses to the Indemnitee which are incurred by the Indemnitee in
connection with any action brought by the Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under this Agreement or any other
agreement or Company Bylaw now or hereafter in effect relating to Claims for
Indemnifiable Events and/or (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
the Indemnitee ultimately is determined to be entitled to such indemnification,
advance expense payment or insurance recovery, as the case may be.
6. PARTIAL INDEMNITY, ETC. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of a Claim but not, however, for all of the total amount thereof, the
Company shall nevertheless indemnify the Indemnitee for the portion thereof to
which the Indemnitee is entitled. Moreover, notwithstanding any other provision
of this
5
<PAGE>
Agreement, to the extent that the Indemnitee has been successful on the merits
or otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, the Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
7. BURDEN OF PROOF. In connection with any determination by the
Reviewing Party or otherwise as to whether the Indemnitee is entitled to be
indemnified hereunder the burden of proof shall be on the Company to establish
that the Indemnitee is not so entitled.
8. NO PRESUMPTIONS. For purposes of this Agreement, the termination of
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that the
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law. In addition, neither the failure of the Reviewing
Party to have made a determination as to whether the Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
determination by the Reviewing Party that the Indemnitee has not met such
standard of conduct or did not have such belief, prior to the commencement of
legal proceedings by the Indemnitee to secure a judicial determination that the
Indemnitee should be indemnified under applicable law shall be a defense to the
Indemnitee's claim or create a presumption that the Indemnitee has not met any
particular standard of conduct or did not have any particular belief.
9. NONEXCLUSIVITY, ETC. The rights of the Indemnitee hereunder shall be
in addition to any other rights the Indemnitee may have under the Company's
Bylaws or the Delaware General Corporation Law or otherwise. To the extent that
a change in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's Bylaws and this Agreement, it is the intent of the
parties hereto that the Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
10. LIABILITY INSURANCE. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance, the
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
11. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against the
Indemnitee, the Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
12. AMENDMENTS, ETC. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the
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provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.
13. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
14. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against the
Indemnitee to the extent the Indemnitee has otherwise actually received payment
(under any insurance policy, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
15. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation, liquidation or otherwise)
to all, substantially all, or a substantial part, of the business and/or assets
of the Company, by written agreement in form and substance satisfactory to the
Indemnitee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. This Agreement shall continue in effect
regardless of whether the Indemnitee continues to serve as an officer or
director of the Company or of any other enterprise at the Company's request.
16. SEVERABILITY. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) is held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such provision in every other respect and
of the remaining provisions hereof shall not be in any way impaired and shall
remain enforceable to the fullest extent permitted by law.
17. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
18. EFFECTIVENESS. This Agreement shall become effective only if FHP
holds less than 50% of the Company's Common Stock upon completion of the rights
offering to purchase the Company's Common Stock being made in connection with
PacifiCare Health Systems, Inc.'s acquisition of FHP and more fully described in
the Form S-1 Registration Statement filed with the Securities and Exchange
Commission on December 11, 1996.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of November 21, 1996.
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
By:
-------------------------------------------
Name: Jack D. Massimino
Title: President and Chief Executive Officer
-----------------------------------------------
Indemnitee
8
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT by and between Talbert Medical Management Holdings Corporation, a
Delaware corporation (the "Company") and ____________________ (the "Executive"),
dated as of the 7th day of January, 1997. For all purposes of this Agreement,
employment with the Company shall include employment with any of its affiliated
companies.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS.
(a) The "Effective Date" shall mean the first date during the Change
of Control Period (as defined in Section 1(b)) on which a Change of Control (as
defined in Section 2) occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's employment
with the Company is terminated prior to the date on which the Change of Control
occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the second anniversary of the date hereof.
(c) A "Hostile Change in Control" shall mean a change of control that
results from an unsolicited proposal that is not approved by a majority of the
Continuing Directors (as defined below) prior to disclosure of such proposal for
a Change in Control or if such disclosure is made without the prior approval of
a majority of the disinterested directors. Any reference in this Agreement to a
Change in Control includes any Hostile Change in Control unless specifically
noted otherwise.
(d) A "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
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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.
(e) "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 defined below), as in effect as of the date hereof.
2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of
Control" shall mean:
(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")) (an "Acquiring 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 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 2; or (v) any
acquisition by FHP International Corporation ("FHP") as a result of the rights
offering to purchase the Company's Common Stock being made in connection with
PacifiCare Health Systems, Inc.'s acquisition of FHP and more fully described in
the Form S-1 Registration Statement filed with the Securities and Exchange
Commission on December 11, 1996, (the "Rights Offering"), 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 an Acquiring 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
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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 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; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on either (i) the third anniversary
of such date if such Effective Date is triggered by a Hostile Change of Control
or (ii) the second anniversary of such date if such Effective Date is triggered
by a Change in Control that is not hostile (the "Employment Period").
4. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES.
(i) During the Employment Period, the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate
in all material respects with the most significant of those held,
exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the
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Company and, to the extent necessary to discharge the responsibilities
assigned to the Executive hereunder, to use the Executive's reasonable
best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a
violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver
lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in
accordance with this Agreement. To the extent that any such
activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with the
performance of the Executive's responsibilities to the Company.
(b) COMPENSATION.
(i) BASE SALARY. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the
highest monthly base salary paid or payable, including any base salary
which has been earned but deferred, to the Executive by the Company
and its affiliated companies in respect of the twelve-month period
immediately preceding the month in which the Effective Date occurs.
During the Employment Period, the Annual Base Salary shall be reviewed
no more than 12 months after the last salary increase awarded to the
Executive prior to the Effective Date and thereafter at least
annually. Any increase in Annual Base Salary shall not serve to limit
or reduce any other obligation to the Executive under this Agreement.
Annual Base Salary shall not be reduced after any such increase and
the term Annual Base Salary as utilized in this Agreement shall refer
to Annual Base Salary as so increased. As used in this Agreement, the
term "affiliated companies" shall include any company controlled by,
controlling or under common control with the Company.
(ii) OTHER BENEFITS. During the Employment Period, the
Executive shall be entitled to participate in all incentive, savings,
retirement, welfare benefit, vacation and sick leave plans, practices,
policies and programs applicable generally to other peer executives of
the Company and its affiliated companies.
5. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In
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such event, the Executive's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by the Executive (the
"Disability Effective Date"), provided that, within the 30 days after such
receipt, the Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" shall mean the
absence of the Executive from the Executive's duties with the Company on a full-
time basis for 180 consecutive business days as a result of incapacity due to
mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative.
(b) CAUSE. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one
of its affiliates (other than any such failure resulting from
incapacity due to physical or mental illness), after a written demand
for substantial performance is delivered to the Executive by the Board
or the Chief Executive Officer of the Company which specifically
identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the
Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) GOOD REASON. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
5
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(i) the assignment to the Executive of any duties inconsistent
in any material respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by Section 4(a) of this Agreement,
or any other action by the Company which results in material
diminution in such position, authority, duties or responsibilities;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(iv) any failure by the Company to comply with and satisfy
Section 10(c) of this Agreement.
For purposes of this Section 5(c), any controversy or claim arising out of or
relating to any determination of "Good Reason" made by the Executive shall be
settled by arbitration in Orange County, California, in accordance with the
following:
(v) Each party shall appoint its own arbitrator and the two
arbitrators shall choose a third, impartial arbitrator as umpire
before the date set for the hearing. If a party fails to appoint its
arbitrator within 30 days after have either received or given the
notice requesting arbitration, the other shall appoint the second
arbitrator. If the two arbitrators fail to appoint the umpire without
30 days after their appointments, either party may apply to the Orange
County Superior Court of the State of California to appoint an
impartial umpire. The umpire shall promptly notify all parties to the
arbitration of his selection.
(vi) The arbitration shall be conducted pursuant to the
provisions of the California Code of Civil Procedure, including the
rules pertaining to discovery.
(vii) Within a reasonable time after completion of the
arbitration, the arbitrators shall prepare a written opinion, a copy
of which shall be provided to each party.
(viii) The parties shall share equally the expenses of
arbitration, including the arbitrator's fee, provided, however, that
the arbitrators, in their discretion, may award costs to the
prevailing party.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(c) of
this Agreement. For purposes of this Agreement,
6
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a "Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive's employment under the
provision so indicated and (iii) if the Date of Termination (as defined below)
is other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than thirty days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) DATE OF TERMINATION. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination, and (iii) if the Executive's employment is
terminated by reason of Death or Disability, the Date of Termination shall be
the date of Death of the Executive or the Disability Effective Date, as the case
may be.
6. OBLIGATIONS OF THE COMPANY OR EXECUTIVE UPON TERMINATION.
(a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause, Death or Disability or the Executive shall
terminate employment for Good Reason, such termination, for purposes of this
Section 6(a), shall constitute separation from, and cessation of duties for, the
Company as of the Date of Termination. Under such circumstances, the Company
shall pay to the Executive the following payments and benefits:
(i) Bi-weekly salary continuation at the Executive's Annual Base
Salary as if the Executive had remained employed through the end of
the Employment Period; and
(ii) Medical and Dental Coverage continuation as if the Executive
had remained employed through the end of the Employment Period at the
Executive's benefit level as of the Date of Termination;
(iii) Life Insurance Coverage continuation through the end of the
Employment Period at the Executive's current benefit level as of the
Date of Termination;
(iv) Outplacement services consistent with the Company's
outplacement policy for a person at the Executive's job classification
and/or grade level;
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<PAGE>
(v) A payment on the last day of the Employment Period in an
amount equal to the sum of (A) the additional contributions that would
have been allocated to Executive's accounts under the Talbert Medical
Management Holdings Corporation Employee Stock Ownership Plan (the
"ESOP") and the Talbert Medical Management Holdings Corporation Money
Purchase Pension Plan if the Executive had remained employed through
the end of the Employment Period and deferred the maximum pretax
deferral allowed under the terms of the ESOP (after the application of
the limitations on deferrals set forth in the ESOP) and (B) the amount
of any benefits under the ESOP which were forfeited upon termination
of employment but which would have become vested if the Executive had
remained employed through the end of the Employment Period;
(vi) Payment within 30 days of the Date of Termination of all
accrued vacation, holiday and personal leave days as of the Date of
Termination; and
(vii) Payment of any incentive compensation that Executive would
have earned if Executive had remained employed through the end of the
Employment Period under, and in accordance with the terms of, any
applicable incentive compensation plan.
The Company reserves the right to deduct from any applicable sum those
amounts required by law. Any monies owed to the Company by Executive may be
deducted from the Amounts payable pursuant to this Section 6(a). All accruals
of vacation, holiday and personal leave days shall end effective the Date of
Termination. The payments called for in this Section 6(a) shall be in lieu of
and discharge any obligations of Company to Executive for compensation, accrued
vacation, accrued personal leave days, accrued holidays, incentive compensation,
car allowances or any other expectations of remuneration or benefit on the part
of the Executive.
(b) DEATH. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of accrued obligations and the
timely payment or provision of other benefits under any plan, program, policy or
practice of the Company in accordance with the terms of such plan, program,
policy or practice (the "Other Benefits"). Accrued obligations shall be paid to
the Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the Date of Termination.
(c) DISABILITY. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of accrued obligations and the timely payment or provision of Other Benefits.
Accrued obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.
(d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without
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<PAGE>
further obligations to the Executive other than the obligation to pay to the
Executive (x) his Annual Base Salary through the Date of Termination, (y) the
amount of any compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the Executive
voluntarily terminates employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for accrued obligations and the timely
payment or provision of Other Benefits. In such case, all accrued obligations
shall be paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination.
(e) ACCELERATION OF OPTIONS. The Board of Directors has determined
that the events described in Section 2 hereof will constitute a "Change of
Control of the Company" for purposes of Section 6.2(b) of the Incentive Plan (as
defined below). Therefore, if the Executive's employment is terminated other
than voluntarily or for Cause, Death or Disability prior to the end of the
Employment Period, then, subject to Section 11 of this Agreement, all of the
Executive's outstanding Options under, and as defined in, the Talbert Medical
Management Holdings Corporation 1996 Stock Incentive Plan (the "Incentive Plan")
which have not otherwise become exercisable shall become immediately exercisable
in full on the Date of Termination, and all substantial risks of forfeiture and
restrictions on transfer relating to any of the Executive's shares of Restricted
Stock under, and as defined in, the Incentive Plan shall be terminated on the
Date of Termination. For purposes of this provision, any termination of the
Executive's employment other than voluntarily or for Cause, Death or Disability
shall be deemed to be a termination for the convenience of the Board;
accordingly, any Option granted to the Executive which are or become exercisable
as of the Date of Termination shall terminate 90 days after the Date of
Termination.
(f) DUTY TO COOPERATE. During the Employment Period and thereafter,
Executive agrees to cooperate with and assist the Company, upon reasonable
notice, in the defense of any litigation or governmental investigation arising
from events which occurred while Executive was employed by the Company. Such
cooperation and assistance shall include, but not be limited to, Executive's
full participation in locating, producing, collecting, analyzing and preparing
documents and other informational materials; in preparing for and participating
in depositions, hearings and trials; and in responding to document production
requests, interrogatories, and other discovery. If it becomes necessary for
Executive to testify in any judicial or administrative proceedings, the Company
shall reimburse Executive for any reasonable travel expenses (including
transportation, food and lodging) which are incurred (or are to be incurred) in
connection with such testimony (including preparation therefor). The Company
shall not be required to pay Executive any additional consideration, including,
but not limited to, consulting or witness fees, in connection with any
cooperation, assistance or testimony required of or provided by Executive
pursuant to this Agreement. In addition, from the Date of Termination to the
end of the Employment Period, the Executive shall devote a reasonable amount of
time cooperating with and assisting the Company in maintaining and improving its
relationships with its customers.
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7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated companies at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
8. FULL SETTLEMENT. Except as stated herein, the Company's obligation to
make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may have
against the Executive or others. In no event shall the Executive be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement
and such amounts shall not be reduced whether or not the Executive obtains other
employment.
9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it.
10. SUCCESSORS. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(a) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(b) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken
10
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place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
11. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.
(a) Notwithstanding anything to the contrary in Section 6 of this
Agreement or the Incentive Plan (as defined in Section 6(e) above), in no event
shall (1) Options and Stock Appreciation become immediately exercisable (2) the
risks of forfeiture and restrictions relating to Restricted Stock terminate or
(3) Performance Share Awards become payable under the Incentive Plan upon the
Executive's Date of Termination if such acceleration would (i) cause any payment
made to the Executive, whether pursuant to the terms of this Agreement or
otherwise (a "Payment") to constitute an "excess parachute payment" within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), or (ii) disqualify the transaction constituting the Change of Control
from being accounted for as a "pooling of interests" within the meaning of APB
No. 16, which would qualify for such accounting treatment in the absence of such
acceleration (the "Disqualification"). In the event acceleration of any Options
would cause any Payment to constitute an excess parachute payment, or would
cause a Disqualification, the Compensation Committee of the Company's Board of
Directors shall select the Options which shall remain unexercisable so that no
Payment shall constitute an excess parachute payment and/or no Disqualification
shall occur. Any Options which remain unexercisable upon the Executive's Date
of Termination by reason of this Section 11(a) shall become exercisable as set
forth in Section 11(c) below. Any shares of Restricted Stock or Performance
Share Awards which do not become vested by reason of this Section 11(a) shall be
forfeited upon the Executive's Date of Termination.
(b) All determinations required to be made under this Section 11 as
to whether a Payment or benefit would be deductible by the Company shall be made
by the Company's independent auditors (the "Accounting Firm") which shall
provide detailed supporting information both to the Company and the Executive
within 30 business days following the Date of Termination or such earlier time
as is requested by the Company. A determination as to whether a
Disqualification would occur shall be made by the Accounting Firm at least 10
days prior to a Change of Control. Any such determination by the Accounting
Firm shall be binding upon the Company and the Executive.
(c) PROVIDED that within 30 days after the Date of Termination (i)
the Executive shall have executed and delivered to the Company a Covenant Not to
Compete during the Employment Period in the form of EXHIBIT "A" hereto and (ii)
the Executive shall have executed and delivered to the Company a Settlement and
Release Agreement in the form of "EXHIBIT "B" hereto in the manner specified
therein, THEN: If the Executive's employment is terminated other than
voluntarily or for Cause, Death or Disability prior to the end of the Employment
Period, each of the Executive's outstanding Options which shall not otherwise
have become exercisable shall become exercisable in such manner and at such
times as the Options would have become exercisable if the
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Executive had not terminated employment and shall remain exercisable until the
earlier of the date which is 90 days following the date on which the Options
first becomes exercisable or the original expiration date of the Options.
Calculation of the number of Options that become immediately exercisable under
Section 11(a) shall be made independently of this Section 11(c).
12. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
IF TO THE EXECUTIVE:
________________________
________________________
________________________
IF TO THE COMPANY:
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, California 92626
Attention: President
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) As stated, the Company may withhold from any amounts payable
under this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may
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have hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 5(c)(i)-(iv) of this
Agreement, shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in which case
the Executive shall have no further rights under this Agreement.
(g) From and after the Effective Date, this Agreement shall supersede
any other agreement between the parties with respect to the subject matter
hereof entered into prior to the date hereof.
(h) This Agreement shall be void and without further force and effect
unless executed and delivered by the Executive to Russell D. Phillips, Jr.,
Assistant Secretary of the Company, at least 48 hours prior to the Effective
Time of the merger contemplated by the 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, dated as of November 11,
1996.
(i) This Agreement shall be void and without further force and effect
if FHP holds in excess of 50% of the Company's Common Stock as a result of the
Rights Offering.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
TALBERT MEDICAL MANAGEMENT HOLDINGS
CORPORATION
-----------------------------------------------
By: Jack D. Massimino
Its: President and Chief Executive Officer
------------------------------------------------
Executive
<PAGE>
COVENANT NOT TO COMPETE
This COVENANT NOT TO COMPETE, is entered into as of ____________, 1997
(the "Agreement"), is made by and between Talbert Medical Management Holdings
Corporation, a Delaware corporation (the "Company"), and _____________________
("Executive") pursuant to the Employment Agreement between them dated as of the
7th day of January, 1997 (the "Employment Agreement"). Defined terms not
defined herein shall have the meanings assigned to them in the Employment
Agreement.
WHEREAS, the Company desires the benefits of the continued services of the
Executive, and the Executive is willing to render such services, pursuant and
subject to the terms and conditions of the Employment Agreement; and
WHEREAS, Executive desires the benefits of Section 11(c) of the Employment
Agreement and in consideration thereof desires to execute and deliver this
Agreement in accordance therewith.
NOW, THEREFORE, in consideration of the promises and the covenants and
agreements contained herein, the parties hereto agree as follows:
1. COVENANT NOT TO COMPETE. Until the earlier of the expiration of the
Employment Period or the expiration of 30 days following Executive's Date
of Termination without execution and delivery by Executive of a Settlement
and Release Agreement as provided in Section 11(c) of the Employment
Agreement, Executive shall not, directly or indirectly, as principal,
employee, agent, independent contractor, proprietor, partner, or otherwise,
operate, own, manage, control, or participate in conducting the same
business in the same cities and counties as carried on by the Company in
the State of California at the Effective Date, if in so doing Executive
personally carries on activities substantially the same in all material
respects as the activities carried on by Executive as an officer and
employee of the Company at the Effective Date.
2. REASONABLENESS OF COVENANT. Executive has carefully considered the nature
and extent of the restrictions upon Executive and the rights and remedies
conferred upon Company under this Agreement, and hereby acknowledges and
agrees that such covenants are reasonable, are designed to prevent
irreparable damage to Company, are required to protect Company's legitimate
interests, and do not confer a benefit upon Company disproportionate to the
detriment of Executive.
3. NO WAIVER. No waiver of any of the provisions herein shall be valid unless
in writing signed by the party against whom such claimed waiver is sought
to be enforced, nor shall a failure to enforce any right hereunder
constitute a continuing waiver of the notice or a waiver of any other right
hereunder. The failure of the Company at any time or from time
"EXHIBIT A"
<PAGE>
to time to require performance of any of Executive's obligations hereunder
shall in no manner affect the Company's right to enforce any provision of
this Agreement at a subsequent time.
4. SEVERABILITY. In the event that any provision or portion of this Agreement
be found by a court of competent jurisdiction to be invalid or
unenforceable, this Agreement shall be deemed to be amended so as to delete
only the invalid or unenforceable provision, or the invalid or
unenforceable portion thereof, and the remaining provisions hereof shall
remain in full force and effect.
5. SUCCESSORS. This Agreement shall inure to the benefit of, and be binding
upon the parties, their heirs, executors, administrators, successors and
assigns.
6. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of California, without reference to
principles of conflicts of laws.
7. COUNTERPARTS. This Agreement 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 Agreement as
of the date first above mentioned.
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
By:
------------------------------------------
Jack D. Massimino
President and Chief Executive Officer
---------------------------------------------
Executive
<PAGE>
SETTLEMENT AGREEMENT AND RELEASE
This SETTLEMENT AGREEMENT AND RELEASE ("Agreement") is entered into by and
between ____________________ ("Executive") and Talbert Medical Management
Holdings Corporation, a Delaware corporation (the "Company"), pursuant to the
EMPLOYMENT AGREEMENT between them dated as of the 7th day of January, 1997 (the
"Employment Agreement").
WHEREAS, the employment of Executive by the Company terminated
__________________ (the "Termination Date"); and
WHEREAS, Executive desires the benefits of Section 11(c) of the Employment
Agreement and in consideration thereof desires to execute and deliver this
Agreement in accordance therewith.
NOW, THEREFORE, in consideration of the promises and the covenants and
agreements contained herein, the parties hereto agree as follows:
1. RELEASE. In consideration of the above, the sufficiency of which
Executive hereby acknowledges, and subject to the proviso hereinafter set forth,
Executive hereby agrees not to sue and fully, finally, completely and generally
releases, absolves and discharges the Company, its predecessors, successors,
subsidiaries, parents, related companies and business concerns, affiliates,
partners, trustees, directors, officers, agents, attorneys, servants,
representatives and employees, past and present, and each of them (hereinafter
collectively referred to as "Releasees") from any and all claims, demands,
liens, agreements, contracts, covenants, actions, suits, causes of action,
grievances, arbitrations, unfair labor practice charges, wages, vacation
payments, severance payments, obligations, commissions, overtime payments,
Workers' Compensation claims, debts, profit sharing or bonus claims, expenses,
damages, judgments, orders and/or liabilities of whatever kind or nature in law,
equity or otherwise, whether known or unknown to Executive, which Executive now
owns or holds or has at any time owned or held as against Releasees, or any of
them ("Claims"), including specifically but not exclusively and without limiting
the generality of the foregoing, any and all Claims arising out of or in any way
connected to Executive's employment with or separation of employment from
Executive including any Claims based on contract, tort, wrongful discharge,
fraud, breach of fiduciary duty, attorneys' fees and costs, discrimination in
employment, any and all acts or omissions in contravention of any federal or
state laws or statutes (including but not limited to federal or state securities
laws and the Racketeer Influenced and Corrupt Organizations Act), and any right
to recovery based on state or federal age, sex, pregnancy, race, color, national
origin, marital status, religion, veteran status, disability, sexual
orientation, medical condition, union affiliation or other anti-discrimination
laws, including, without limitation, Title VII, the Age Discrimination in
Employment Act, the Americans with Disabilities Act, the National Labor
Relations Act, and the California Fair Employment and Housing Act, all as
amended, whether such claim be based upon
"EXHIBIT B"
<PAGE>
an action filed by Executive or by a governmental agency; PROVIDED, HOWEVER, the
foregoing release shall not affect or diminish any rights of Executive under the
Employment Agreement or in respect of vested employee benefits. "Vested
employee benefits" means any and all rights of Executive under or in respect of
(i) any employee benefit plan of the Company or any corporation or other entity
which controlling, controlled by or under common control with the Company or
that is a Releasee ("Affiliated Company"), (ii) any option or other agreement
relating to any right or interest of Executive in any stock or other securities
of the Company or any Affiliated Company, (iii) salary or wages payable for
services rendered before the Termination Date, (iv) reimbursement for business
expenses or other amounts for which Executive is entitled to reimbursement by
the Company immediately before the Termination Date, or (v) indemnification as
an agent.
(a) Executive acknowledges and agrees that neither anything in this
Agreement or the offer, execution, delivery, or acceptance thereof shall be
construed as an admission of any kind by the Company, and this Agreement shall
not be admissible as evidence in any proceeding except to enforce this
Agreement.
(b) It is the intention of Executive in executing this instrument
that it shall be effective as a bar to each and every claim, demand, grievance
and cause of action hereinabove specified as being released. In furtherance of
this intention, Executive hereby expressly consents that this Agreement shall be
given full force and effect according to each and all of its express terms and
provisions, including those relating to unknown and unsuspected claims, demands
and causes of action, if any, as well as those relating to any other claims,
demand and causes of action hereinabove specified, and elects to assume all
risks for claims that now exist in Executive's favor, known or unknown, that are
released under this Agreement. Executive acknowledges that Executive may
hereafter discover facts different from, or in addition to, those Executive now
knows or believes to be true with respect to the claims, demands, liens,
agreements, contracts, covenants, actions, suits, causes of action, wages,
obligations, debts, expenses, damages, judgments, orders and liabilities herein
released, and agrees the release herein shall be and remain in effect in all
respects as a complete and general release as to all matters released herein,
notwithstanding any such different or additional facts.
(c) If any provision of this Agreement or application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provision or
application. To this end, the provisions of this Agreement are severable.
(d) Executive represents and warrants that Executive has not
heretofore assigned or transferred or purported to assign or transfer to any
person, firm or corporation any claim, demand, right, damage, liability, debt,
account, action, cause of action, or any other matter herein released.
(e) NOTICE TO EXECUTIVE: The law requires that Executive be advised
and the Company hereby advises Executive to consult with an attorney and discuss
this Agreement before executing it. Executive acknowledges that the Company has
provided to Executive at least 21 days within which to review and consider this
Agreement before signing it.
<PAGE>
If Executive decides not to use the full 21 days, then Executive knowingly and
voluntarily waives any claims that Executive was not in fact given that period
of time or did not use the entire 21 days to consult an attorney and/or consider
this Agreement. Executive acknowledges that Executive may revoke this Agreement
for up to seven calendar days following Executive's execution of this Agreement
and that it shall not become effective or enforceable until the revocation
period has expired. Executive further acknowledges and agrees that such
revocation must be in writing addressed to the Company as follows: Talbert
Medical Management Holdings Corporation, 3540 Howard Way, Costa Mesa, California
92626-1417, Attn: President, and received by the Company as so addressed not
later than midnight on the seventh day following execution of this Agreement by
Executive. If Executive so revokes this Agreement, the Agreement shall not be
effective or enforceable and Executive will not receive the benefits described
above. If Executive does not revoke this Agreement in the time frame specified
above, the Agreement shall become effective at 12:00:01 on the eighth day after
it is signed by Executive.
(f) Executive represents that Executive has read and understood the
foregoing Agreement, has been advised to and has had the opportunity to discuss
it with anyone he or she desires, including an attorney of his or her own
choice, and Executive accepts and agrees to the terms of this Agreement,
acknowledges receipt of a copy of the same and the sufficiency of the benefits
described above, and hereby executes this Agreement voluntarily and with full
understanding of its consequences.
PLEASE READ CAREFULLY. THIS AGREEMENT CONTAINS A GENERAL RELEASE OF
ALL KNOWN AND UNKNOWN CLAIMS.
Date:_______________, 199__ Executive:
----------------------------------------
Date:_______________, 199__ Talbert Medical Management
Holdings Corporation
By:
------------------------------------------
Its:
-----------------------------------------
<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.
3
<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.
3
<PAGE>
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:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
TALBERT MEDICAL MANAGEMENT CORPORATION
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
---------------------------------------
[Shareholder]
4
<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.......................... (4) (4) (4) (4) (4)
---------- ---------- ---------- ---------- ---------
Total shares....................................... 2,996 2,996 2,996 2,996 2,996
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Primary and fully diluted loss per
common and common equivalent share.................... $ (4.48) $ (6.54) $ (9.55) $ (7.74) $ (1.26)
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
