<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1997
REGISTRATION NO. 333-17679
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
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
--------------------------
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. / /
--------------------------
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
2,772,000 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 92.4% 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 1:55 p.m., Eastern Standard Time, on February 14, 1997. FHP stockholders
will receive one Right for every 21.19154 shares of FHP Common Stock and one
Right for every 26.27752 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 $59.6 million. Proceeds of the
Offering will be used to repay indebtedness to FHP of approximately $59.6
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 FHP 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 Daylight Time, on May , 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 13 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.
------------------------
FEDERAL AND CERTAIN STATE LAWS PROHIBIT THE COMPANY FROM BILLING FOR BUSINESS
REFERRED TO THE COMPANY BY A PHYSICIAN IF THE PHYSICIAN OR ANY OF THE
PHYSICIAN'S IMMEDIATE FAMILY MEMBERS HAVE CERTAIN PROSCRIBED SPECIAL
RELATIONSHIPS WITH THE COMPANY, INCLUDING OWNERSHIP OF ITS COMMON STOCK.
ACCORDINGLY, A PHYSICIAN WHO IS REFERRING BUSINESS TO THE COMPANY, OR
A PERSON WHO IS AN IMMEDIATE FAMILY MEMBER OF SUCH A PHYSICIAN,
SHOULD NOT PURCHASE SHARES OF THE COMPANY'S COMMON STOCK. SEE
"BUSINESS--GOVERNMENT REGULATION."
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC COMPANY(1)
<S> <C> <C>
Per Share........................................................................... $21.50 $21.50
Total............................................................................... $59,598,000 $59,598,000
</TABLE>
(1) Does not include expenses of the Offering payable by FHP estimated at
approximately $1.9 million.
------------------------
The date of this Prospectus is April , 1997
<PAGE>
TALBERT MEDICAL CENTERS
THE COMPANY, THROUGH ITS WHOLLY-OWNED SUBSIDIARY, TALBERT MEDICAL MANAGEMENT
CORPORATION ("TMMC"), ORGANIZES AND MANAGES PHYSICIAN AND DENTIST PRACTICE
GROUPS (THE "TALBERT MEDICAL GROUPS") THAT CONTRACT WITH HEALTH MAINTENANCE
ORGANIZATIONS AND OTHER PAYORS TO PROVIDE HEALTH CARE SERVICES TO THEIR MEMBERS.
THE TALBERT MEDICAL GROUPS INCLUDE A NUMBER OF MEDICAL PROFESSIONAL CORPORATIONS
THAT ARE LEGALLY DISTINCT FROM TMMC. 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 FACILITATES THE DELIVERY OF
MEDICAL CARE BY PROVIDING PRACTICE MANAGEMENT SERVICES. TMMC DOES NOT ENGAGE
DIRECTLY IN THE PRACTICE OF MEDICINE AND NEITHER EMPLOYS ANY PHYSICIANS TO
PROVIDE MEDICAL SERVICES NOR EXERTS CONTROL OVER PHYSICIANS' DECISIONS REGARDING
MEDICAL CARE.
THE FOLLOWING MAPS INDICATE THE LOCATION OF EACH MEDICAL CENTER MANAGED BY
THE COMPANY FOR THE TALBERT MEDICAL GROUPS:
[MAP] OF SOUTHERN CALIFORNIA MEDICAL CENTERS
[MAP] OF UTAH MEDICAL CENTERS
[MAP] OF ARIZONA MEDICAL CENTERS
[MAP] OF NEVADA MEDICAL CENTERS
[MAP] OF NEW MEXICO 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 December 31, 1996, TMMC had management services agreements with ten practice
groups and directly employed the physicians in one practice group (collectively,
the "Talbert Medical Groups"). The Talbert Medical Groups employed approximately
316 physicians and 70 dentists and provided care through 52 medical, dental
and/or vision centers (the "Medical Centers") located in southern California,
Utah, Arizona, New Mexico and Nevada as of December 31, 1996. Together with the
Talbert Medical Groups, TMMC managed approximately 288,000 capitated enrollees
as of February 28, 1997, and generated, for the year ended December 31, 1996,
revenues of more than $460 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 of 15% of the Talbert Medical Group's revenues
after deducting certain reimbursed clinic operating expenses (except in
California, where the management fee is 60% of 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. See
"Business--The Company--Contractual Relationships." 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.
When a Talbert Medical Group assumes risk for over-utilization through
participation in such incentive funds, its exposure is generally limited to no
more than 10% of the fund. The Company currently does not share any hospital
risk other than participation in such incentive funds. See "Business--The
Company--Contractual Relationships." 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
3
<PAGE>
and THSC facilitate the delivery of medical care by providing practice
management and ancillary clinical services, respectively, to the Talbert Medical
Groups. From the enrollee's perspective, TMMC is responsible for all aspects of
a physician encounter other than medical care, including scheduling, reception,
nursing, clinical space, and administrative and clerical support. 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 Company's revenues for the year
ended December 31, 1996. The financial results of the Talbert Medical Groups are
consolidated 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 physical therapy) that are entirely
dependent upon, and largely integrated with, the business of TMMC. The Company
established THSC in order to facilitate compliance with federal and state
regulations regarding physician referrals and kickbacks. See
"Business--Government Regulation."
The following table sets forth the number of managed Medical Centers,
Talbert Medical Group physicians, and capitated enrollees for each of the states
in which the Company does business:
<TABLE>
<CAPTION>
MANAGED TALBERT CAPITATED
MEDICAL MEDICAL GROUP ENROLLEES
CENTERS PHYSICIANS (1) (1)
------------- ----------------- ------------
<S> <C> <C> <C>
California.............................. 24 172 124,369
Utah.................................... 7 79 100,381
Arizona................................. 14 34 35,195
New Mexico.............................. 5 29 24,154
Nevada.................................. 2 2 3,802
--
--- ------------
Total................................. 52 316 287,901
--
--
--- ------------
--- ------------
</TABLE>
- ------------------------
(1) As of February 28, 1997. The Talbert Medical Groups contract with HMOs and
others to provide medical care at the Medical Centers managed by the
Company.
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 provided health care to
approximately 15.2% of FHP's members as of December 31, 1996. In July 1996, FHP
determined to pursue a tax-free spin-off of TMMC and THSC in the belief that
their services 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 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 concurrently with the merger of FHP and PacifiCare (the "FHP Merger"). To
effect this separation, FHP sold its 92.4% equity interest in both TMMC and THSC
to the Company at the closing of the FHP Merger (the "Acquisition"). In
exchange, FHP received rights to
4
<PAGE>
purchase 92.4% of the Company's Common Stock, plus a note (the "Talbert Note")
for $59,598,000, the estimated proceeds of the Offering if fully subscribed. By
virtue of the FHP Merger, shares of FHP Common Stock and FHP Preferred Stock
have been converted, in part, into the Rights, which confer upon the holders,
collectively, the right to purchase 92.4% 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." Prior to the Acquisition, TMMC received, in
connection with the FHP Merger, a capital contribution of $67 million,
sufficient to increase its net worth to approximately $60 million at the
Effective Time (the "Capital Contribution"). A diagram and timeline describing
these transactions is provided under "The Company--Separation from FHP."
At the time of the FHP Merger, the Company, FHP and the holding company that
acquired 100% of FHP and PacifiCare as a result of the FHP Merger ("PacifiCare
Holdings") entered into an agreement to govern certain aspects of the Company's
operations during the period from the closing of the FHP Merger through the
completion of the Offering (the "Interim Operations Agreement"). Among other
things, the Interim Operations Agreement provides for (i) certain limitations on
the Company's operations prior to completion of the Offering without the consent
of PacifiCare Holdings and (ii) the election of two persons designated by
PacifiCare Holdings to the Company's Board of Directors until the completion of
the Offering. See "The Company--Separation from FHP" and "Relationship with FHP
and Pacificare Following the Offering--Interim Operations Agreement."
If the Offering is not fully subscribed, the unsubscribed portion of the
Common Stock will be reacquired by FHP (and therefore indirectly by 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. If FHP acquires in excess of 20% of the outstanding Common
Stock, these restrictions will not apply. In such circumstances, FHP could
exercise the powers of a substantial stockholder, including the voting of shares
of Common Stock in its discretion. See "Relationship with FHP and PacifiCare
Following the Offering." The Standstill Agreement also provides that FHP will be
entitled to certain registration rights. The number of shares subject to these
rights is limited to 20% of the outstanding Common Stock. See "Description of
Capital Stock--Registration Rights."
TMMC will continue to provide practice management services to the Talbert
Medical Groups following the Acquisition. 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")
took effect as of March 1, 1997. 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."
RISK FACTORS
An investment in the Common Stock is subject to substantial risk of loss.
See "Risk Factors."
5
<PAGE>
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 21.19154
shares of FHP Common Stock and one Right for every 26.27752
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.
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 were 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.
No Exercise by Referring
Physicians.............. Physicians in a position to make referrals to THSC, or persons
who are immediate family members of such physicians, are
prohibited from exercising Rights or otherwise acquiring the
Company's Common Stock.
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........... May , 1997 at 5:00 P.M., Eastern Daylight 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 $59.6 million. The proceeds of the Offering will
be used entirely to repay indebtedness to FHP incurred in the
Acquisition. Prior to the Acquisition, TMMC received the Capital
Contribution to increase its net worth to approximately $60
million. The Subscription Price of $21.50 per share was
calculated by FHP and PacifiCare based on their intent to return
to FHP approximately $60 million through the proceeds of the
Offering. The Subscription Price does not reflect an estimate by
FHP or PacifiCare of the fair market value of the Common Stock.
Listing................... The Rights and the Common Stock have been approved for quotation
on the Nasdaq National Market under the symbols "TMMCR" and
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
"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>
7
<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 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
and THSC facilitate the delivery of medical care by providing practice
management and ancillary clinical services. The consolidated statement of
operations data presented below for the years ended December 31, 1994, 1995 and
1996, and the consolidated balance sheet data at December 31, 1995 and 1996, 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, 1992 and 1993, and
the consolidated balance sheet data at December 31, 1992, 1993 and 1994, 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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992(1) 1993(1) 1994(1) 1995(1) 1996
----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue (2)(3):
Capitation from FHP....... $ 311,001 $ 355,791 $ 403,787 $ 419,471 $ 379,740
Copayments, fee for
service and other....... 30,316 38,143 52,000 76,228 80,806
----------- ----------- ----------- ----------- -----------
Total revenue........... 341,317 393,934 455,787 495,699 460,546
Expenses (2):
Affiliated medical
services................ 139,439 153,985 162,385 173,417 136,672
Purchased medical
services................ 53,229 74,825 104,755 121,570 109,750
Dental services........... 15,290 18,894 26,528 31,379 27,478
Optometry, pharmacy and
other primary health
care services........... 60,701 72,703 87,967 102,412 105,415
Clinic operations......... 65,549 65,164 79,446 85,585 63,509
----------- ----------- ----------- ----------- -----------
Total cost of health
care.................. 334,208 385,571 461,081 514,363 442,824
Marketing, general and
administrative.......... 15,894 16,586 22,387 29,698 31,479
----------- ----------- ----------- ----------- -----------
Operating loss.............. (8,785) (8,223) (27,681) (48,362) (13,757)
Interest income (4)......... -- -- -- -- 1,691
----------- ----------- ----------- ----------- -----------
Loss before income taxes.... (8,785) (8,223) (27,681) (48,362) (12,066)
Income tax benefit.......... (3,514) (3,289) (11,349) (19,754) (4,087)
----------- ----------- ----------- ----------- -----------
Net loss.................... $ (5,271) $ (4,934) $ (16,332) $ (28,608) $ (7,979)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Loss per common and common
equivalent share (5)...... $ (1.76) $ (1.65) $ (5.45) $ (9.55) $ (2.66)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1992 (1) 1993 (1) 1994 (1) 1995 (1) 1996
----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (6)......... $ (12,100) $ (11,291) $ (18,742) $ (18,638) $ (16,110)
Total assets (6)............ 13,335 17,739 23,087 23,178 86,699
Long-term obligations....... -- -- -- -- --
Stockholders' deficit
(6)(7).................... (11,587) (10,765) (18,113) (17,886) (5,537)
</TABLE>
- ------------------------
(1) Reflects financial information relating to the historical staff model
operations of FHP prepared from separate records maintained by subsidiaries
of FHP. Includes the costs of management information services and certain
administrative and overhead activities provided to the Company by FHP. Prior
to July 1, 1994, FHP's operations in Arizona and New Mexico were not a part
of the Company's staff model operations and, accordingly, their respective
financial position and results of operations for all periods prior to July
1, 1994 have been omitted from the accompanying consolidated statement of
operations and balance sheet data. 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 expense for the periods presented.
(3) Nearly 100% of revenue was received pursuant to former provider agreements
with FHP. The New FHP Provider Agreements took effect as of March 1, 1997.
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 period presented.
(4) Prior to January 1, 1996, all available cash balances, and the interest
income on such cash balances, were retained by FHP.
(5) 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 Securities and Exchange Commission (the "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 price) as if the shares were outstanding for all
periods presented, even if the impact of the incremental shares is anti-
dilutive.
(6) Does not reflect the Capital Contribution of $67,000,000 made prior to the
Acquisition as reflected in the pro forma financial data presented elsewhere
herein.
(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. See "Consolidated Financial Statements--Note 9."
9
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statement of
operations data for the year ended December 31, 1996, and the pro forma
condensed consolidated balance sheet data at December 31, 1996, present the
results of operations and financial position of the Company as of and for the
year ended December 31, 1996 as if the following events had occurred, on January
1, 1996 with respect to the unaudited consolidated statement of operations data,
or on December 31, 1996 with respect to the unaudited consolidated balance sheet
data: (i) the New FHP Provider Agreements had taken effect; and (ii) the Capital
Contribution of $67 million had been received from FHP.
In November 1996, the Company renegotiated the Talbert Medical Groups'
provider agreements with FHP. The New FHP Provider Agreements, which became
effective as of March 1, 1997, 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, 1996. See "Relationship
with FHP and PacifiCare Following the Offering." 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 and THSC
facilitate the delivery of medical care by providing practice management and
ancillary clinical services.
Prior to the Acquisition, FHP contributed $67 million to TMMC, which
resulted in a stockholders' equity balance of approximately $60 million at the
Effective Time.
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 and the Capital Contribution occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future.
10
<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
DEEMBER 31, 1996
---------------------------------------------
HISTORICAL ADJUSTMENTS AS ADJUSTED
-------------- ------------ -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Capitation from FHP............................................ $ 379,740 $ (39,290) $ 340,450
Copayments, fee-for-service and other.......................... 80,806 80,806
-------------- ------------ -----------
Total revenue................................................ 460,546 (39,290)(3a) 421,256
-------------- ------------ -----------
Expenses:
Affiliated medical services.................................... 136,672 136,672
Purchased medical services..................................... 109,750 7,296(3b) 117,046
Dental services................................................ 27,478 27,478
Optometry, pharmacy, and other primary health care services.... 105,415 105,415
Clinic operations.............................................. 63,509 63,509
-------------- ------------ -----------
Total cost of health care.................................... 442,824 7,296 450,120
-------------- ------------ -----------
Marketing, general and administrative.......................... 31,479 31,479
Operating loss................................................... (13,757) (46,586) (60,343)
Interest income.................................................. 1,691 2,970(4) 4,661
-------------- ------------ -----------
Loss before income taxes......................................... (12,066) (43,616) (55,682)
Provision (benefit) for income taxes (1)......................... (4,087) 4,087 --
-------------- ------------ -----------
Net loss......................................................... $ (7,979) $ (47,703) $ (55,682)
-------------- ------------ -----------
-------------- ------------ -----------
Loss per common and common equivalent share (2).................. $ (2.66) $ (15.92) $ (18.58)
-------------- ------------ -----------
-------------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA(5):
Working capital................................................. $ (16,110) $ 67,000 $ 50,890
Total assets.................................................... 86,699 67,000 153,699
Long-term obligations........................................... -- --
Stockholders' equity (deficit).................................. (5,537) 67,000 61,463
</TABLE>
- --------------------------
(1) 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 certain when 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 increased by $4,087,000, as of December 31, 1996, with a
corresponding increase in the valuation allowance of the same amount.
(2) Loss per common and common equivalent share is computed based on 2,996,104
common equivalent shares for the period 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's 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
price) as if the shares were outstanding for the period presented, even if
the impact of the incremental shares is anti-dilutive.
11
<PAGE>
(3) Adjusted to reflect the effect of the New FHP Provider Agreements:
a. REVENUE. Compared to the old provider agreements, the New FHP Provider
Agreements reduce the Company's monthly capitation fee for each member
enrolled with the Talbert Medical Groups. The Company's weighted average
percent of FHP's revenue for each member decreased from approximately 47%
to approximately 42%. The revenue adjustment is calculated by multiplying
this rate decrease by FHP's revenue for each Talbert enrollee.
b. HEALTH CARE EXPENSE. Adjustments reflect the costs attributable to
specific additional medical services that the Talbert Medical Groups have
agreed to provide to their members under the capitation fee. The 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. Under the old FHP provider agreements, costs of
these added health care services were paid by FHP.
(4) Adjusted to reflect assumed interest earnings, at an assumed average
investment return of 5.5%, on the Capital Contribution of $67,000,000 as if
made on January 1, 1996.
(5) Adjusted to reflect the assumed impact on balance sheet data as if the
following transactions had occurred:
(1) TMMC received the Capital Contribution of $67 million to increase its
net worth to approximately $60 million.
(2) The management and other investors exchanged their aggregate 7.6%
interests in TMMC and THSC for an equivalent interest in the Company.
(3) The Company purchased from FHP its 92.4% equity interest in TMMC and
THSC in exchange for Rights to purchase 92.4% 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 stockholders, collectively, the right to purchase 92.4% of the
Company's Common Stock.
(6) The Rights holders exercised their Rights and purchased the Company's
Common Stock in the Offering.
(7) The Company used the proceeds of the Offering to repay indebtedness
under the Talbert Note.
12
<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, a substantial portion of 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 year ended December 31, 1996, the Company
incurred losses before income tax benefit of $12.1 million, compared to losses
of $48.4 million and $27.7 million for the years ended December 31, 1995 and
1994, respectively. Subsidies from FHP have partially offset losses incurred in
these and in prior periods, but FHP has not provided such subsidies since March
1, 1997. 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 Acquisition, TMMC received, in connection with the FHP Merger,
the Capital Contribution to increase its net worth to approximately $60 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, 1994, 1995 and 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 FHP Merger to solicit employer groups currently
served by FHP. From December 31, 1995 to December 31, 1996, the Company's
capitated enrollment declined from 321,588 to 293,837. Nearly 100% of the lost
enrollees were FHP members. 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."
13
<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
March 1, 1997, these provider agreements were 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 decreased
the Company's revenue from $460.5 million to $421.3 million and increased its
pretax operating loss from $12.1 million to $58.7 million for the year ended
December 31, 1996. Although the Capital Contribution in connection with the FHP
Merger was 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 year ended December 31, 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. As a
result of capitated nature of such payments, the Talbert Medical Groups assume
the risk that the cost of providing medical services will exceed the capitation
fee. Because the financial results of the Talbert Medical Groups are
consolidated with those of the Company, and because the Company has in certain
cases guaranteed the ability of the Talbert Medical Groups to perform their
contractual obligations, the Company's 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. See "Business--The
Company--Contractual Relationships." 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
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. Certain risk arrangements, particularly those that do not involve
a licensed intermediary, have recently been under review. Although the Company
is not a party to such arrangements, changes in government regulation of
capitated payment arrangements could require the Company to restructure its
operating relationships, and have an adverse effect on its operating results.
See "Business-- Government Regulation." 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 also 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
14
<PAGE>
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. As a
result, the Company's historical financial statements, particularly its
historical revenues, may not be indicative of the Company's future operating
performance. See "Business--The Company--Payor Relationships." There can be no
assurance that the Company will be able to address these challenges
successfully.
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 and the interests of
FHP and its parent, PacifiCare Holdings, may be different from those of other
stockholders. 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
implemented a revised physician compensation program that includes 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 was subject to open enrollment programs
occurring in January and February 1997. The results of this open enrollment
period indicate that the Company's capitated enrollment declined from 293,837 at
December 31, 1996 to 287,901 at February 28, 1997. The Company lost
approximately 10,300 former FHP capitated enrollees, which was partially offset
by an increase of approximately 4,400 new capitated enrollees from other payors.
Any failure by FHP to maintain or
15
<PAGE>
increase commercial enrollment in the Company's markets could have a significant
adverse effect on the Company's future revenues, earnings, cash flows and
financial position.
The Company's costs fluctuate quarterly, based on the overall health of its
patient population. Enrollees, particularly seniors, typically require more care
during the winter months. Because capitation payments are not adjusted on a
seasonal basis to account for fluctuations in required care, the Company's costs
may increase in proportion to its revenues during such periods. Quarterly
results also may be affected by significant differences between actual and
estimated amounts receivable or payable for payor shared risk arrangements and
provider "incurred but not yet reported" claims ("IBNR"), that are adjusted
periodically, in the case of shared risk arrangements, as settlements are made
and, in the case of IBNR, as actual claims adjustments occur.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon the services of certain of its executive
officers for management and implementation of strategy. The loss to the Company
of the services of any of these executive officers could have a material adverse
effect upon the Company's future operations. The Company has entered into change
of control employment agreements with certain of its key personnel to provide
compensation assurances to such officers in the event of a change of control of
the Company. See "Management-- Change of Control Employment Agreements." The
Company has not purchased key-man life insurance with respect to such
individuals.
COMPOSITION OF BOARD OF DIRECTORS AND MANAGEMENT; POTENTIAL CONFLICTS OF
INTEREST
The Company's Board of Directors currently includes five persons who are or
will become directors and/or executive officers of PacifiCare Holdings and/or
certain of its subsidiaries, including FHP and PacifiCare (Jack R. Anderson,
Richard M. Burdge, Sr., Jeffrey M. Folick, Warner Heineman and Alan R. Hoops).
Seven of the Company's directors were directors of FHP prior to the FHP Merger.
Most of the Company's senior management is 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." Certain of the
Company's executives own Common Stock that is subject to repurchase by FHP under
certain conditions, including termination of employment and the Company's
failure to achieve certain performance goals. See "Certain Transactions." The
Company has granted options to certain executives with exercise prices less than
fair market value, and therefore will recognize stock compensation expense as
those options vest. See "Prospectus Summary--Unaudited Pro Forma Condensed
Consolidated Financial Data" and "Consolidated Financial Statements--Note 7."
Certain of the Company's executives (including Jack D. Massimino, Gloria L.
Austin, Becky J. Behlendorf, Jennifer M. Gutzmore, M.D., Regina B. Lightner and
Walter R. Stone) have entered into employment agreements with the Company that
provide compensation assurances in the event of a change of control of the
Company. Such assurances may make these executives less likely to resist a
change of control. See "Management--Change in 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
16
<PAGE>
care industry, changes in estimates of the Company's earnings or financial
position, the impact of health care reform proposals and other developments
affecting the Company or its competitors, many of which are beyond the Company's
control.
MANAGEMENT OF GROWTH
The Company's strategy involves growth through the development of practice
groups in existing and new markets, as well as selected acquisitions and
affiliations in such markets. There can be no assurance that the Company will be
able to grow in existing or new markets or successfully identify, complete and
integrate future acquisitions. Further, there can be no assurance that the
Company will be able to maintain and develop an adequate infrastructure to
support future growth. See "Business."
POSSIBLE DILUTIVE EFFECT OF USING COMMON STOCK FOR FUTURE ACQUISITIONS OR
AFFILIATIONS
The Company's expansion strategy includes acquisitions of, and affiliations
with, additional practice groups and practice management companies. Such
acquisitions or affiliations may be consummated using newly issued shares of
Common Stock as consideration. The issuance of additional shares of Common Stock
may have a dilutive effect on the Company's tangible net book value or earnings
per share following such issuance.
COMPETITION
The managed care industry is highly competitive. The industry also is
subject to continuing changes in the ways services are provided and providers
are selected and paid. As prepaid medical care continues to grow, the Company
may encounter increased competition, including competition for enrollees,
primary care physicians, community health care resources and management
personnel. This competition also may have the effect of reducing capitated
payments received by providers from payors. FHP, the Company's principal source
of capitated enrollees, has experienced significant competition with respect to
its staff model commercial enrollment programs in California in recent periods,
which has been responsible, in part, for declines in the Company's capitated
enrollment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Certain companies are expanding their presence in the physician practice
management industry 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 the Talbert 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. 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 control arrangements maintained by the
Company, through TMMC, over the Talbert Medical Groups are structured to give
TMMC control over the Talbert Medical Groups excluding the delivery of
17
<PAGE>
medical care. The Company believes these arrangements are consistent with
restrictions on the corporate practice of medicine in the relevant states. See
"Business--Government Regulation."
INSURANCE. 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. State insurance regulatory authorities, including the National
Association of Insurance Commissioners (the "NAIC"), have made, and are expected
to continue to make, recommendations regarding certain forms of risk sharing
arrangements involving provider networks. Such recommendations could result in
legislation that requires modification to such arrangements. The NAIC recently
approved the Managed Care Network Adequacy Model Act (the "Model Act"), which is
intended to establish standards for the creation and maintenance of provider
networks by health carriers and establish requirements for written agreements
between health carriers offering managed care plans, participating providers
(like the Talbert Medical Groups), and intermediaries, under which health care
services are provided. The Model Act does not carry the force of law unless
enacted by state legislatures. The Company cannot predict which states, if any,
may adopt the Model Act or a variation of it, and is unable to predict what
effect the adoption of such legislation may have on the business of the Company.
THE CALIFORNIA KNOX-KEENE ACT. The California Department of Corporations
has recently issued licenses pursuant to the Knox-Keene Health Care Service Plan
Act ("Knox-Keene Act") to networks of providers that seek to contract with HMOs,
on a capitated basis, for the global provision of health care services,
including hospital services. At present the activities of the Company and the
Talbert Medical Groups are limited to contracting for physician services and
certain ancillary services for which physicians and physician groups may
contract without such licensure under the Knox-Keene Act. In the event that the
Company elects to change its strategy, and assume risk for the provision of
hospital services, it may be necessary to comply with the Knox-Keene Act.
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. Non-compliance with such legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties. California
law similarly restricts self-referrals by physicians, irrespective of the source
of payment for the services. Violation of this law can result in fines,
penalties and loss of licensure for a physician. The Company believes that its
business arrangements do not involve the referral of patients to entities with
whom referring physicians have a financial interest, because referrals are made
directly to other providers rather than to entities in which referring
physicians have a financial interest. The Company established THSC in order to
facilitate compliance with federal and state regulations regarding physician
referrals and kickbacks. The physicians in the Talbert Medical Groups do not
hold a prohibited interest in THSC. Physicians in a position to make referrals
to THSC, or persons who are immediate family members of such physicians, are
prohibited from exercising Rights or otherwise acquiring the Company's Common
Stock. The Company believes it is in compliance with the laws governing
Medicare, Medicaid and physician referrals, 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."
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 prohibited conduct 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. See "Business--Government
Regulation."
18
<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."
19
<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, but may not exceed 20% of the outstanding Common
Stock. Certain members of management also have registration rights with respect
to their restricted shares of Common Stock. Approximately 228,000 shares of
Common Stock are subject to such rights. See "Description of Capital
Stock--Registration Rights."
20
<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. 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
and THSC facilitate the delivery of medical care by providing practice
management and ancillary clinical services.
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 concurrently with the FHP Merger through the transactions described
below:
[CHART]
21
<PAGE>
Concurrently with the FHP Merger:
(1) TMMC received the Capital Contribution of $67 million to increase its
net worth to approximately $60 million.
(2) The management and other investors ("MIs") exchanged their aggregate
7.6% equity interests in TMMC and THSC for an equivalent interest in the
Company.
(3) The Company purchased from FHP its 92.4% equity interest in TMMC and
THSC in exchange for Rights to purchase 92.4% 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
92.4% 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 has agreed to sell to FHP any unsubscribed shares of Common Stock
in exchange for cancellation of any remaining indebtedness under the
Talbert Note.
Concurrently with the FHP Merger, the Company, FHP and PacifiCare Holdings
entered into the Interim Operations Agreement to govern certain aspects of the
Company's operations during the period between the Effective Time and the
completion of the Offering. The Interim Operations Agreement provided for the
election of two PacifiCare Holdings nominees to the Board of Directors of the
Company (see "Management--Directors and Executive Officers") who will serve
until the completion of the Offering. In addition, the Interim Operations
Agreement places certain restrictions on the operations of the Company without
the consent of PacifiCare Holdings until the completion of the Offering. See
"Relationship with FHP and PacifiCare Following the Offering--Interim Operations
Agreement."
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 took
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."
22
<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 21.19154 shares of FHP
Common Stock and one Right for every 26.27752 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. The Subscription Price of $21.50 per share was
calculated by FHP and PacifiCare based on their intent to return to FHP
approximately $60 million through the proceeds of the Offering. The Subscription
Price does not reflect an estimate by FHP or PacifiCare of the fair market value
of the Company. 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.
NO EXERCISE BY REFERRING PHYSICIANS
Physicians in a position to make referrals to THSC, or persons who are
immediate family members of such physicians, are prohibited from exercising
Rights or otherwise acquiring the Company's Common Stock.
SUBSCRIPTION EXPIRATION DATE
The Rights will expire at 5:00 P.M., Eastern Daylight 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.
23
<PAGE>
SUBSCRIPTION AGENT
The Subscription Agent is American Stock Transfer & Trust Company. The
address to which Subscription Certificates and payment of the Subscription Price
should be delivered, whether by hand, by mail or by overnight courier, is:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: 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.
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 Daylight
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
Daylight 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 Daylight 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
DAYLIGHT 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.
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 DAYLIGHT
TIME, ON THE EXPIRATION DATE.
24
<PAGE>
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 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 Daylight 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.
25
<PAGE>
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 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. 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 and
26
<PAGE>
THSC facilitate the delivery of medical care by providing practice management
and ancillary clinical services. See "Business--The Company."
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 $59.6 million. FHP will pay the expenses of the Offering, which
are currently estimated to be approximately $1.9 million. 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.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company and
its subsidiaries as of December 31, 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>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(1)
--------- ----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Stockholders' equity (deficit):
Preferred Stock, par value $.01 per share; 1,200,000 shares
authorized; no shares issued and outstanding................. $ -- $ --
Common Stock, par value $.01 per share; 15,000,000 shares
authorized; 3,000,000 shares issued and outstanding.......... 30 30
Paid-in capital (1)............................................ 5,922 72,922
Deferred stock compensation expense............................ (3,510) (3,510)
Retained deficit............................................... (7,979) (7,979)
--------- -------
Total stockholders' equity (deficit)......................... $ (5,537) $ 61,463
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Adjusted to reflect the Capital Contribution of $67,000,000.
27
<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, 1994, 1995 and 1996, and the consolidated balance sheet data at
December 31, 1995 and 1996, 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, 1992 and 1993, and the consolidated balance sheet data at December
31, 1992, 1993 and 1994, 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>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1992(1) 1993(1) 1994(1) 1995(1) 1996
----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue (2)(3):
Capitation from FHP....... $ 311,001 $ 355,791 $ 403,787 $ 419,471 $ 379,740
Copayments, fee for
service and other....... 30,316 38,143 52,000 76,228 80,806
----------- ----------- ----------- ----------- -----------
Total revenue........... 341,317 393,934 455,787 495,699 460,546
Expenses (2):
Affiliated medical
services................ 139,439 153,985 162,385 173,417 136,672
Purchased medical
services................ 53,229 74,825 104,755 121,570 109,750
Dental services........... 15,290 18,894 26,528 31,379 27,478
Optometry, pharmacy and
other primary health
care services........... 60,701 72,703 87,967 102,412 105,415
Clinic operations......... 65,549 65,164 79,446 85,585 63,509
----------- ----------- ----------- ----------- -----------
Total cost of health
care.................. 334,208 385,571 461,081 514,363 442,824
Marketing, general and
administrative.......... 15,894 16,586 22,387 29,698 31,479
Operating loss.............. (8,785) (8,223) (27,681) (48,362) (13,757)
Interest income (4)......... -- -- -- -- 1,691
----------- ----------- ----------- ----------- -----------
Loss before income taxes.... (8,785) (8,223) (27,681) (48,362) (12,066)
Provision (benefit) for
income taxes.............. (3,514) (3,289) (11,349) (19,754) (4,087)
----------- ----------- ----------- ----------- -----------
Net loss.................... $ (5,271) $ (4,934) $ (16,332) $ (28,608) $ (7,979)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Loss per common and common
equivalent share (5)...... $ (1.76) $ (1.65) $ (5.45) $ (9.55) $ (2.66)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1992 (1) 1993 (1) 1994 (1) 1995 (1) 1996
----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (6)......... $ (12,100) $ (11,291) $ (18,742) $ (18,638) $ (16,110)
Total assets (6)............ 13,335 17,739 23,087 23,178 86,699
Long-term obligations....... -- -- -- -- --
Stockholders' deficit
(6)(7).................... (11,587) (10,765) (18,113) (17,886) $ (5,537)
</TABLE>
- --------------------------
(1) Reflects financial information relating to the historical staff model
operations of FHP prepared from separate records maintained by subsidiaries
of FHP. Includes the costs of management information services and certain
administrative and overhead activities provided to the Company by FHP. Prior
to July 1, 1994, FHP's operations in Arizona and New Mexico were not a part
of the Company's staff model operations and, accordingly, their respective
financial position and results of operations for all periods prior to July
1, 1994 have been omitted from the accompanying consolidated statement of
operations and balance sheet data. 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 expense for the periods presented.
(3) Nearly 100% of revenue was received pursuant to former provider agreements
with FHP. The New FHP Provider Agreements took effect as of March 1, 1997.
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 period presented.
(4) Prior to January 1, 1996, all available cash balances, and the interest
income on such cash balances, were retained by FHP.
(5) 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's 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
price) as if the shares were outstanding for all periods presented, even if
the impact of the incremental shares is anti-dilutive.
(6) Does not reflect the Capital Contribution of $67,000,000 to be made prior to
the Acquisition as reflected in the pro forma financial data presented
elsewhere herein.
(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. See "Consolidated Financial Statements--Note 9."
29
<PAGE>
The following table sets forth, for the periods indicated, the percentage of
revenue represented by the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Capitation from FHP................................................ 88.6% 84.6% 82.5%
Copayments, fee for service and other.............................. 11.4 15.4 17.5
----------- ----------- -----------
Total revenue.................................................... 100.0 100.0 100.0
Expenses:
Affiliated medical services........................................ 35.6 35.0 29.7
Purchased medical services......................................... 23.0 24.5 23.8
Dental services.................................................... 5.8 6.3 6.0
Optometry, pharmacy, and other primary health care services........ 19.3 20.7 22.9
Clinic operations.................................................. 17.4 17.3 13.8
----------- ----------- -----------
Total cost of health care........................................ 101.1 103.8 96.2
Marketing, general and administrative.............................. 4.9 6.0 6.8
----------- ----------- -----------
Operating loss....................................................... (6.0) (9.8) (3.0)
Interest income...................................................... 0.4
----------- ----------- -----------
Loss before income tax benefit....................................... (6.0) (9.8) (2.6)
Income tax benefit................................................... (2.4) (4.0) (.9)
----------- ----------- -----------
Net loss............................................................. (3.6)% (5.8)% (1.7)%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
30
<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. 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 and THSC facilitate the delivery of medical
care by providing practice management and ancillary clinical services.
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
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
generally limited to no more than 10% of the fund. The Company currently does
not share any hospital risk other than participation in such incentive funds. 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.
31
<PAGE>
The Company currently derives substantially all of its revenue from provider
agreements with FHP. As a result of the FHP Merger, these agreements were
renegotiated, resulting in lower revenues and higher costs per enrollee to the
Company. On a pro forma basis, these changes to the New FHP Provider Agreements
would have decreased the Company's revenue from $460.5 million to $421.3 million
and increased its pretax operating loss from $12.1 million to $58.7 million for
the year ended December 3 1996.
TMMC provides a broad range of practice management services to the Talbert
Medical Group, and in return is reimbursed for certain clinic operating expenses
and receives a management fee of 15% of revenues net of reimbursed clinic
operating expenses (except in California, where the management fee is 60% of the
Talbert Medical Group's gross revenues, and in New Mexico, where TMMC directly
employs the physicians in the Talbert Medical Group). Under the management
services agreement, the Talbert Medical Groups are in control of and responsible
for all aspects of the practice of medicine and the delivery of medical
services. TMMC is responsible for all other elements of the patient encounter,
including scheduling, reception, nursing, clinical space, and administrative and
clerical support.
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 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 from separate records maintained by
subsidiaries of FHP. 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 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 18 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 for every county and
the contracted percentage of the increase is passed to the Talbert Medical
Groups pursuant to their provider agreements with FHP.
32
<PAGE>
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. FHP received an average
rate increase of 5.1% and 5.7% in the Company's markets for 1996 and 1997,
respectively. There can be no assurance that such annual rate increases will
continue.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE. Total revenue decreased $35.2 million, or 7.1%, to $460.5 million
for the year ended December 31, 1996, from $495.7 million for the year ended
December 31, 1995. This decrease primarily reflects an 8.6% decline in capitated
enrollment, from 321,588 at December 31, 1995 to 293,837 at December 31, 1996.
California's enrollment decline was responsible for $28.8 million of the total
decline in capitated revenue of $39.7 million. Declines in capitated enrollment
in Utah, New Mexico, and Nevada were collectively responsible for an additional
$11.0 million decline in capitated revenue. Copayment and fee for service
revenue increased by a net $4.6 million, or 6.0%, to $80.8 million at December
31, 1996, from $76.2 million at December 31, 1995. This increase primarily
reflects additional copayment and fee for service revenue for optometry,
pharmacy and dental services provided by the Medical Centers in California,
Utah, New Mexico and Nevada. The Company also experienced an increase in bad
debt expense of approximately $2.8 million, primarily attributable to the
increase in fee for service and copayment revenue, as well as a new billing
system that temporarily diverted resources from the Company's collection
efforts.
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 $36.7 million, or 21.2%, to $136.7
million (29.7% of revenues) for the year ended December 31, 1996 from $173.4
million (35.0% of revenues) for the year ended December 31, 1995. This decline
primarily reflects the impact of lower capitated enrollment, including lower
physician and malpractice insurance costs resulting from reductions in physician
staffing levels. In California and Arizona, affiliated medical services expense
was reduced by $24.5 million and $3.3 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
$9.2 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 $11.8 million, or 9.7%, to $109.8 million for the year ended
December 31, 1996, compared to $121.6 millon for the year ended December 31,
1995. Declines in enrollment in Utah and Arizona resulted in a reduction of
$11.2 million. As a percentage of revenues, purchased medical services expense
decreased to 23.8% from 24.5%.
DENTAL SERVICES EXPENSE. Dental services expense declined $3.9 millon, or
12.4% to $27.5 million (6.0% of revenues) for the year ended December 31, 1996,
from $31.4 million (6.3% of revenues) for the year ended December 31, 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 $3.0 million, or 2.9%, to $105.4 million (22.9% of revenues) for the
year ended December 31, 1996, from $102.4 million (20.7% of revenues) for the
year ended December 31, 1995. Higher utilization of these services in California
and New Mexico was responsible for $3.9 million and $1.3 million, respectively,
of the increase, which was partially offset by a reduction of $2.0 million
resulting from lower utilization in Arizona.
CLINIC OPERATION EXPENSE. Clinic operations expense declined $22.1 million,
or 25.8% to $63.5 million (13.8% of revenues) for the year ended December 31,
1996, from $85.6 million (17.3% of revenues) for the
33
<PAGE>
year ended December 31, 1995. Closures of clinics in California accounted for
$13.3 million of the decline. Also, clinic operations expense in Utah and
Arizona declined by $5.2 million and $2.6 million, respectively, reflecting
primarily reductions in physician support staff.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative ("MG&A") expense increased $1.8 million, or 6.0%, to $31.5
million (6.8% of revenues) for the year ended December 31, 1996, from $29.7
million, (6.0% of revenues) for the year ended December 31, 1995. The increase
was attributable primarily to the recognition of stock compensation expense of
$2.0 million in connection with the Capital Contribution of $67.0 million.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE. Total revenue increased $39.9 million, or 8.8%, to 495.7 million
for the year ended December 31, 1995, from $455.8 million for the year ended
December 31, 1994. The increase was primarily attributable to the addition of
the Company's Arizona and New Mexico operations for a full year during 1995, and
only six months during 1994. The net increases in capitated revenue in Arizona
and New Mexico were $18.1 million and $15.6 million, respectively. Prior to July
1, 1994, the Company's Medical Centers in Arizona and New Mexico operated
independently from FHP's capitated staff model networks. Accordingly, the
Arizona and New Mexico operations are not included in the Company's financial
statements prior to July 1, 1994. In addition, operations in Nevada began in
November 1994, which added capitated revenues of $6.0 million for the year ended
December 31, 1995. Offsetting the added revenues were capitated revenue
reductions in California and Utah of $16.7 million and $7.4 million,
respectively, as a result of declines in enrollment. Copayment and fee for
service revenue increased by $24.2 million to $76.2 million at December 31,
1995. This increase reflects a $20.9 million increase generated from the
Arizona, New Mexico and Nevada operations which were in operation for the full
year in 1995, but only six months in 1994. California and Utah fee for service
revenue increased by $3.4 million.
AFFILIATED MEDICAL SERVICES EXPENSE. Affiliated medical expense increased
by $11.0 million, or 6.8%, to $173.4 million for the year ended December 31,
1995, from $162.4 million for the year ended December 31, 1994. Physician,
nursing, laboratory and radiology costs required to support the new Arizona, New
Mexico and Nevada operations collectively added $12.7 million in operating
costs. Affiliated medical services expense for Utah and California collectively
declined by $1.6 million, reflecting lower utilization of professional services
in the Medical Centers. As a percent of revenue, affiliated medical services
expense decreased to 35.0% in 1995 from 35.6% in 1994.
PURCHASED MEDICAL SERVICES EXPENSE. Purchased medical services expense
increased by $16.8 million or 16.0% to $121.6 million (24.5% of revenue) for the
year ended December 31, 1995 from $104.8 million (23.0% of revenue) for the year
ended December 31, 1994. Physician specialty costs for the Arizona, New Mexico
and Nevada operations added $21.6 million to purchased medical services expense.
Start up operations typically incur substantially higher physician specialty
costs until sufficient enrollment is attained to either procure favorable
specialty contracts or add the specialty to the Company's Medical Center staff.
California and Utah costs declined by $4.8 million, reflecting the lower
utilization resulting from their respective declines in enrollment.
DENTAL SERVICES EXPENSE. Dental services expense increased to $31.4 million
for the year ended December 31, 1995, compared to $26.5 million for the year
ended December 31, 1994. The Arizona, New Mexico and Nevada operations added
$2.4 million in dental service costs, and California and Utah expanded their
benefit coverage, which contributed another $2.5 million in dental service
costs. 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 $88.0 million (19.3% of revenue) for the year ended December
31, 1994. Nearly all of the increase was attributable to the Arizona, New Mexico
and Nevada operations, which
34
<PAGE>
collectively added $13.4 million in operating costs in 1995. Behavioral health
expense increased $1.3 million, primarily due to expanded benefit coverage in
California and Utah.
CLINIC OPERATIONS EXPENSE. Clinic operations expense increased to $85.6
million for the year ended December 31, 1995, from $79.4 million for the year
ended December 31, 1994. Arizona, New Mexico and Nevada added $10.8 million in
clinic operating costs in 1995. California and Utah clinic expense declined by
$4.7 million, reflecting closures of clinics and associated staff reductions due
to lower enrollment. As a percent of revenue, the Company's overall clinic
operation expense declined slightly to 17.3% in 1995 from 17.4% in 1994.
MG&A EXPENSE. MG&A expense increased to $29.7 million (6.0% of revenue) for
the year ended December 31, 1995, from $22.4 (4.9% of revenue) for the year
ended December 31, 1994, reflecting the first full year of administrative costs
incurred for the Arizona, New Mexico and Nevada operations.
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 was subject to open enrollment programs
occurring in January and February 1997. The results of this open enrollment
period indicate that the Company's capitated enrollment declined from 293,837 at
December 31, 1996 to 287,901 at February 28, 1997. The Company lost
approximately 10,300 former FHP enrollees, which was partially offset by an
increase of approximately 4,400 enrollees from other payors. Any failure by FHP
to maintain or increase commercial enrollment in the Company's markets following
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.
Subsidies from FHP have partially offset losses incurred in these periods, but
FHP has not provided such subsidies since March 1, 1997. 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. The Company's
revenue enhancement plans focus on attracting new capitated Medicare and
commercial enrollees by entering into
35
<PAGE>
provider agreements with payors other than FHP. 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. To date, the Company has obtained 18
other provider agreements and in excess of 30 preferred provider organization
("PPO") contracts with more than 20 payors on behalf of one or more of the
Talbert Medical Groups. See "Business--The Company--Payor Relationships." The
Company also intends to increase revenues by offering additional services and by
generating increased fee-for-service business, particularly in the pharmacy and
optical segments.
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) 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 and the FF&E Agreement (as defined herein) with FHP. The Master Lease
Agreement has been amended to extend its term 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 extend. See
"Relationship with FHP and PacifiCare following the Offering--Master Lease
Agreement." The Company's consolidated financial statements reflect the Master
Lease Agreement and the FF&E Agreement as operating leases. See "Consolidated
Financial Statements--Note 5."
At December 31, 1996, the Company had cash balances of $41.2 million and a
stockholders' deficit of approximately $5.5 million. On February 14, 1997 and
immediately prior to the Acquisition, the Company received the Capital
Contribution of $67 million. Immediately following the Acquisition, the Company
settled amounts due to FHP of approximately $23 million to reimburse FHP for
medical service and other costs paid on behalf of the Company. The Company
intends to use the remainder of the Capital Contribution to fund operating
losses and for working capital and other general corporate purposes.
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
36
<PAGE>
business days after their receipt. During 1996, the Company outsourced a number
of specialty care services that were formerly provided by staff physicians
within the Medical Centers. Accordingly, as the usage of purchased services
increased, the Company's medical claims payment activity from outside provider
specialists increased as well. In the third quarter of 1996, Utah began
participating in FHP's Medicare risk program that replaced the existing Medicare
cost contract. Under the Medicare risk program, the Company is required to pay
for outside specialty care services that were formerly paid by FHP under the
Medicare cost contract. As a result, Utah's claims activity increased during the
last six months of 1996. In addition, Utah's revenue increased as a result of
this new responsibility for outside specialty care services. See "Consolidated
Financial Statements--Note 4." 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."
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."
37
<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 December 31, 1996, TMMC had management services
agreements with four physician groups representing approximately 287 primary and
specialty care physicians operating in southern California, Utah, Arizona and
Nevada. TMMC also directly employed 29 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 approximately 288,000 capitated enrollees as of February
28, 1997.
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 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 and THSC facilitate the delivery of medical care by
providing practice management and ancillary clinical services.
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
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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 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
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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.
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 managed Medical Centers and
Talbert Medical Group physicians for each of the states in which the Company
does business.
THE TALBERT MEDICAL GROUPS
<TABLE>
<CAPTION>
MANAGED MEDICAL TALBERT MEDICAL
CENTERS (1) GROUP PHYSICIANS(1)
--------------- -------------------
<S> <C> <C>
California....................................................... 24 172
Utah............................................................. 7 79
Arizona.......................................................... 14 34
New Mexico....................................................... 5 29
Nevada........................................................... 2 2
--
---
Total.......................................................... 52 316
--
--
---
---
</TABLE>
- ------------------------
(1) As of February 28, 1997. The Talbert Medical Groups contract with HMOs and
others to provide medical care at the Medical Centers managed by the
Company.
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 FEBRUARY
AS OF DECEMBER 31, 28,
------------------------------------- -----------------
1994 1995 1996 1997
--------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
California.......................... 150,125 145,986 124,749 124,369
Utah................................ 138,588 122,596 105,840 100,381
Arizona............................. 43,748 21,954(1) 34,866 35,195
New Mexico.......................... 23,472 26,738 24,315 24,154
Nevada.............................. 2,960 4,314 4,067 3,802
--------- ------------ ------------ -------
Total............................. 358,893 321,588 293,837 287,901
--------- ------------ ------------ -------
--------- ------------ ------------ -------
</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.
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Currently, FHP is the primary payor for the Talbert Medical Groups,
accounting for nearly 100% of capitated enrollees and revenues for the years
ended December 31, 1996, 1995 and 1994. The Company believes FHP will continue
to be the primary source of capitated revenue for the forseeable future. See
"Risk Factors--Contracted Rate Decrease."
TMMC has, however, recently established contractual relationships with the
following payors on behalf of one or more of the Talbert Medical Groups:
<TABLE>
<S> <C>
Arizona:
- - Blue Cross/Blue Shield Nevada:
- - United/Metra Health - AMIL International of Nevada
California: - Humana
- - BPS HMO Inc. - Silmo
- - CIGNA New Mexico:
- - Foundation Health Corporation - Blue Cross
- - HMO California Utah:
- - Health Net - American Family Health
- - Maxicare - Blue Cross/Blue Shield of Utah
- - PacifiCare of California - Inter Group
- - United/Metra Health - United Health Plan
</TABLE>
In addition, TMMC is currently negotiating contracts with a number of other
payors. TMMC has negotiated in excess of 30 PPO contracts with more than 20
payors 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).
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
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<PAGE>
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 the Talbert Medical Group.
MEDICARE RISK MANAGEMENT. Many payors have contracted with the federal
government to provide health care for Medicare beneficiaries under full risk
capitation arrangements. Under these types of 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.
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<PAGE>
QUALITY ASSURANCE AND RISK MANAGEMENT. The Talbert Medical Groups maintain,
as a service to both physicians and payors, a comprehensive quality assurance
program designed to assess patient outcomes. The quality assurance program
incorporates peer review, patient satisfaction surveys, medical records
auditing, continuing medical staff development and regular continuing medical
education seminars to meet or exceed the requirements of accrediting
organizations and state law. Medical staff development also includes training
and support programs to encourage the application of identified "best medical
practices." 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. THSC derives substantially all of its revenues through referrals from
the Talbert Medical Groups, and currently does not receive referrals from other
providers (other-than for enrollees of the Talbert Medical Groups). The Company
has established THSC in order to facilitate compliance with federal and state
regulations regarding physican referrals and kickbacks. The physicians in the
Talbert Medical Groups do not hold a prohibited interest in THSC. See
"--Government Regulation."
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.
43
<PAGE>
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.
A typical payor contract includes a direct professional capitation payment
to the Talbert Medical Group. Because such payments are capitated, the Talbert
Medical Group assumes the risk that the cost of providing medical services will
exceed the capitation fee. Payor contracts also often include 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 generally limited to no more than a maximum of 10% of the
fund. The Company currently does not share any hospital risk other than
participation in such incentive funds. 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. However, because its financial results are consolidated with those
of the Talbert Medical Groups the Company does not believe this guarantee
constitutes a additional contingent liability for the consolidated group. See
"Relationship with FHP and PacifiCare Following the Offering--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 15% of each Talbert Medical Group's revenues net of
reimbursed clinic operating expenses (except in California, where the management
fee is 60% of the Talbert Medical Group's gross revenues, and in New Mexico,
where TMMC directly employs the physicians in the Talbert Medical Group). These
management fees are eliminated in the consolidation of the financial results of
the Company with the Talbert Medical Groups. 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
44
<PAGE>
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 adopted 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 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.
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Various states are considering forms of single-payor systems, restructuring
of Medicaid programs and the adoption of "any willing provider" legislation that
could require managed care companies to contract with any medical provider who
agrees to the terms of the company's standard provider contract and payment
schedule. Any legislation along these lines that becomes law could adversely
affect the Company's business.
The Company is unable to predict how existing federal or state laws and
regulations may be changed or interpreted, what additional laws or regulations
affecting its businesses may be enacted or proposed, when and which of the
proposed laws will be adopted or what effect the new laws and regulations will
have on its businesses. However, certain of the proposals, if adopted, could
have a material adverse effect on the Company's business, while others, if
adopted, could potentially benefit the Company's business. Although the effects
of many proposals cannot yet be determined, the Company remains committed to
participate in the debate over health care reform and in the restructuring of
the health care system.
The laws of the states where the Company currently operates generally
specify who may practice medicine and limit the scope of relationships between
medical practitioners and other parties. Under these laws, the Company is
prohibited from practicing medicine or exercising control over the provision of
medical services. In order to comply with these laws, the Talbert Medical Groups
are organized so that all physician services are offered by physicians employed
by or under contract with the professional corporations affiliated with the
Company. Other than in New Mexico, the Company itself does not employ practicing
physicians as practitioners. The Company does not, in any state, exert control
over physician decisions regarding medical care or represent to the public that
it offers medical services. The Company believes that the services it provides
to the Talbert Medical Groups do not constitute the practice of medicine under
applicable laws.
Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate HMOs and other managed care organizations with which the physician
groups may have contracts. Many states require regulatory approval, including
certificates of need, before establishing or expanding certain types of health
care facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs. Some
states also require licensing of third party administrators. In connection with
its existing operations and its expansion into new markets, the Company believes
it is in compliance with all applicable laws, regulations and interpretations,
but there can be no assurance that they will not change in the future or that
additional laws and regulations will not be enacted. The ability of the Company
to operate profitably will depend in part upon the Company and its affiliated
physician groups obtaining and maintaining all necessary licenses, certificates
of need and other approvals and operating in compliance with applicable health
care regulations.
The laws of all states prohibit physicians from splitting fees with
non-physicians and many states prohibit non-physician entities (such as the
Company) from practicing medicine and, in certain circumstances, from employing
physicians directly. The Company believes its current and planned activities do
not constitute fee-splitting, the practice of medicine or the direct employment
of physicians as contemplated by these laws. There can be no assurance, however,
that interpretations or enforcement of these laws will not force changes in the
Company's relationships with its facilities and physicians. In addition,
statutes in some states could restrict expansion of the Company's operations to
those jurisdictions.
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services, or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service, in each
case, reimbursable under Medicare or Medicaid. Pursuant to this anti-kickback
law, the federal government has recently announced a policy of 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
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entities in which they have an ownership interest or other compensation
arrangement. Many states, including those in which the Company presently does
business, have similar anti-kickback and anti-referral laws.
A violation of the federal anti-kickback statute generally requires several
elements: (i) the offer, payment, solicitation, or receipt of remuneration; (ii)
the intent to induce referrals; and (iii) the ability of the parties to make or
influence referrals of patients for services reimbursable under Medicare or
Medicaid programs or to provide items or services reimbursable under such
programs. Noncompliance with, or violation of, the federal anti-kickback
legislation can result in exclusion from Medicare and Medicaid programs and
civil and criminal penalties. With respect to the self-referral prohibition, the
entity and the referring physician are prohibited from receiving Medicare or
Medicaid reimbursement for services rendered. Similar penalties are provided for
violation of state anti-kickback and anti-referral laws. The federal government
has promulgated "safe harbor" regulations that identify certain business and
payment practices deemed not to violate the federal anti-kickback statute.
Although the Company's business does not fall within certain of the current or
proposed safe harbors, the Company believes that its operations substantially
comply with such statutes and regulations.
The Company believes that its business arrangements do not involve the
referral of patients to entities with whom referring physicians have an
ownership interest or compensation arrangement within the meaning of federal and
state anti-referral laws, because referrals are made directly to other providers
rather than to entities in which referring physicians have an ownership or
compensation arrangement. Physicians in a position to make referrals to THSC, or
persons who are immediate family members of such physicians, are prohibited from
exercising Rights or otherwise acquiring the Company's Common Stock. 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 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 NAIC has been reviewing risk arrangements involving provider
networks. In particular, the NAIC has been concerned with risk arrangements
between provider networks and health care purchasers that do not involve a
licensed intermediary such as an HMO. The NAIC has made, and will continue to
make, recommendations for state legislation in this area. The Company cannot
predict whether such legislation will be adopted. However, the Company's current
risk arrangements all involve licensed HMO or similar intermediaries and the
Company does not have any plans to enter into any risk arrangement where a
licensed intermediary would not be involved. The NAIC recently approved the
Model Act, which is intended to establish standards for the creation and
maintenance of provider networks by health carriers and establish requirements
for written agreements between health carriers offering managed care plans,
participating providers (like Talbert Medical Groups), and intermediaries, under
which health care services are provided. The Model Act does not carry the force
of law unless enacted by state legislatures. The Company cannot predict which
states, if any, may adopt the Model Act or a
47
<PAGE>
variation of it, and is unable to predict what effect the adoption of such
legislation may have on the Company.
The California Department of Corporations has recently issued licenses
pursuant to the Knox-Keene Act to networks of providers that seek to contract
with HMOs, on a capitated basis, for the global provision of health care
services, including hospital services. At present the activities of the Company
and the Talbert Medical Center are limited to contracting for physician services
and certain ancillary services for which physicians and physician groups may
contract without such licensure under the Knox-Keene Act. In the event that the
Company elects to change its strategy, and assume risk for the provision of
hospital services, it may be necessary to comply with the Knox-Keene Act.
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. This policy is in effect through February 15,
1999. However, there can be no assurance that a future claim or claims will not
exceed the limits of available insurance coverage, that any insurer will remain
solvent and able to meet its obligations to provide coverage for any claim or
claims, or that coverage will continue to be available or available with
sufficient limits on a commercially reasonable basis to insure adequately the
Company's operations. Since January 1, 1996, substantially all claims have been
made within 12 months of incurrence, and no settlements have exceeded policy
limits.
Physicians not directly employed by the Talbert Medical Groups are required
by contract to carry certain minimum amounts of professional liability insurance
coverage. These amounts generally correspond to statutory or customary minimums
in the physician's practice area.
In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits alleging medical malpractice, bad
faith denial of services and other claims for recovery in connection with
alleged injuries or misconduct. Many of these lawsuits involve large claims and
substantial defense costs. The Company has significant operations in California,
where very large jury awards have been sustained by other companies for claims
alleging negligent or fraudulent withholding of approval for necessary medical
services. The Company monitors these kinds of cases in each jurisdiction and
considers litigation possibilities in the review and implementation of its risk
management programs.
Due to the nature of its business, the Company and some of its physicians
and officers from time to time may become involved as defendants in medical
malpractice lawsuits, and are subject to the attendant risk of substantial
damage awards. A significant source of potential liability in this regard is the
negligence of health care professionals employed or contracted by the Company
and its affiliates. See "Risk Factors-- Potential Claims Affecting the Company's
Industry; Insurance."
EMPLOYEES
At December 31, 1996, the Company had approximately 3,475 full-time
equivalent employees. 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.
48
<PAGE>
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.
On April 2, 1997, six former FHP stockholders filed a class action lawsuit
entitled BRADY, ET. AL. VS. ANDERSON, ET. AL. in U.S. District Court for the
Central District of California. The lawsuit alleges certain violations of
federal securities laws and common law by certain of the Company's directors and
officers, including material misrepresentations in connection with the FHP
Merger and the separation of the Company from FHP. The plaintiffs seek
unspecified damages and other relief. The Company, which is not named as a
defendant, believes these allegations are without merit.
49
<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............................... 48 President, Chief Executive Officer and Director
Gloria L. Austin................................ 43 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................................ 72 Chairman and Director
Richard M. Burdge, Sr........................... 70 Director
Warner Heineman................................. 74 Director
Van B. Honeycutt................................ 52 Director
Robert W. Jamplis, M.D.......................... 77 Director
Robert C. Maxson, Ed.D.......................... 60 Director
Westcott W. Price III........................... 57 Director
Alan R. Hoops................................... 49 Director*
Jeffrey M. Folick............................... 49 Director*
</TABLE>
- ------------------------
* Mr. Hoops and Mr. Folick were elected to their directorships pursuant to the
Interim Operating Agreement following the Effective Time to serve only until
the completion of the Offering. See "The Company--Separation from FHP."
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 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.
50
<PAGE>
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.
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 Holdings
in connection with the FHP Merger and his term will commence in May 1997. 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. and
PacifiCare Holdings.
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 Alexander Haagen Properties, Inc. and the
Countrybaskets Index Funds, Inc. Mr. Heineman is a director of FHP Financial
Corporation.
51
<PAGE>
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.
ALAN R. HOOPS has been a director of the Company since February 1997. Mr.
Hoops was elected as a nominee of PacifiCare Holdings pursuant to the Interim
Operating Agreement to serve only until the completion of the Offering. He has
been President, Chief Executive Officer and a director of PacifiCare Holdings
since February 1997 and has been President and Chief Executive Officer of
PacifiCare since April 1993 and a director of PacifiCare since 1994. He
previously served PacifiCare as Executive Vice President and Chief Operating
Officer from 1986 to April 1993, as Secretary from 1982 to April 1993, as Senior
Vice President from 1985 to 1986 and as Vice President, Marketing and Planning
from 1977 to 1985.
JEFFREY M. FOLICK has been a director of the Company since February 1997.
Mr. Folick was elected as a nominee of PacifiCare Holdings pursuant to the
Interim Operating Agreement to serve only until the completion of the Offering.
Mr. Folick has been Executive Vice President and Chief Operating Officer of
PacifiCare Holdings since February 1997 and has been President and Chief
Operating Officer of PacifiCare since December 1994. He previously served
PacifiCare in various capacities, including Regional Vice President of the West,
President of PacifiCare of California ("PCC") and Chief Operating Officer of
PCC. Prior to joining PCC in July 1992, Mr. Folick served as President of Secure
Horizons from January 1992 to July 1992.
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 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. 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.
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.
KENNETH S. ORD has been a consultant to the Company since shortly after the
Effective Time. Following 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 51 years old and was Senior Vice
President and Chief Financial Officer of FHP from 1994 to February 1997. 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.
52
<PAGE>
Joseph F. Prevratil served as a director of the Company from November 1996
to February 1997. Mr. Prevratil resigned from that position as a result of
various undertakings with the California Department of Corporations entered into
by FHP and PacifiCare in connection with the FHP Merger. Those undertakings
prohibited directors of the FHP Foundation from serving as director of FHP,
PacifiCare or their subsidiaries. Mr. Prevratil has remained a director of the
FHP Foundation.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the terms of the Certificate of Incorporation of the Company,
the Board of Directors is divided into three classes, designated Class I, Class
II and Class III. Class I, consisting of Messrs. Anderson, Burdge and Heineman,
will hold office for a term expiring at the annual meeting of stockholders to be
held in 2000, Class II, consisting of Mr. Honeycutt, Dr. Jamplis, Mr. Massimino
and Mr. Folick 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. Price and Mr. Hoops, 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, except for Messrs. Hoops and
Folick, who will serve as directors only until the completion of the Offering.
At each annual meeting of the stockholders of the Company, the successors to the
class of directors whose terms expire at such meeting will be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. See "Description of Capital
Stock--Certain Anti-Takeover Effects." The Board of Directors elects officers
annually and such officers serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Finance Committee, an Audit
Committee and a Compensation Committee.
FINANCE COMMITTEE. The Finance Committee has the responsibility to review
the Company's 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) and Dr. Jamplis 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. Mr. Burdge and Dr. Jamplis both served as directors of FHP until the
Effective Time. Substantially all of the Company's revenues are derived from
provider agreements with FHP. In addition to provider agreements, the Company
has entered into a number of other transactions
53
<PAGE>
with respect to the Company's separation from FHP, including agreements
concerning the Acquisition, the Talbert Note, Common Stock acquired by FHP,
administrative services and the allocation of liabilities, taxes and employee
benefits obligations between the Company and FHP. See "Relationship with FHP and
PacifiCare Following the Offering."
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 years ended December 31, 1995 and 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.
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 $ 10,267
President and Chief Executive Officer 1995 411,925(7) -- 13,560
Gloria L. Austin.............................................. 1996 210,001 645,280 10,031
Senior Vice President 1995 205,502 20,000 12,263
Walter R. Stone............................................... 1996 151,382 258,833 10,611
Vice President, Finance, Treasurer and Secretary 1995 148,627 -- 12,074
Jennifer M. Gutzmore, M.D..................................... 1996 200,273 188,578 10,108
Vice President, Health Care Services 1995 175,036 3,000 12,325
Gary E. Goldstein, M.D. (5)................................... 1996 191,334 -- 281
Former Senior Vice President 1995 249,995 1,549 13,050
Regina B. Lightner (6)........................................ 1996 93,830 10,000 5,831
Vice President, Marketing 1995 -- -- --
</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.
54
<PAGE>
(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; Dr. Goldstein:
1996--$281, 1995--$1,050 and Ms. Lightner: 1996--$159. 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--$3,495, 1995--$3,000;
Ms. Austin: 1996--$3,495, 1995--$3,000; Mr. Stone: 1996--$3,495,
1995--$2,973; Dr. Gutzmore: 1996--$3,495, 1995--$3,000; Dr. Goldstein:
1995-- $3,000 and Ms. Lightner: 1996--$2,286. Also includes FHP
contributions under the 401(k) portion of the FHP ESOP Plan as follows: Mr.
Massimino: 1996--$6,150; Ms. Austin: 1996--$6,150; Mr. Stone: 1996--$6,150;
1995--$500; Dr. Gutzmore: 1996--$6,150; Dr. Goldstein: 1995--$500 and Ms.
Lightner: 1996--$3,386.
(5) Dr. Goldstein has not been employed by the Company since July 12, 1996.
(6) Ms. Lightner joined the Company in April 1996.
(7) 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. Mr. Ord served as Senior Vice President and Chief Financial
Officer of FHP during 1996 and 1995, and received from FHP salary of $336,265 in
1996 and $249,995 in 1995 (see footnote 2 above); bonus of $59,170 in 1996 (see
footnote 3 above); and other compensation in the amount of $101,219 in 1996
(representing $95,756 of loan forgiveness by FHP, $1,968 in dollar value of
taxable income from group term life insurance coverage in excess of $50,000
purchased by FHP and $3,495 in FHP contributions under the FHP ESOP) and $12,864
in 1995 (representing $864 in dollar value of taxable income from group term
life insurance coverage in excess of $50,000 purchased by FHP, $9,000 in FHP
contributions under the FHP Money Purchase Pension Plan and $3,000 in FHP
contributions under the FHP ESOP).
OPTION GRANTS
OPTION GRANTS IN FISCAL YEAR 1996. The following table sets forth the
options granted with respect to the fiscal year ended December 31, 1996 to the
Named Executive Officers. The Company has not granted any stock appreciation
rights. Pursuant to Mr. Ord's consulting agreement, the Company has agreed to
grant to him options to purchase 30,000 shares of Common Stock upon assuming the
position of Executive Vice President and Chief Financial Officer of the Company.
Subject to certain accelerating events, these options will vest at the rate of
20% on each December 15 of the years 1997 through 2001.
55
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/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 -- -- -- -- --
Regina B. Lightner.............. 4,500(3) 4.1% 29.17 09/17/2006 82,697 208,711
</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.
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.
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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
Regina B. Lightner........................................ 0 4,500 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. The Company has agreed to enter into a Change of Control Employment
Agreement with Mr. Ord when he assumes the position of Executive Vice President
and Chief Financial Officer shortly after the completion of the Offering.
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 not
approved by a majority of the disinterested directors prior to disclosure of the
Change in Control or if such disclosure is made without the prior approval of a
majority of the disinterested directors. If during the relevant period the
executive's employment is terminated other than for "Cause," death or
disability, or if the executive terminates his employment for "Good Reason" (as
defined in the Employment Agreements), the executive is entitled to receive an
accrued salary and annual incentive
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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 in November 1996. The purpose of the Stock
Incentive Plan is to provide long-term incentives to those key employees
(including executive officers), significant agents and consultants responsible
for the continued success and growth of the Company. In addition, the Stock
Incentive Plan is intended to enable the Company to attract, motivate and retain
experienced and knowledgeable independent directors.
The Stock Incentive Plan is administered by a committee (the "Committee"),
comprised of the Board of Directors or a committee consisting of two or more of
its members, each of whom is an "outside" director within the meaning of Section
162(m) of the Internal Revenue Code (the "Code"). The Committee may grant
discretionary awards to any officer, non-employee director, key employee, or
significant consultant or advisor to the Company. In addition, the Stock
Incentive Plan provides for the automatic grant of nonqualified stock options to
non-employee directors.
SHARES THAT MAY BE ISSUED UNDER THE STOCK INCENTIVE PLAN. A maximum of
180,000 shares of Common Stock, or approximately 5.7% of the issued and
outstanding shares of Common Stock (on a fully diluted basis), has been reserved
for issuance under the Stock Incentive Plan and may be issued upon the exercise
of stock options ("Options") or stock appreciation rights ("SARs") or pursuant
to awards of restricted stock ("Restricted Stock Awards") or performance share
awards ("Performance Awards") and stock bonuses ("Stock Bonuses") or
non-employee director options ("Non-Employee Director Options") (Options, SARs,
Restricted Stock Awards, Performance Awards, Stock Bonuses and Non-Employee
Director Options are collectively referred to as "Awards"). The maximum number
of shares of Common Stock that may be delivered pursuant to incentive stock
options is 50,000 shares. The maximum number of shares of Common Stock that may
be delivered as Non-Employee Director Options is 60,000. The maximum number of
shares subject to Options and SARs that are granted during any calendar year to
any
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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 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
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<PAGE>
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.
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 in November 1996, with a
vesting schedule determined as if the grant were as of September 17, 1996 (the
"Initial Non-Employee Director Options"), the Chairman of the Board of Directors
received options to purchase 6,000 shares of Common Stock, the chairmen of the
Audit, Compensation
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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. Mr. Hoops and Mr. Folick will not receive any non-employee
director options. 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 Initial Non-Employee
Director Options 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. Unexercised options granted to a non-employee
director who resigns from service but then returns to the Board of Directors
within 180 days will not expire upon resignation, but will remain intact as if
there had been no interruption in the director's service. 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.
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 contribution that can
be made each year and allocated to the employer contribution accounts of
participants. The employer contribution accounts 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, subject to the satisfaction of applicable
nondiscrimination rules, equal 50% of the participant's 401(k) deferrals up to
six percent of the participant's compensation. If the participant has completed
at least five years of service, the employer matching contributions rate will,
subject to the satisfaction of applicable nondiscrimination rules, 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 will include a prohibition on the ability of
physician-employees of the Talbert Medical Groups to invest in the Company
Common Stock fund.
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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 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
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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
TRANSACTIONS WITH FHP
As a result of its role in the formation of the Company, FHP could be
considered a "promoter" of the Company, as defined under the Securities Exchange
Act of 1934 (the "Exchange Act"). As such, the Company has provided the
following disclosure regarding certain transactions with FHP.
THE ACQUISITION. On February 14, 1997, the Company acquired FHP's 92.4%
equity interest in TMMC and THSC in exchange for Rights to purchase 92.4% of the
Company's Common Stock, plus the Talbert Note. Immediately prior to the
Acquisition, TMMC received the Capital Contribution of $67 million. The Company
and FHP also entered into a number of other agreements in connection with the
Acquisition, including with respect to Common Stock acquired by FHP,
administrative services, and the allocation of liabilities, taxes and employee
benefits obligations between the Company and FHP. These transactions were
effected for the purpose of separating TMMC and THSC from FHP concurrently with
the FHP Merger. See "The Company--Separation from FHP" and "Relationship with
FHP and PacifiCare Following the Offering."
PROVIDER AGREEMENTS. The Talbert Medical Groups have provided health care
services to FHP members since their formation pursuant to provider agreements
with FHP. The Company derives nearly all of its revenues from FHP, either
through capitated payments directly from FHP or copayments, fee for service or
other revenue from FHP members. Capitated revenue from FHP amounted to
approximately $379.8 million and $419.5 million for the years ended December 31,
1996 and 1995, respectively, while copayments, fee for service and other revenue
accounted for $80.8 million and $76.2 million, respectively, during those
periods. Pursuant to the terms of the FHP Merger, the Talbert Medical Groups
entered into the New FHP Provider Agreements, which took effect as of March 1,
1997. The New FHP Provider Agreements will result in significantly lower
revenues to the Company. On a pro forma basis, the New FHP Provider Agreements
would have decreased the Company's revenue from $460.5 million to $421.3 million
and increased its pretax operating loss from $12.1 million to $58.7 million for
the year ended December 31, 1996. See "Relationship with FHP and PacifiCare
Following the Offering" and "Prospectus Summary--Unaudited Pro Forma Condensed
Consolidated Financial Data."
MASTER LEASE AGREEMENT. As of January 1, 1996, TMMC and FHP entered into a
Real Estate and Equipment Master Transfer Agreement (the "Master Lease
Agreement") that provides for the lease, sublease or assignment to the Company
of the facilities and equipment used by the Talbert Medical Groups that are
either owned or leased by FHP. For the year ended December 31, 1996, TMMC made
payments to FHP of approximately $21 million in connection with the Master Lease
Agreement. See "Relationship with FHP and PacifiCare Following the
Offering--Master Lease Agreement" and "Consolidated Financial Statements--Note
5."
ADMINISTRATIVE SERVICES. FHP historically provided the Company with
management information services and certain administrative and overhead
activities. These costs were allocated to TMMC and THSC by FHP based on FHP's
actual costs allocated on a per enrollee basis. The Company paid FHP
approximately $7.5 million and $5.4 million for the years ended December 31,
1996 and 1995, respectively, for such services. FHP will provide such services
for up to one year following the Acquisition. See "Relationship with FHP and
PacifiCare Following the Offering--Administrative Services Agreement."
TRANSFERS TO TMMC AND THSC. In connection with their commencement of
operations on January 1, 1996, FHP recapitalized TMMC and THSC to eliminate a
stockholder's deficit of approximately $17.9 million and transferred to TMMC and
THSC certain assets and liabilities related to the operations of the Company's
predecessor businesses. These transfers included current assets of approximately
$27.5 million (including approximately $5.1 million in cash, accounts receivable
of approximately $5 million, inventories of approximately $7.4 million, deferred
income taxes of approximately $6.4 million, and prepaid expenses and other
current assets of approximately $3.6 million), all of which were transferred at
their historical cost
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to FHP. These transfers are reflected on the Company's consolidated financial
statements presented herein.
TRANSACTIONS WITH THE MANAGEMENT INVESTORS
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 were issued as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Jack D. Massimino.......................................................... 150,000(1)
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
Barbara C. McNutt.......................................................... 4,500
Gary E. Goldstein, M.D..................................................... 3,750
Kenneth S. Ord............................................................. 3,000
Michael J. Weinstock....................................................... 3,000
Margaret Van Meter......................................................... 1,500
-------
Total 228,000
-------
-------
</TABLE>
- ------------------------
(1) 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 $5.1 million. See
"Prospectus Summary--Unaudited Pro Forma Condensed Consolidated Financial Data."
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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 Acquisition and 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 as of March 1, 1997.
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 after one year. If the parties are unable to agree
upon new rates, the existing rates will remain in effect.
The Talbert Medical Groups are responsible for providing or arranging all
covered medical services to members of various FHP HMO subsidiaries in
accordance with professional standards. FHP provides 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 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 the contractual obligations 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 of TMMC and THSC held by FHP in exchange for
the Rights and the Talbert Note. The Talbert Note is payable in an amount equal
to the proceeds of the Offering if fully subscribed. If the Offering is not
fully subscribed, the
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<PAGE>
Company has agreed to sell to FHP any of its shares of Common Stock unsubscribed
in the Offering in exchange for the cancellation of any remaining indebtedness
under the Talbert Note. As a condition precedent to the Company's obligations
under the Acquisition Agreement, FHP 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 the Master Lease Agreement to provide
for the lease, sublease or assignment to 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
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<PAGE>
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 on
December 31, 2000.
ADMINISTRATIVE SERVICES AGREEMENT
The Company and FHP have entered an Administrative Services Agreement
pursuant to which FHP will provide information systems services to the Company
after the Expiration Date for up to one year. The Administrative Services
Agreement may be terminated earlier by: (i) 120 days written notice; (ii) 30
days written notice of a material breach, subject to cure; or (iii) mutual
agreement of the Company and FHP.
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 $6.2 million as of December
31, 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 $66.8 million as of December 31, 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 $89.2 million as of December 31, 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 Company will
not assume any unfunded liabilities under the Benefits Agreement.
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
were outstanding as of the date of merger of FHP with PacifiCare Holdings were
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
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<PAGE>
FHP will share equally the liability for, or the benefit of, such an adjustment
to the extent any such adjustment, when combined with all other such adjustments
that have occurred, exceeds $4 million. The Tax Allocation Agreement will become
effective only if, upon completion of the Offering, FHP owns less than 50% of
the outstanding shares of Common Stock.
ALLOCATION OF LIABILITIES AND INDEMNIFICATION AGREEMENT
The Company and FHP have entered into an Allocation of Liabilities and
Indemnification Agreement ("the Assumption Agreement") to provide for
assumptions of liabilities and cross-indemnities designed to allocate between
them financial responsibility for certain liabilities. Under the Assumption
Agreement, the Company will assume, to the extent they arose from the 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 arising from the business of TMMC or THSC prior to the Expiration
Date 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.
INTERIM OPERATIONS AGREEMENT
The Company, FHP and PacifiCare Holdings have entered into the Interim
Operations Agreement to govern certain aspects of the Company's operations
during the period between the time of the closing of the FHP Merger and the
completion of the Offering. The Interim Operations Agreement requires the
Company to obtain the consent of PacifiCare Holdings before taking certain
actions prior to the completion of the Offering, including, among other things,
actions with respect to: (i) certain issuances of stock options to employees or
physicians; (ii) the amendment of the Company's Certificate of Incorporation,
Bylaws or Stockholder Rights Agreement; (iii) mergers and acquisitions and sales
of assets; (iv) the incurrence of indebtedness or issuance of any debt
securities, except pursuant to lines of credit in effect prior to the Effective
Time; (v) the adoption or material amendment of employee benefit plans, or the
entering into or amendment of employment or severance agreements with directors
and officers; (vi) changes in the compensation of officers and directors; (vii)
certain capital expenditures; (viii) loans or transactions with officers and
directors or (ix) the settlement of certain lawsuits. In addition, pursuant to
the Interim Operations Agreement, two PacifiCare Holdings nominees were
appointed to the Board of Directors of the Company to serve as directors until
the completion of the Offering. See "Management-- Directors and Executive
Officers."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1997 (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...... 2,772,000(4) 92.4% 2,772,000 -- --
3120 Lake Center Drive
Santa Ana, California 92704
Jack D. Massimino.................. 160,433(5)(6)(7) 5.0% -- 160,591(8) 5.4%
Gloria L. Austin................... 17,141(5)(7) * -- 17,244(8) *
Walter R. Stone.................... 8,141(5)(7) * -- 9,414(8) *
Jennifer M. Gutzmore, M.D.......... -- * -- 113(8) *
Gary E. Goldstein, M.D............. 3,750(5) * -- 6,836(8) *
Regina B. Lightner................. -- -- -- 91(8) *
Franklin Resources, Inc. .......... -- -- -- 264,812(9) 8.8%
777 Mariners Island Boulevard
San Mateo, CA 94404
Jack R. Anderson................... -- -- -- 132,737(10) 4.4%
Richard M. Burdge, Sr.............. -- -- -- 41,814(11) 1.4%
Warner Heineman.................... -- -- -- -- --
Van B. Honeycutt................... -- -- -- -- --
Alan R. Hoops......................
Jeffrey Folick.....................
Robert W. Jamplis, M.D............. -- -- -- -- --
Robert C. Maxson, Ed.D............. -- -- -- -- --
Westcott W. Price III.............. 20,250(5) * -- 45,176(12) 1.5%
All executive officers and
directors as
a group (16 persons)............. 209,715(5) 7.0% -- 414,030 13.8%
</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 41,779,927 shares of FHP Common Stock and 21,034,163 shares of FHP
Preferred Stock outstanding as of the Effective Date.
(4) Based on the receipt of rights to purchase 92.4% of the Company's Common
Stock pursuant to the Acquisition Agreement.
(5) Transfer of certain 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.
(6) Includes 15,000 shares held under an irrevocable trust for the benefit of
Mr. Massimino's children.
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(7) Based on beneficial ownership of Common Stock that includes stock options
exercisable on the date of commencement of trading of the Common Stock on
Nasdaq, currently anticipated to be May , 1997.
(8) Based on beneficial ownership of FHP Common Stock that includes shares held
by the trustee under the FHP ESOP. As of December 31, 1996, the approximate
number of shares of FHP Common Stock allocated to the ESOP accounts of the
individuals named above were as follows: Mr. Price--5,342 shares; Mr.
Massimino--3,365 shares; Ms. Austin--2,187 shares; Mr. Stone--4,283 shares;
Dr. Gutzmore-- 2,404 shares; Dr. Goldstein--5,584 shares and Ms.
Lightner--99 shares.
(9) Based on beneficial ownership of 5,370,900 shares of FHP Common Stock and
298,680 shares of FHP Preferred Stock, as reported on Schedule 13F for the
period ended December 31, 1996.
(10) Based on beneficial ownership of 819,518 shares of FHP Common Stock and
2,471,794 shares of FHP Preferred Stock as of February 14, 1997, 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.
(11) Based on beneficial ownership of 287,630 shares of FHP Common Stock and
742,107 shares of FHP Preferred Stock as of February 14, 1997, 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.
(12) Based on beneficial ownership of 528,211 shares of FHP Common Stock as of
February 14, 1997, including shares held under a revocable trust controlled
by Mr. Price.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation provides that the Company may
issue up to 15 million shares of common stock, par value $0.01 per share (the
"Common Stock"), and 1.2 million shares of preferred stock, par value $0.01 per
share (the "Preferred Stock"). Immediately preceding the Offering, there will be
228,000 shares of Common Stock and no shares of Preferred Stock issued and
outstanding, held by 12 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.
The initial term of the directors in Class I expired at the 1997 annual
stockholders meeting, at which time the directors in Class I were re-elected to
serve a three-year term. The initial terms of the directors in Classes II and
III will expire at the 1998 and 1999 annual stockholders meetings, respectively,
at which meetings the directors in those classes will be elected to serve for a
three-year term
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(with the exception of Messrs. Folick and Hoops, who will serve only until the
completion of the Offering). A director may be removed by the stockholders of
the Company only for cause. See "Management-- Classified Board of Directors."
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
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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.
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
74
<PAGE>
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.
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 228,000 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, but may not exceed 20% of the outstanding Common Stock.
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 and certain tax matters relating to the Offering are being passed
upon for the Company by O'Melveny & Myers LLP, Los Angeles, California.
EXPERTS
The financial statements as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996, 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
75
<PAGE>
Statement, reference hereby is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement filed by
the Company with the Commission, as well as such reports and other information
filed by the Company with the Commission, may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material, when filed, may
also be obtained from the Public 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.
PacifiCare Holdings, 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 Holdings is, and prior to the FHP Merger FHP and PacifiCare
were, subject to the information requirements of the Exchange Act, and, in
accordance therewith, will file or have filed 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.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
-------------
<S> <C>
Independent Auditors' Report........................................................................... F-2
Consolidated Balance Sheets, as of December 31, 1995 and 1996.......................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996............. F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 1994, 1995 and
1996................................................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996............. 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, 1996 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, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, 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 was 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, 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.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
April 4, 1997
F-2
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
--------- ---------
Cash and cash equivalents (Notes 1 and 2)............................... $ -- $ 41,212
<S> <C> <C>
Accounts receivable, net of allowance for doubtful accounts of $5,478
and $7,292 at December 31, 1995, and 1996, respectively (Note 1)...... 4,976 8,473
Receivables from FHP (Note 1)........................................... -- 2,791
Inventories (Note 1).................................................... 7,414 7,302
Deferred income taxes (Notes 1 and 6)................................... 6,434 8,771
Prepaid expenses and other current assets............................... 3,602 5,530
--------- ---------
Total current assets................................................ 22,426 74,079
Property and equipment, net (Note 3).................................... -- 8,075
Deferred rent........................................................... -- 3,995
Other assets............................................................ 752 550
--------- ---------
Total assets........................................................ $ 23,178 $ 86,699
--------- ---------
--------- ---------
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C> <C>
Accounts payable (Note 2)............................................... $ 8,693 $ 12,121
Medical claims payable (Notes 1 and 4).................................. 12,831 15,538
Accrued salaries and employee benefits (Note 7)......................... 19,055 21,113
Other current liabilities............................................... 485 2,255
Advances from FHP....................................................... -- 39,162
--------- ---------
Total current liabilities........................................... 41,064 90,189
Deferred income taxes (Notes 1 and 6)................................... -- 1,934
Other liabilities....................................................... -- 113
--------- ---------
Total liabilities................................................... $ 41,064 $ 92,236
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' deficit (Notes 2, 7, 9 and 10):
Preferred Stock, $0.01 par value; 1,200,000 shares authorized; no
shares outstanding at December 31, 1996............................. -- --
Common Stock, $0.01 par value; 15,000,000 shares authorized; issued
and outstanding 3,000,000 shares at December 31, 1996............... -- 30
Paid in capital....................................................... -- 5,922
Deferred stock compensation expense (Notes 7 and 10).................. -- (3,510)
Retained deficit (Note 9)............................................. (17,886) (7,979)
--------- ---------
Total stockholders' deficit......................................... (17,886) (5,537)
--------- ---------
Total liabilities and stockholders' deficit......................... $ 23,178 $ 86,699
--------- ---------
--------- ---------
</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,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue (Note 1):
Capitation from FHP........................................................ $ 403,787 $ 419,471 $ 379,740
Copayments, fee for service and other...................................... 52,000 76,228 80,806
---------- ---------- ----------
Total revenue............................................................ 455,787 495,699 460,546
Expenses (Notes 1, 2, 5 and 7):
Affiliated medical services................................................ 162,385 173,417 136,672
Purchased medical services................................................. 104,755 121,570 109,750
Dental services............................................................ 26,528 31,379 27,478
Optometry, pharmacy, and other primary health care services................ 87,967 102,412 105,415
Clinic operations.......................................................... 79,446 85,585 63,509
---------- ---------- ----------
Total cost of health care................................................ 461,081 514,363 442,824
Marketing, general and administrative...................................... 22,387 29,698 31,479
---------- ---------- ----------
Operating loss............................................................... (27,681) (48,362) (13,757)
Interest income.............................................................. -- -- 1,691
---------- ---------- ----------
Loss before income tax benefit............................................... (27,681) (48,362) (12,066)
Income tax benefit (Notes 1 and 6)........................................... (11,349) (19,754) (4,087)
---------- ---------- ----------
Net loss............................................................... $ (16,332) $ (28,608) $ (7,979)
---------- ---------- ----------
---------- ---------- ----------
Loss per common and common equivalent share (Note 2)......................... $ (5.45) $ (9.55) $ (2.66)
---------- ---------- ----------
---------- ---------- ----------
</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 DEFERRED EARNINGS STOCKHOLDERS'
SHARES STOCK CAPITAL COMPENSATION (DEFICIT) DEFICIT
------------ ----------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 -- -- -- -- $ (10,765) $ (10,765)
Transfer of net deficit related to the
Company's Arizona and New Mexico
operations as of July 1, 1994 (Notes 1 and
2)........................................ -- -- -- -- (6,824) (6,824)
Net change in stockholders' deficit arising
from intercompany transactions (Note 2)... -- -- -- -- 15,808 15,808
Net loss.................................... -- -- -- -- (16,332) (16,332)
------------ ----- ---------- ------------- ---------- ------------
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 --
Stock compensation expense from capital
contribution (Note 10).................... -- -- 5,092 $ (3,054) -- 2,038
Stock compensation expense from common stock
option grant (Note 7)..................... -- -- 760 (456) -- 304
Net loss.................................... -- -- -- -- (7,979) (7,979)
------------ ----- ---------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 1996 3,000,000 $ 30 $ 5,922 $ (3,510) $ (7,979) $ (5,537)
------------ ----- ---------- ------------- ---------- ------------
------------ ----- ---------- ------------- ---------- ------------
</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,
---------------------------------
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................................................... $ (16,332) $ (28,608) $ (7,979)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. -- -- 1,292
Increase in allowance for doubtful accounts................................ 368 92 1,814
Deferred income taxes...................................................... (632) (646) (403)
Deferred stock compensation expense........................................ -- -- 2,342
Effect on cash of changes in operating assets and liabilities
Accounts receivable...................................................... (1,212) (1,439) (5,311)
Accounts receivable from FHP............................................. -- -- (2,791)
Inventories.............................................................. (1,813) 412 112
Prepaid expenses and other current assets................................ (715) 1,613 (1,928)
Deferred rent............................................................ -- -- (3,995)
Other assets............................................................. (18) (123) 202
Accounts payable......................................................... (408) 2,024 3,428
Medical claims payable................................................... 2,594 1,055 15,538
Accrued salaries and employee benefits................................... 1,909 (2,902) 2,058
Other liabilities........................................................ 451 (313) 1,883
---------- ---------- ---------
Net cash provided by (used in) operating activities............................ (15,808) (28,835) 6,262
---------- ---------- ---------
INVESTING ACTIVITIES--Purchase of property and equipment....................... -- -- (9,367)
---------- ---------- ---------
FINANCING ACTIVITIES:
Issuance of common stock..................................................... -- -- 100
Advances from FHP............................................................ 15,808 28,835 39,162
Capital contribution by FHP.................................................. -- -- 5,055
---------- ---------- ---------
Net cash provided by financing activities...................................... 15,808 28,835 44,317
---------- ---------- ---------
Net increase in cash and cash equivalents...................................... -- -- 41,212
Cash and cash equivalents, at beginning of period.............................. -- -- --
---------- ---------- ---------
Cash and cash equivalents, at end of period.................................... $ -- $ -- $ 41,212
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information:
Non-cash transactions:
Transfer of net deficit related to the Company's Arizona and New Mexico
operations as of July 1, 1994 (Notes 1 and 2).............................. $ (6,824) -- --
----------
----------
Recapitalization of the Company by FHP--Assumption of medical claims payable
by FHP (Note 9)............................................................ -- -- $ 12,831
---------
---------
Deferred stock compensation expense charged to paid in capital (Note 10)..... -- -- $ 5,852
---------
---------
</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.
Prior to July 1, 1994, FHP's operations in Arizona and New Mexico were not a
part of the Company's staff model operations. Accordingly, their respective
financial position and results of operations for all periods prior to July 1,
1994 have been omitted from the accompanying consolidated statement of
operations and balance sheet data. At July 1, 1994 FHP's operations in Arizona
and New Mexico were merged with the Company's staff model operations. On July 1,
1994 net liabilities of $6,824,000 were contributed to the Company relating to
FHP's operations in those states. 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 from separate records
maintained by subsidiaries of FHP. These statements also reflect key assumptions
regarding the allocation of certain FHP overhead expense items and certain
balance sheet accounts 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. (SUBSEQUENT EVENTS)
On August 4, 1996, FHP entered into an Agreement and Plan of Reorganization,
as amended and restated, (the "Merger Agreement"), by and among FHP, PacifiCare
and the other parties named therein.
F-7
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to the Merger Agreement, FHP became a wholly-owned subsidiary of
PacifiCare Holdings (as defined herein) on February 14, 1997 (the "Effective
Time").
In connection with the merger between FHP and PacifiCare, FHP sold its 92.4%
of the common stock of TMMC and THSC to TMMHC in exchange for transferable
rights to acquire 92.4% of the common shares of the Company for $21.50 per
share, plus a note for $59,598,000 (the "Talbert Note"). The rights are expected
to be distributed to the stockholders of FHP. FHP stockholders will receive one
right for every 21.19154 shares of FHP common stock and one right for every
26.27752 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 2,772,000. If fully
subscribed, the Company expects to receive $59,598,000 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, 7.6% of the
outstanding shares of TMMC's common stock and 7.6% 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 exchanged their Management Shares in TMMC and THSC for 7.6% of the
common shares of TMMHC in connection with TMMHC's acquisition of 92.4% of the
common stock of TMMC and THSC from FHP. As a result of these transactions
(collectively the "Acquisition") TMMC and THSC became wholly-owned subsidiaries
of TMMHC in a transaction accounted for similar to a pooling of interests.
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 acquired 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.
In November 1996, the Company renegotiated its provider contracts 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, 1996, would, on an unaudited pro forma basis, have resulted in
reducing the Company's revenue by $39,290,000 and increasing total cost of
health care by $7,296,000.
Just prior to the Acquisition, FHP contributed $67,000,000 to TMMC which
resulted in a stockholders' equity balance of approximately $60,000,000 at the
Effective Time (the "Capital Contribution"). Immediately following the
Acquisition, the Company settled amounts due to FHP of approximately $23 million
to reimburse FHP for medical service and other costs paid on behalf of the
Company.
F-8
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concurrently with the FHP Merger, the Company, FHP and PacifiCare Holdings
entered into the Interim Operations Agreement to govern certain aspects of the
Company's operations during the period between the time of the closing of the
FHP Merger and the completion of the Offering. The Interim Operations Agreement
provided for the election of two PacifiCare Holdings nominees to the Board of
Directors of the Company to serve until the completion of the Offering. In
addition, the Interim Operations Agreement places certain restrictions on the
operations of the Company without the consent of PacifiCare Holdings until the
completion of the Offering.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of 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, 1994, 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 89%, 85% and 83% of the
Company's net revenue for the years ended December 31, 1994, 1995 and 1996,
respectively. The Company's remaining revenues are largely derived from
copayments 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.
F-9
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net revenue includes reserves for 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.
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.
F-10
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES FROM FHP
Receivables from FHP at December 31, 1996 of $2,791,000 are comprised of
accrued hospital incentives.
ADVERTISING COSTS
Advertising costs, which have not been significant, are expensed when
incurred.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method. The principal components of
inventories are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Pharmacy................................................................... $ 5,400 $ 4,967
Optometry.................................................................. 1,368 1,436
Other...................................................................... 646 899
--------- ---------
$ 7,414 $ 7,302
--------- ---------
--------- ---------
</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 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 in accordance with the method
utilized by FHP's consolidated group. Under this method, the tax expense of the
group is allocated to its members based on the members' profit or loss,
including the recording of benefits for tax losses utilized in the consolidated
groups tax return. 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. Furthermore,
had the Company's accounting for income taxes been performed utilizing the
separate return basis for the year ended December 31, 1996, the Company would
have recorded a valuation allowance equal to the tax benefit of $4,087,000. For
the year ended December 31, 1996 such adjustment would have resulted in a pro
forma net loss and net loss per common and common equivalent share of
$12,066,000 and $4.03, respectively.
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 has agreed, among other things, to file all tax returns
with respect to the Company for all taxable periods beginning after the
Effective Time 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
F-11
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which requires adoption of the
disclosure provisions no later than years beginning after December 15, 1995 and
adoption of the recognition and measurement provisions for non-employee
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period
which is usually the vesting period.
Pursuant to the new accounting standard, companies are encouraged, but are
not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, but are required to disclose in a note
to the financial statements pro forma net income and earnings per share as if
the company had applied the new method of accounting. The Company has determined
that it will not change to the fair value method and will continue to use
Accounting Principle Board Opinion No. 25 for measurement and recognition of
employee stock-based transactions (Note 7).
PER SHARE CALCULATIONS
The per common and common equivalent 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.
F-12
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" (SFAS 128) which
is effective for financial statements issued for periods ending after December
15, 1997. SFAS 128 simplifies the previous standards for computing earnings per
share and requires the disclosure of basic and diluted earnings per share. For
the year ended December 31, 1996, the amount reported as net income per common
and common equivalent share is not materially different than that which would
have been reported for basic and diluted earnings per share in accordance with
SFAS 128.
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 payors and new capitated enrollees. 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 the
implementation of a new physician compensation system. The Company also expects
to 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 to a performance basis. Contributions will be made only if the
Company meets its financial goals. The Company also intends to further reduce
costs by improving its use of outside specialists and by renegotiating its
specialty provider contracts. 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
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)
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
liabilities and expenses not specifically identifiable to any particular
business of FHP, certain allocations were made to reflect the future and ongoing
operations of the Company. These allocations were based on a variety of factors
which management believes provide a reliable basis for the accompanying
consolidated financial statements and include the following:
1. Prior to July 1, 1994, Arizona and New Mexico operations were not a part
of the Company's staff model operations and their respective financial
position, results of operations, and cash flows for all periods prior to
July 1, 1994 have been omitted from the accompanying consolidated
financial statements.
2. 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.
3. The Company determined its proportionate share of expenses incurred by
FHP on a company-wide basis and used such amounts as a basis to determine
its applicable accounts payable balances.
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. In the future the
Company may assume hospital risk under certain circumstances when the
Company believes it can make sufficient improvement in utilization to
warrant such risk.
6. The historical financial statements include the costs of management
information services and certain administrative and overhead activities
provided to the Company by FHP. Such costs were based on FHP's actual
costs allocated on a per enrollee basis. 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 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.
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, 1994,
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)
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>
DECEMBER 31,
1996
-------------
<S> <C>
Furniture, fixtures and equipment................................................................... $ 1,955
Computer equipment.................................................................................. 5,290
Leasehold improvements.............................................................................. 2,122
------
9,367
Less accumulated depreciation and amortization...................................................... (1,292)
------
Property and equipment, net..................................................................... $ 8,075
------
------
</TABLE>
The Company historically used fixed assets owned or leased by FHP, and will
lease or sublease such assets following its separation from FHP (Note 5) .
Subsequent to commencing operations on January 1, 1996, the Company began
purchasing certain types of fixed assets, including furniture, fixtures and
equipment for certain facilities occupied after January 1, 1996.
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, 1994................ $ 6,646 $ 45,972 $ (40,842) $ 11,776
Year ended December 31, 1995................ $ 11,776 51,803 (50,748) $ 12,831(1)
Year ended December 31, 1996................ $ -- (1) 76,958 (61,420) $ 15,538
</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 Company and FHP have agreed to certain amendments
of the Master Lease Agreement, which include (i) the extension, at prevailing
market rates, of the existing terms of the individual leases to December 31,
2005, with the exception of leases with respect to up to 90,000 square feet (of
a total of approximately 472,000 square feet) that the Company may elect not to
renew; (ii) two five-year extension options at prevailing market rates,
exercisable solely at the Company's discretion; (iii) a right of first offer for
the Company to purchase the furniture, fixtures and equipment subject to the
Master Lease Agreement ("FF&E"). The parties have also agreed to enter into a
separate lease agreement with respect to FF&E that will expire on December 31,
2000. The Company has also
F-15
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LEASES (CONTINUED)
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:
1997......................................................... $ 18,518 $ 2,690 $ 21,208
1998......................................................... 16,774 2,709 19,483
1999......................................................... 15,143 2,703 17,846
2000......................................................... 13,562 2,626 16,188
2001......................................................... 9,848 2,241 12,089
Remainder.................................................... 30,800 9,185 39,985
------------ ------------ ----------
Total operating lease commitments.............................. $ 104,645 $ 22,154 $ 126,799
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
NOTE 6--INCOME TAX BENEFIT
The components of the income tax benefit are summarized as follows (amounts
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal........................................................... $ (8,427) $ (14,899) $ (2,854)
State............................................................. (2,290) (4,209) (830)
---------- ---------- ----------
Total current benefit............................................... (10,717) (19,108) (3,684)
---------- ---------- ----------
Deferred:
Federal and state................................................. (632) (646) (403)
---------- ---------- ----------
Total income tax benefit............................................ $ (11,349) $ (19,754) $ (4,087)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The income tax benefit differs from the amount of tax determined by applying
the federal statutory rate to loss before income taxes. The components of this
difference are summarized as follows (amounts in thousands, except percentages):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996
------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tax benefit from net losses at federal statutory
tax rate....................................... $ (9,688) 35% $ (16,926) 35% $ (4,223) 35%
State tax benefit, net of federal tax............ (1,661) 6 (2,828) 6 (613) 5
Non-deductible stock compensation expense........ -- -- -- -- 749 (6)
-- -- --
--------- --------- ---------
Total income tax benefit......................... $ (11,349) 41% $ (19,754) 41% $ (4,087) 34%
-- -- --
-- -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAX BENEFIT (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Deferred tax assets-reserves and accruals not currently deductible... $ 5,788 $ 6,434 $ 8,771
Deferred tax liabilities-difference between book and tax deduction
allowable under operating leases................................... -- -- (1,934)
--------- --------- ------
Net deferred tax assets.......................................... $ 5,788 $ 6,434 $ 6,837
--------- --------- ------
--------- --------- ------
</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 in any of the periods
presented.
NOTE 7--EMPLOYEE BENEFITS
FHP has certain benefit plans in which the Company's employees are currently
participating. FHP has two tax-qualified retirement plans: a Money Purchase
Pension Plan ("MPPP") and an Employee Stock Ownership Plan with Code section
401(k) and employer matching contribution features ("ESOP"). Following the
separation from FHP, the Company intends to establish a money purchase pension
plan that will be virtually identical to FHP's MPPP. The Company's Money
Purchase Pension Plan (the "Money Purchase Pension Plan") is intended to be a
tax-qualified retirement plan that satisfies the requirements of Sections 401(a)
and 501(a) of the Internal Revenue Code. The Money Purchase Pension Plan will be
frozen both as to contributions as well as to participation. The account
balances under the FHP MPPP attributable to employees of the Company will be
transferred to the Money Purchase Pension Plan. The accounts of each participant
under the Plan will be 100% vested. In general, accounts will be distributable
upon a participant's termination from employment. With respect to the ESOP, the
Company will establish its own plan and trust which are substantially the same
as FHP's ESOP and its related trust. Following the separation from FHP, the
account balances under FHP's ESOP which are attributable to employees of the
Company will be transferred to the new plan and trust to be established by the
Company.
Under the provisions of the FHP plans, FHP contributed into trusts for the
benefit of employees an amount equal to 12% of eligible annual compensation, as
defined, of all plan participants. Effective January 1, 1995, the contribution
rate was reduced to 8% of eligible annual compensation, as defined. Effective
January 1, 1996 the contribution rate was further reduced to 2% of eligible
annual compensation. Participants do not vest until they have completed five
years of service with the Company. Nonvested contributions, which are forfeited
upon an employee's termination, are treated as a reduction in the amount of
FHP's contribution. The combined contribution expenses for the Company's
employees for the MPPP and ESOP were $15,611,000, $10,246,000, and $15,745,000
for the years ended December 31, 1994, 1995 and 1996 respectively.
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
F-17
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFITS (CONTINUED)
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 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 of 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 anniversaries of the grant date.
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 at the rate of 40% on the date of commencement of trading of the
Common Stock on Nasdaq and 15% each on January 1 from 2000 through 2003. Based
on a 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).
F-18
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFITS (CONTINUED)
The following is a summary of the activity in the Plan for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding at beginning of year........................................... 0 --
Granted.................................................................... 109,986 $ 22.26
Exercised.................................................................. -- --
Forfeitures................................................................ -- --
--------- ------
Outstanding at end of year................................................. 109,986 $ 22.26
--------- ------
--------- ------
Options exercisable at year end............................................ 15,854
---------
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OUTSTANDING WEIGHTED AVERAGE
AT DECEMBER 31, REMAINING CONTRACTUAL WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES 1996 LIFE EXERCISE PRICE
- ----------------------------------------- ------------------- ------------------------- -----------------
<S> <C> <C> <C>
$8.00-$13.50............................. 39,636 8 $ 10.00
$13.75-$20.50............................ -- -- --
$20.75-$31.25............................ 70,350 6 29.17
-------
109,986 6.7 $ 22.26
-------
-------
</TABLE>
The estimated fair value of options granted during 1996 was $29.17 per
share. The Company applies APB Opinion No. 25 in accounting for its stock
options. Accordingly, no compensation expense has been recognized for its stock
based compensation plan other than in respect of those options which vested on
December 31, 1996. Had compensation expense for the Company's Stock Incentive
Plan been determined on the fair value at the grant dates for awards under the
plan consistent with the method of FASB 123, the Company's net loss and loss per
common and common equivalent share for the year ended December 31, 1996 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss to common stockholders
As reported.................................................. $(7,979,000)
Pro forma.................................................... $(8,423,000)
Net loss per common and common equivalent share
As reported.................................................. $(2.66)
Pro forma.................................................... $(2.81)
</TABLE>
The fair value of options granted under the Company's Stock Incentive Plan
during 1996 was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used: no dividend
yield, expected volatility of 50%, risk free interest rate of 7.0%, assumed
forfeiture rate of 0%, and an expected life of 6 years for the options granted
on September 17, 1996 and 8 years for those granted on November 21, 1996.
NOTE 8--COMMITMENTS AND CONTINGENCIES
LITIGATION
During the ordinary course of business, the Company has 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.
F-19
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
SUBSEQUENT EVENT
On April 2, 1997, six former FHP stockholders filed a class action lawsuit
entitled BRADY, ET. AL. V ANDERSON ET. AL. in U.S. District Court for the
Central District of California. The lawsuit alleges certain violations of
federal securities laws and common law by certain of the Company's directors and
officers, including material misrepresentations in connection with the FHP
Merger and the separation of the Company from FHP. The plaintiffs seek
unspecified damages and other relief. The Company, which is not named as a
defendant, believes these allegations are without merit.
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 at January 1, 1996 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.
Management and other investors (the "Management Investors") own 7.6% 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. Forty percent of
the shares issued to each Management Investor vested by December 31, 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.
F-20
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' DEFICIT (CONTINUED)
As the Management Investors will not be making a capital contribution, the
Company has recognized stock compensation expense representing the portion of
the Capital Contribution made by FHP that could be deemed to accrue to the
Management Investors. Total compensation expense of $5.1 million (7.6% of the
total Capital Contribution of $67 million) will be recognized over the vesting
period of the restricted shares of Common Stock held by the Management
Investors. As of December 31, 1996, restrictions with respect to 40% of the
Management Shares had lapsed, and accordingly the Company recognized
approximately $2.3 million of stock compensation expense for the year ended
December 31, 1996.
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-21
<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, 1996:
Revenue.................................................... $ 117,395 $ 119,097 $ 112,452 $ 111,602
Operating loss............................................. (2,249) (3,223) (4,503) (3,782)
Loss before income tax benefit............................. (2,018) (2,803) (3,954) (3,291)(1)
Net loss................................................... (1,174) (1,630) (2,299) (2,876)
Loss per common and common equivalent share................ (0.39) (0.54) (0.77) (0.96)
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 equivalent share................ (2.08) (2.51) (3.14) (1.81)
</TABLE>
- ------------------------
(1) Includes recognition of non tax-deductible stock compensation expense of
approximately $2.3 million.
In the opinion of management, all adjustments necessary to fairly present
the unaudited quarterly information are included for all quarters presented.
F-22
<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.............................................................. 13
The Company............................................................... 21
The Offering.............................................................. 23
Financial Statements...................................................... 26
Use of Proceeds........................................................... 27
Dividend Policy........................................................... 27
Capitalization............................................................ 27
Selected Consolidated Financial Data...................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 31
Business.................................................................. 38
Management................................................................ 50
Certain Transactions...................................................... 64
Relationship with FHP and PacifiCare Following the Offering............... 66
Principal Stockholders.................................................... 70
Description of Capital Stock.............................................. 72
Legal Matters............................................................. 75
Experts................................................................... 75
Additional Information.................................................... 75
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.
2,772,000 SHARES
[logo]
TALBERT MEDICAL
MANAGEMENT
HOLDINGS
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
APRIL , 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....................................... $ 18,060
Financial advisor expenses................................................................ 450,000
Printing and engraving expenses........................................................... 325,000
Legal fees and expenses................................................................... 735,000
Accounting fees and expenses.............................................................. 325,000
Miscellaneous............................................................................. 46,940
------------
Total................................................................................. $ 1,900,000
------------
------------
</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
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.
On March 15, 1996, TMMC and THSC entered into an agreement to issue 270,000
shares (adjusted for a subsequent 3-for-10 reverse stock split) and 45 shares,
respectively, of their common stock to the Management Investors for aggregate
consideration of $8,125 and $90, respectively, 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." FHP
subsequently repurchased approximately 4,500 TMMC shares and 1 THSC share
pursuant to its buy-back rights upon the departure of certain Management
Investors from the Company or FHP.
At the Effective Time, the Company exchanged 228,000 shares of its Common
Stock to the Management Investor for 265,580 shares of common stock TMMC and
THSC (which represent 7.6% of the outstanding common stock of those companies).
These 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. See "Certain Transactions" and
"Relationship with FHP and PacifiCare Following the Offering."
The Company believes the securities transactions referred to under this item
were exempt from registration by virtue of Section 4(2) of the Securities Act.
II-1
<PAGE>
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 the Expiration Date 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 Form of Opinion of O'Melveny & Myers LLP.
*8.1 Form of Tax Opinion of O'Melveny & Myers LLP.
+10.1 Form of Provider Agreement dated as of November 6, 1996 between certain HMO subsidiaries of FHP
International Corporation and the Talbert Medical Groups.
+10.2 Form of Provider Agreement dated as of November 6, 1996 between the California HMO subsidiary of
PacifiCare Health Systems, Inc. and the Talbert Medical Groups.
*10.3 Stock Purchase Agreement dated as of February 14, 1997 between Talbert Medical Management Holdings
Corporation and FHP International Corporation.
*10.4 Standstill Agreement dated as of February 14, 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 February 13, 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 February 14, 1997 between Talbert Medical Management
Corporation and FHP International Corporation.
*10.8 Employee Benefits and Compensation Allocation Agreement dated as of February 14, 1997 between Talbert
Medical Management Holdings Corporation and FHP International Corporation.
*10.9 Tax Allocation Agreement dated as of February 14, 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 February 14, 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
+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.
*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.
*10.26 Interim Operations Agreement
+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-6)
</TABLE>
- ------------------------
* Filed herewith.
+ Filed previously.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULE
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED 1994, 1995 AND 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>
Allowance for doubtful accounts:
Accounts Receivable
Year Ended December 31, 1994................................... $ 5,018 1,500 (1,132) $ 5,386
Year Ended December 31, 1995................................... $ 5,386 952 (860) $ 5,478
Year Ended December 31, 1996................................... $ 5,478 3,711 (1,897) $ 7,292
</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 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
II-4
<PAGE>
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 Amendment
No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized
in the City of Costa Mesa, State of California, on this 4th day of April, 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
Amendment No. 2 has been signed on April 4, 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
Alan R. Hoops
*
------------------------------------------- Director
Jeffrey M. Folick
*
------------------------------------------- Director
Robert W. Jamplis, M.D.
*
------------------------------------------- Director
Robert C. Maxson
*
------------------------------------------- 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 the Expiration Date 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 Form of Opinion of O'Melveny & Myers LLP.
*8.1 Form of Tax Opinion of O'Melveny & Myers LLP.
+10.1 Form of Provider Agreement dated as of November 6, 1996 between certain HMO subsidiaries of FHP
International Corporation and the Talbert Medical Groups.
+10.2 Form of Provider Agreement dated as of November 6, 1996 between the California HMO subsidiary
of PacifiCare Health Systems, Inc. and the Talbert Medical Groups.
*10.3 Stock Purchase Agreement dated as of February 14, 1997 between Talbert Medical Management
Holdings Corporation and FHP International Corporation.
*10.4 Standstill Agreement dated as of February 14, 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 February
13, 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 February 14, 1997 between Talbert Medical
Management Corporation and FHP International Corporation.
*10.8 Employee Benefits and Compensation Allocation Agreement dated as of February 14, 1996 between
Talbert Medical Management Holdings Corporation and FHP International Corporation.
*10.9 Tax Allocation Agreement dated as of February 14, 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.
*10.26 Interim Operations Agreement
+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-6)
</TABLE>
- ------------------------
* Filed herewith.
+ Filed previously.
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
FHP INTERNATIONAL CORPORATION
AND
TALBERT MEDICAL MANAGEMENT CORPORATION,
ON THE ONE HAND,
AND
KATHRYN M. ADAIR,
GLORIA L. AUSTIN,
WILLIAM P. BRACCIODIETA,
LARRY L. GEORGOPOLOUS,
GARY E. GOLDSTEIN, M.D.,
RICHARD D. JACOBS,
R. JUDD JESSUP,
JACK D. MASSIMINO,
BARBARA C. MCNUTT,
KENNETH S. ORD,
WESTCOTT W. PRICE III,
WALTER R. STONE,
MARGARET VAN METER,
AND
MICHAEL J. WEINSTOCK,
ON THE OTHER HAND
March 15, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . 2
1.2 Terms Generally . . . . . . . . . . . . . . . . . . . . . . 2
2. Purchase and Sale of Stock . . . . . . . . . . . . . . . . . . . . 2
2.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . 2
2.2 Closing and Closing Date. . . . . . . . . . . . . . . . . . 3
3. Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Additional Securities. . . . . . . . . . . . . . . . . . . . . . . 4
5. FHP Options to Purchase. . . . . . . . . . . . . . . . . . . . . . 4
5.1 Options Related to Termination of Employment. . . . . . . . 4
5.2 Unrestricted Option . . . . . . . . . . . . . . . . . . . . 4
5.3 Performance Options . . . . . . . . . . . . . . . . . . . . 5
5.4 Mechanics of Option Exercise. . . . . . . . . . . . . . . . 6
5.5 Certain Adjustments . . . . . . . . . . . . . . . . . . . . 7
6. Drag-Along Rights and Tag-Along Rights . . . . . . . . . . . . . . 7
6.1 Drag-Along Rights . . . . . . . . . . . . . . . . . . . . . 7
6.2 Tag-Along Rights. . . . . . . . . . . . . . . . . . . . . . 8
6.3 Same Terms and Conditions . . . . . . . . . . . . . . . . . 8
7. Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . 8
7.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . 8
7.2 Incidental Registration . . . . . . . . . . . . . . . . . . 9
(a) Right to Include Registrable Securities. . . . . . . . 9
(b) Priority in Incidental Registrations . . . . . . . . . 9
(c) Seller Information; Suspension . . . . . . . . . . . . 9
7.3 Underwritten Offerings; Lockup. . . . . . . . . . . . . . . 10
7.4 Indemnification/Indemnification Agreements. . . . . . . . . 10
7.5 Termination of Registration Rights. . . . . . . . . . . . . 10
7.6 Registration Expenses . . . . . . . . . . . . . . . . . . . 11
8. Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9. Representations, Warranties and Agreements . . . . . . . . . . . . 11
9.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . 11
9.2 Investment Representations. . . . . . . . . . . . . . . . . 11
9.3 Legends; Stop Transfer. . . . . . . . . . . . . . . . . . . 13
10. Certain Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 14
10.1 Right of First Refusal. . . . . . . . . . . . . . . . . . . 14
i
<PAGE>
11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.1 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.2 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . 16
11.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.4 No Third Party Beneficiaries. . . . . . . . . . . . . . . . 18
11.5 Assignment by FHP . . . . . . . . . . . . . . . . . . . . . 18
11.6 Time is of the Essence. . . . . . . . . . . . . . . . . . . 18
11.7 Entire Agreement; Amendments. . . . . . . . . . . . . . . . 18
11.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . 19
11.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 19
11.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 19
11.11 Waiver of Jury Trials; Consent to Jurisdiction. . . . . . . 19
11.12 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of March 15, 1996, by and among FHP International Corporation, a
Delaware corporation ("FHP"), Talbert Medical Management Corporation, a Delaware
corporation (the "Company"), Kathryn M. Adair ("Adair"), Gloria L. Austin
("Austin"), William P. Bracciodieta ("Bracciodieta"), Larry L. Georgopolous
("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard D. Jacobs
("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino ("Massimino"), Barbara
C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W. Price III ("Price"),
Walter R. Stone ("Stone"), Margaret Van Meter ("Van Meter"), and Michael J.
Weinstock ("Weinstock"). In this Agreement, Adair, Austin, Bracciodieta,
Georgopolous, Goldstein, Jacobs, Jessup, Massimino, McNutt, Ord, Price, Stone,
Van Meter and Weinstock are referred to individually as a "Management Investor"
and collectively as the "Management Investors."
A. WHEREAS, FHP has formed the Company to function as a physician
practice management company to provide practice management services to certain
professional corporations; and
B. WHEREAS, FHP has acquired 9,100,000 shares of the Class A
Voting Common Stock of the Company, par value $.01 (one cent) per share (the
"Class A Common Stock"), which shares of Class A Common Stock comprise all of
the issued and outstanding shares of Class A Common Stock of the Company, for
consideration in the amount of $91,000.00; and
C. WHEREAS, the Company and FHP regard the services provided to
the Company by the Management Investors as valuable to the Company and FHP, and
have determined that it would be to the advantage and in the best interests of
the Company and FHP to provide for the issuance of shares of Class B Common
Stock of the Company, par value $.01 (one cent) per share (the "Class B Common
Stock," with the Class A Common Stock and the Class B Common Stock collectively
referred to herein as the "Common Stock"), to the Management Investors as
provided for in this Agreement (i) as an inducement to remain in the service of
the Company and FHP, and (ii) as an incentive for increased efforts during such
service; and
D. WHEREAS, FHP desires to provide for the issuance of shares of
Class B Common Stock of the Company to the Management Investors, and the
Management Investors wish to acquire such shares from the Company, all on the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, and for other good and valuable
<PAGE>
consideration, the receipt of which is hereby acknowledged, the parties to this
Agreement mutually agree as follows:
1. DEFINITIONS.
1.1 ACCOUNTING TERMS. In this Agreement, "GAAP" means generally
accepted accounting principles, consistently applied. All accounting terms
not specifically defined herein shall be construed in accordance with GAAP.
1.2 TERMS GENERALLY. The definitions in this Agreement shall apply
equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed by the phrase
"without limitation" if such phrase does not actually appear. The headings
of Sections are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement. Unless the context shall otherwise require, any reference to
any agreement or other instrument or statute or regulation is to it as
amended and supplemented from time to time (and, in the case of a statute
or regulation, to any successor provision). Any reference in this
Agreement to a "day" or a number of "days" (without the explicit
qualification of "business") shall be interpreted as a reference to a
calendar day or number of calendar days. If any action or notice is to be
taken or given on or by a particular calendar day, and such calendar day is
not a business day, then such action or notice shall be deferred until, or
may be taken or given, on the next business day.
2. PURCHASE AND SALE OF STOCK.
2.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, each of the Management Investors, severally and not jointly,
agrees to purchase, and FHP agrees to cause the Company to, and the Company
agrees to, issue, sell and transfer to each of the Management Investors,
severally and not jointly, at the Closing (as defined below), for
consideration in the amount of $.01 (one cent) per share, the following: as
to each such Management Investor, the number of shares of the Class B
Common Stock of the Company (the "Stock") set forth in that certain
schedule signed by each of FHP, the Company, and such Management Investor
(each, a "Management Investor Schedule"). The aggregate number of shares
of Stock issued to the Management Investors shall be 900,000, and the Stock
issued to the Management Investors, collectively, initially shall comprise
9% of the total outstanding Common Stock of the Company (the "Management
Stock"). Stock certificates evidencing the Management Stock, in addition
to blank stock
2
<PAGE>
powers executed by each Management Investor, initially shall be held by the
Assistant Secretary of FHP (the "Escrow Holder"), and shall continue to be
held by the Escrow Holder for the periods set forth in Section 3 below,
subject to the rights and limitations set forth in this Agreement. All
shares of Management Stock shall be fully paid and nonassessable shares.
Except as otherwise provided in this Agreement, each Management Investor
shall have all rights of a shareholder with respect to the Management
Stock, including rights to vote, to receive dividends (including stock
dividends), to participate in stock splits or other recapitalizations, and
to exchange such shares in a merger, consolidation or other reorganization
or exchange of shares.
2.2 CLOSING AND CLOSING DATE. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place on the date
ten (10) days following the date of the execution of this Agreement.
3. RESTRICTIONS. Subject to other limitations contained in this
Agreement, the Management Investors shall not have any right to sell, give,
pledge, hypothecate or otherwise transfer or dispose of any Management Stock
(the "Restrictions") until the Restrictions lapse as provided in this Section 3.
Prior to the lapse of the Restrictions, and subject to the provisions of
Section 3.1 below, the Management Stock shall continue to be held in escrow by
the Escrow Holder and shall be deemed to be "Restricted Securities." The
Restrictions shall lapse, and the Management Stock (and a proportional amount of
any Additional Securities (as defined herein)) shall vest, during the period
commencing on the date of the Closing and ending on July 1, 1999 (the "Vesting
Period") as follows:
3.1 The Restrictions imposed on the Restricted Securities under
this Section 3 shall lapse as to 25% of the shares of the Management Stock
issued to each Management Investor on July 1 of each year during the
Vesting Period. Upon the lapse of the Restrictions on shares of the
Management Stock, such shares shall cease to be Restricted Securities.
Within thirty (30) days after the lapse of the Restrictions on shares of
the Management Stock, the Escrow Holder shall, upon receiving confirmation
from the Company that the Management Investor's withholding obligations, if
any, under Section 8 of this Agreement have been satisfied, transmit to the
Management Investor the certificates evidencing those shares of Management
Stock with respect to which the Restrictions have lapsed; PROVIDED,
HOWEVER, that certificates representing shares of Management Stock which
are subject to a Performance Purchase Option under Section 5.3, below,
shall not be released from escrow until such time as the applicable
Performance Purchase Option has expired without having been exercised.
3
<PAGE>
3.2 The occurrence of a change in control of the Company or FHP
shall not be an event which causes Restrictions imposed upon and remaining
applicable to Management Stock to terminate.
4. ADDITIONAL SECURITIES. Any securities received as the result of
ownership of Restricted Securities ("Additional Securities"), including, without
limitation, securities received as a stock dividend or stock split, or as a
result of a merger, consolidation, recapitalization or reorganization, shall be
held by the Escrow Holder in the same manner and subject to the same conditions
as the Restricted Securities with respect to which they were issued. Each
Management Investor shall be entitled to direct the Escrow Holder to exercise
any warrant or option received as Additional Securities upon supplying the funds
necessary to do so, in which event the securities so purchased shall constitute
Additional Securities. In the event any Restricted Securities or Additional
Securities consist of a security by its terms or otherwise convertible or
exchangeable for another security at the election of the holder thereof, each
Management Investor may exercise any such right or conversion or exchange, and
any securities so acquired shall be deemed Additional Securities.
5. FHP OPTIONS TO PURCHASE. Notwithstanding the foregoing, the
Management Stock held by the Management Investors shall be subject to the
following terms:
5.1 OPTIONS RELATED TO TERMINATION OF EMPLOYMENT. Prior to the
lapse of the Restrictions on any Restricted Securities, and upon such time
as a Management Investor ceases to be employed by one of the Company, FHP,
or an Affiliate (as defined below) of FHP, FHP shall have the option to
purchase from such Management Investor, and such Management Investor shall
be obligated to sell to FHP, for consideration in the amount of $.01 (one
cent) per share (subject to Section 5.5, below), all or any portion of such
Restricted Securities (including any Additional Securities issued in
respect of such Restricted Securities) at the date of such termination of
employment. As used herein, an "Affiliate" of a Person (as defined in
Section 9.2(a), below) shall mean a Person controlling, under common
control with or controlled by such Person.
5.2 UNRESTRICTED OPTION. At any time prior to October 1, 1999, FHP
shall have the option to purchase from any Management Investor(s), and such
Management Investor(s) shall be obligated to sell to FHP, any or all of the
Management Stock, together with any Additional Securities issued in respect
of such Management Stock, of such Management Investor(s), at a price per
share of $30.00 (subject to Section 5.5, below).
4
<PAGE>
5.3 PERFORMANCE OPTIONS. FHP shall have the option to purchase
from any Management Investor(s), and such Management Investor(s) shall be
obligated to sell to FHP, for consideration in the amount of $.01 (one
cent) per share (subject to Section 5.5, below), certain amounts of the
Management Stock, together with any Additional Securities issued in respect
of such Management Stock, under the following circumstances (the
"Performance Purchase Options"):
(a) If the Company fails to meet the Financial Goal, as
adjusted, for the fiscal year 1996, as approved by the Audit Committee of
FHP's Board of Directors (the "Audit Committee") in accordance with the
procedures outlined in Section 5.3(d) below, FHP shall have the option to
purchase from each Management Investor that portion of the Management Stock
with respect to which the Restrictions lapsed on July 1, 1996 comprising
20% of the total amount of such Management Stock.
(b) If the Company fails to meet the Financial Goal, as
adjusted, for the fiscal year 1997, as approved by the Audit Committee in
accordance with the procedures outlined in Section 5.3(d) below, FHP shall
have the option to purchase from each Management Investor that portion of
the Management Stock with respect to which the Restrictions lapsed on
July 1, 1997 comprising 20% of the total amount of such Management Stock.
(c) If the Company fails to meet the Financial Goal, as
adjusted, for the fiscal year 1998, as approved by the Audit Committee in
accordance with the procedures outlined in Section 5.3(d) below, FHP shall
have the option to purchase from each Management Investor up to an
additional 20% of the total amount of Management Stock pursuant to the
following formula: for every $100,000 below the amount which is $4 million
below the Financial Goal, FHP shall have the option to purchase from each
Management Investor 0.5% of the total amount of such person's Management
Stock. For example, if the Company's fiscal year 1998 results are $7
million below the Financial Goal for the fiscal year 1998, FHP may purchase
additionally that portion of the Management Stock with respect to which the
Restrictions lapsed on July 1, 1998 comprising 15% of the total amount of
such Management Stock.
(d) The Financial Goals for the fiscal years 1996, 1997 and
1988 shall be as approved by the Audit Committee in accordance with the
following guidelines: The Financial Goal for fiscal year 1996 will be a
pretax loss of $21,784,000 (after allocation of FHP corporate charges and
after net interest income or expense). This pretax loss assumes that the
Fountain Valley Hospital, Salt Lake City
5
<PAGE>
Hospital, and Westminster subacute facility (collectively the "Hospitals")
were sold on July 1, 1995. The Financial Goal for fiscal year 1996 will be
adjusted to reflect the following: (i) an adjustment will be made to
include the budget of daily operating expenses for every day the Hospitals
are not sold during the fiscal year (the daily expenses to be added to
budget are as follows: Fountain Valley - $35,271, Utah Hospital - $21,271,
and Westminster subacute - $10,000); (ii) an adjustment will be made to
reflect interest on any debt incurred in connection with the formation of
the Company or lease expenses in excess of depreciation for assets leased
from FHP or its subsidiaries. The Financial Goal for fiscal year 1997 will
be equivalent to the Financial Goal for fiscal year 1996 (a pretax loss of
$21,784,000) adjusted to reflect (x) the annual impact of adjustments under
clause (ii) above and (y) an improvement of $20,000,000. The Financial
Goal for fiscal year 1998 will be the Financial Goal for fiscal year 1997
plus an improvement of $20,000,000. The determination of the Financial
Goal for fiscal year 1996 will be approved by the Audit Committee, and the
initial determination of the Financial Goals for fiscal year 1997 and 1998
will be approved by the Audit Committee prior to July 1, 1996, and July 1,
1997, respectively. The Audit Committee may, in its sole discretion
exercised in good faith, adjust the Financial Goals if it determines that
such adjustment is necessary or desirable to accomplish the purposes of
this Agreement. The determination as to whether the Company has met the
Financial Goal for any particular fiscal year shall be made by the Audit
Committee within 90 days after the end of such fiscal year (as to each
fiscal year, the "Determination Date"). The determinations of the Audit
Committee shall be conclusive and binding upon the parties in all respects.
5.4 MECHANICS OF OPTION EXERCISE.
(a) An option granted under Sections 5.1 or 5.2 hereof shall
be exercised by FHP upon 30 days' prior written notice to such effect to
the Management Investor(s) whose shares are subject to the option.
(b) With respect to each Performance Purchase Option granted
under Section 5.3 hereof, FHP shall have 90 days from the Determination
Date for such fiscal year within which to exercise the Performance Purchase
Option for that fiscal year.
(c) In the event that an option under this Section 5 is
exercised, the total purchase price for such shares shall be paid by bank
check at the time the certificate or certificates evidencing the shares
involved are delivered. Delivery of the certificate or certificates
6
<PAGE>
evidencing the shares involved, properly endorsed, shall be made, against
payment therefor, immediately after the date of exercise of the option
granted under this Section 5, or such other time as may be agreed upon by
the parties to such transaction.
5.5 CERTAIN ADJUSTMENTS. The Audit Committee may, in its sole
discretion exercised in good faith, adjust the number of shares of Management
Stock that may be purchased by FHP at any time upon the exercise of the options
provided in this Section 5, and the purchase price per share pursuant thereto,
if it determines that such adjustment is equitably required to prevent the
dilution or enlargement of the rights of FHP or the Management Investors, as
appropriate, that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in capital structure of
the Company, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities, or
any other corporate transaction or event having an effect similar to any of the
foregoing.
6. DRAG-ALONG RIGHTS AND TAG-ALONG RIGHTS. The provisions of this
Section 6 shall expire at such time as there has been sold or distributed to the
public in a spin-off or in one or more underwritten public offerings pursuant to
one or more Registration Statements (as defined in Section 7) filed with, and
declared effective by, the Commission under the Securities Act (both as defined
in Section 7) an aggregate number of shares of the Common Stock of the Company
equal to at least twenty percent (20%) of the Common Stock of the Company
outstanding after the last such public offering.
6.1 DRAG-ALONG RIGHTS. If FHP proposes a transaction which would
involve the sale or other transfer for consideration by FHP of an amount of
shares of Common Stock of the Company, which, if completed, would result in
a person or entity (other than FHP or its direct or indirect subsidiaries
or affiliates) acquiring 80% or more of the shares of the outstanding
Common Stock of the Company held by FHP (a "Proposed Transaction"), then
FHP shall give written notice (a "Transaction Notice") to the Management
Investors describing the material terms of the Proposed Transaction. FHP
shall be entitled to require each Management Investor to include in such
Proposed Transaction all of such Management Investor's shares of Management
Stock; PROVIDED, HOWEVER, that no Management Investor shall be required to
enter into any Proposed Transaction pursuant to this Section 6.1 unless the
terms and conditions of the Proposed Transaction provide that either (a)
such Management Investor will not be required to participate in any
indemnification of the buyer or buyers, or (b) if such Management Investor
will participate in such indemnification, (i) such Management Investor's
liability
7
<PAGE>
will be several and not joint and several, and (ii) such Management
Investor's liability will be capped at the market value, determined at the
time of receipt, of the net pre-tax proceeds to be received by such
Management Investor pursuant to the terms of the Proposed Transaction.
6.2 TAG-ALONG RIGHTS. In connection with any Proposed Transaction,
each Management Investor shall have a right to include in such Proposed
Transaction up to the number of shares of Management Stock computed by
multiplying (i) the total number of shares of Common Stock of the Company
proposed to be sold or otherwise disposed of by FHP pursuant to the
Proposed Transaction by (ii) a fraction, the numerator of which shall equal
the aggregate number of shares of Management Stock owned by such Management
Investor and which are no longer subject to the Restrictions provided for
in Section 3 or the Performance Options provided for in Section 5.3 as of
the close of business on the day immediately preceding the date of the
Transaction Notice and the denominator of which shall equal the sum of the
aggregate number of shares of the Common Stock of the Company issued and
outstanding on a fully diluted basis on such date. Any Management Investor
desiring to exercise his or her tag-along right must deliver a written
notice of exercise to FHP within 10 days after the date FHP gives the
Transaction Notice to such Management Investors.
6.3 SAME TERMS AND CONDITIONS. In the case of both the drag-along
rights described in Section 6.1 and the tag-along rights described in
Section 6.2, a sale of Management Stock by a Management Investor shall be
at the same price per share (in both amount and purchase medium) applicable
to the sale of the shares of Common Stock of the Company by FHP and
otherwise shall be on terms and conditions at least as favorable as those
applicable to FHP.
7. REGISTRATION RIGHTS.
7.1 CERTAIN DEFINITIONS. As used in this Section 7 and elsewhere
in this Agreement, the following terms shall have the following respective
meanings: (a) "Commission" shall mean the Securities and Exchange
Commission or any other Federal agency at the time administering the
Securities Act; (b) "Exchange Act" shall mean the Securities Exchange Act
of 1934, or any similar Federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time;
(c) "Registrable Securities" shall mean all Management Stock and Additional
Securities held by the Management Investors which are no longer subject to
the restrictions specified in Section 3 or the purchase options granted to
FHP under Section 5; (d) "Securities Act" shall mean the Securities Act of
1933, or any similar Federal statute, and the rules and regulations
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of the Commission thereunder, all as the same shall be in effect at the
time; and (e) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement
or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
7.2 INCIDENTAL REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company
proposes to register any of its Common Stock under the Securities Act
(other than by a registration on Form S-4 or S-8 or any successor or
similar forms or filed in connection with an exchange offer or any offering
of securities solely to the Company's existing stockholders), whether or
not for sale for its own account, the Company will each such time give
written notice thereof to all Management Investors and, upon the written
request of any Management Investor made within 20 days after the receipt of
any such notice, the Company will use its best efforts to effect the
registration under the Securities Act of the Registrable Securities for
which the Management Investor(s) has requested registration thereof;
PROVIDED, HOWEVER, that if the Company shall determine for any reason (i)
not to register such securities, then the Company shall be relieved of its
obligation to use best efforts to effect registration of the Registrable
Securities, or (ii) to delay registration of such securities, then the
Company shall be permitted to delay registering any Registrable Securities.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration
pursuant to this Section 7 involves an underwritten offering, and the
managing underwriter shall advise the Company that, in its opinion, the
number of securities requested and otherwise proposed to be included in
such registration exceeds the number which can be sold in such offering
within a price range acceptable to the Company, the Company will include in
such registration, to the extent of the number which the Company is so
advised can be sold in such offering, (i) first, all securities proposed to
be sold by the Company, (ii) second, all securities proposed to be sold by
FHP, and (iii) third, the number of Registrable Securities requested to be
included in such registration by the Management Investors and securities of
other persons requested to be included in such registration that, in the
opinion of such managing underwriter, can be sold, such amount to be
allocated among all such Management Investors and other persons pro rata
based upon the respective number of securities each such person has
requested to be included in such registration.
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(c) SELLER INFORMATION; SUSPENSION. The Company may require
each seller of Registrable Securities to furnish the Company such
information regarding such seller and the distribution of such securities
as the Company may from time to time reasonably request. Notwithstanding
any other provision of this Agreement, the Management Investors understand
that there may be periods during which the Company may determine, in good
faith, that it is in the best interest of the Company and its stockholders
to defer disclosure of any material facts regarding the Company business
which the Company requires for reasonable business purposes to remain
confidential (collectively, "Non-Public Information"), until such
information has reached a more advanced stage and that during such periods
sales of Registrable Securities and the effectiveness of any registration
statement covering Registrable Securities may be suspended or delayed.
Each Management Investor agrees by acquisition of such Registrable
Securities that upon receipt of any notice from the Company of (i) the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, or (ii) the
development of any Non-Public Information, then such Management Investor
will forthwith discontinue such Management Investor's disposition of
Registrable Securities pursuant to the registration statement relating to
such Registrable Securities.
7.3 UNDERWRITTEN OFFERINGS; LOCKUP.
In connection with any distribution by one or more underwriters
of the Company's securities registered pursuant to this Section 7, to the extent
not inconsistent with applicable law, each Management Investor agrees as a
condition to such Management Investor's rights under this Agreement not to
effect any public sale or distribution of any equity securities of the Company,
or any securities convertible into or exchangeable or exercisable for such
securities, including a sale pursuant to Rule 144 under the Securities Act (or
any similar provision then in force), during such period as may be agreed to
between the Company and the underwriters, except as part of such underwritten
registration.
7.4 INDEMNIFICATION/INDEMNIFICATION AGREEMENTS. Notwithstanding
the foregoing, the Company may require, as a condition to including any
Management Investor's Registrable Securities in any registration statement filed
pursuant to this Sections 7, that each Management Investor who has requested
that his or her Registrable Securities be included in such registration
statement enter into an indemnification agreement
10
<PAGE>
with the Company on terms and conditions customary for indemnification
agreements in connection with transactions of this type.
7.5 TERMINATION OF REGISTRATION RIGHTS. The registration rights
granted to the Management Investors pursuant to this Section 7 shall terminate:
(a) As to any particular Registrable Securities, at the time that such
Registrable Securities can be sold by the Management Investor holding such
Registrable Securities pursuant to Rule 144 or successor rules without the
necessity for registration; (b) Upon transfer by the Management Investor of such
Registrable Securities; and (c) In any event, ten years from the date of this
Agreement.
7.6 REGISTRATION EXPENSES. All expenses incurred by the Company
incident to the Company's performance of or compliance with this Section 7,
including, without limitation, all registration and filing fees, fees and
expenses of compliance with state securities or blue sky laws, printing expenses
and fees and disbursements of counsel for the Company and all independent public
accountants (including the expenses of any audit), but excluding underwriting
commissions, and discounts and expenses agreed to be paid to underwriters (all
such expenses being herein called "Registration Expenses"), shall be borne by
the Company.
8. WITHHOLDING. The Management Investors acknowledge that the
Company may withhold compensation (in cash, or, at the Company's option, in
stock) to satisfy all applicable federal, state, and local income, employment
and other tax withholding requirements.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
9.1 AUTHORIZATION. FHP and each Management Investor represent and
warrants that this Agreement, when executed and delivered by each of them, will
constitute a valid and legally binding obligation of each of them, enforceable
against each of them in accordance with its terms.
9.2 INVESTMENT REPRESENTATIONS.
(a) This Agreement is made with the Management Investors in
reliance upon each Management Investor's representation to the Company and
to FHP, which by such Management Investor's execution and delivery hereof
each Management Investor hereby confirms, that the shares of the Management
Stock to be received by such Management Investor will be acquired for
investment for such Management Investor's own account, not as a nominee or
agent, and not with a view to the sale in connection with a public
distribution of any part thereof; and (ii) such Management Investor has no
present intention of selling, granting a
11
<PAGE>
participation in or otherwise distributing, and does not have any contract,
undertaking, agreement or arrangement with any natural person, corporation,
partnership, association or other entity ("Person") to sell, transfer or
grant a participation to such Person, or to any third Person, with respect
to any of the shares of the Management Stock.
(b) Each Management Investor understands that the Management
Stock has not been registered under the Securities Act on the ground that
the sale and the issuance of Management Stock hereunder is exempt from
registration under the Securities Act pursuant to Section 4(2) thereof and
regulations issued thereunder, and that FHP's and the Company's reliance on
such exemption is predicated on the Management Investors' representations
set forth herein.
(c) Each Management Investor represents that such Management
Investor is an executive officer or director of the Company or FHP. Each
Management Investor further represents that, during the course of the
transaction and prior to such Management Investor's purchase of shares of
the Management Stock, such Management Investor had access to, the
opportunity to ask questions of, and receive answers from, representatives
of FHP and the Company concerning the terms and conditions of the offering
and to obtain additional information (to the extent FHP or the Company
possessed such information or could acquire it without unreasonable effort
or expense) necessary to verify the accuracy of any information furnished
to such Management Investor or to which such Management Investor had
access.
(d) Each Management Investor has relied solely on its own
investigations in making a decision to purchase the Management Stock, and
has received no representation or warranty from FHP or the Company, or any
of the affiliates, employees or agents of either.
(e) Each Management Investor understands that the Management
Stock may not be sold, transferred or otherwise disposed of without
registration or qualification under the Securities Act and the California
Corporate Securities Law of 1968, as amended (the "CSL") or pursuant to an
exemption therefrom, and that in the absence of an effective registration
statement and permit covering the Management Stock or an available
exemption from registration under the Securities Act and qualification
under the CSL, the Management Stock must be held indefinitely. Each
Management Investor represents that, in the absence of such an effective
registration statement and permit covering the Management Stock, such
Management Investor will sell, transfer or otherwise dispose of the
Management Stock only in a manner consistent with his or its
representations set
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<PAGE>
forth herein and then only in accordance with the provisions of this
Agreement and applicable laws and regulations.
(f) Each Management Investor agrees that, except as
specifically contemplated hereunder, in no event will such Management
Investor transfer or dispose of any of the Management Stock other than
pursuant to an effective registration statement under the Securities Act,
unless and until (i) there is compliance with all requirements contained in
other sections of this Agreement; (ii) the Management Investor shall have
notified the Company of the proposed disposition and shall have furnished
the Company with a statement of the circumstances surrounding the
disposition; (iii) if requested by the Company, at the expense of the
Management Investor or transferee, such Management Investor shall have
furnished to the Company an opinion of counsel, reasonably satisfactory to
the Company, to the effect that such transfer may be consummated without
registration under the Securities Act; and (iv) the transferee executes and
delivers an assumption agreement, in form and substance satisfactory to
FHP, by which the transferee assumes all obligations of a Management
Investor under this Agreement.
9.3 LEGENDS; STOP TRANSFER.
(a) All certificates for shares of the Stock shall bear a
legend in substantially the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
IN COMPLIANCE WITH SUCH ACT AND LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE NOT
TRANSFERABLE, EXCEPT IN ACCORDANCE WITH THE PROCEDURES AND
RESTRICTIONS SET FORTH IN THE CERTIFICATE OF INCORPORATION AND
THE STOCK PURCHASE AGREEMENT DATED AS OF _________, 1996 AMONG
THE COMPANY, FHP INTERNATIONAL CORPORATION ("FHP"), KATHRYN M.
ADAIR, GLORIA L. AUSTIN, WILLIAM P. BRACCIODIETA, LARRY L.
GEORGOPOLOUS, GARY E. GOLDSTEIN, M.D., RICHARD D. JACOBS, R.
JUDD JESSUP, JACK D. MASSIMINO, BARBARA C. MCNUTT, KENNETH S.
ORD, WESTCOTT W. PRICE III, R. WALTER R. STONE, MARGARET VAN
MATER, AND MICHAEL J. WEINSTOCK (THE "STOCK PURCHASE
AGREEMENT"), INCLUDING BUT NOT LIMITED TO FHP'S OPTION TO
PURCHASE THE SECURITIES REPRESENTED BY THIS CERTIFICATE
PURSUANT TO SECTION 5.2 THEREOF. COPIES OF THE STOCK PURCHASE
AGREEMENT ARE FILED AT THE PRINCIPAL OFFICE OF THE COMPANY AND
ARE
13
<PAGE>
AVAILABLE TO ANY HOLDER WITHOUT CHARGE UPON WRITTEN REQUEST
THEREFOR. ANY PURPORTED TRANSFER IN VIOLATION OF SUCH
RESTRICTIONS SHALL BE VOID AND OF NO EFFECT. AS USED HEREIN,
"TRANSFER" SHALL MEAN SALE, EXCHANGE, ASSIGNMENT, TRANSFER,
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF ANY INTEREST IN A
SHARE EXCEPT BY OPERATION OF LAW IN CONNECTION WITH A MERGER OR
CONSOLIDATION OF THE COMPANY.
THE VOTING OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS
SUBJECT TO THE PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND THE STOCK PURCHASE AGREEMENT.
(b) The certificates for shares of the Management Stock shall
also bear any legend required by any applicable state securities law.
(c) In addition, the Company shall make a notation regarding
the restrictions on transfer of the Management Stock in its stock records,
and shares of the Management Stock shall be transferred on the records of
the Company only if transferred or sold pursuant to an effective
registration statement under the Securities Act covering such shares or
pursuant to and in compliance with the provisions of subsection 9.2(f)
hereof.
10. CERTAIN COVENANTS.
10.1 RIGHT OF FIRST REFUSAL. The provisions of this Section 10
shall expire at such time as there has been sold or distributed to the
public in a spin-off or in one or more underwritten public offerings
pursuant to one or more Registration Statements filed with, and declared
effective by, the Commission under the Securities Act.
(a) Each Management Investor agrees that such Management
Investor will not sell or otherwise dispose of all or any portion of the
Management Stock held by such Management Investor unless such sale or
disposition (i) involves only those shares of Management Stock (a) with
respect to which the Restrictions have lapsed, and (b) are no longer
subject to any of the options provided in Section 5 hereof, and (ii) is
made (a) for consideration that is payable in cash or cash equivalents at
the time of sale, (b) only in strict accordance with and after full
compliance with the provisions of this Section 10.1, and (c) pursuant to a
good faith offer to purchase such Management Stock in writing from a
responsible third party. In the event of any such proposed sale or other
disposition, the Management Investor proposing to make such sale or other
disposition (the "Selling Investor") will give notice to the Company and
14
<PAGE>
concurrently to FHP containing a complete description of the transaction
proposed (the "Proposal"), including the number of shares of Management
Stock proposed to be sold or otherwise disposed of (the "Transfer Shares"),
the consideration to be paid per Transfer Share and the names of all other
parties to, and all other material terms of, the proposed transaction, and
a copy of the written offer from the third party.
(b) For a period of thirty (30) business days after delivery
of the Proposal (the "FHP Option Period"), FHP shall have the sole and
exclusive right to purchase all or any portion of the Transfer Shares owned
by the Selling Investor for the consideration stated in the Proposal and on
such other terms and conditions as those offered to the Selling Investor as
set forth in the Proposal.
(c) If within the FHP Option Period FHP does not exercise the
option provided in subsection (b) above as to all of the Transfer Shares,
then for a period of ten (10) days (the "Company Option Period") commencing
upon the expiration of the FHP Option Period (or such earlier time as FHP
has either given notice of exercise pursuant to (e) below or has advised
the Selling Investor that it does not intend to exercise such option), the
Company shall have the sole and exclusive right to purchase all or any
portion of the remaining Transfer Shares for the consideration and on the
other terms and conditions set forth in the Proposal.
(d) After expiration of the FHP Option Period and the Company
Option Period, if FHP and the Company have not exercised their respective
options so as to purchase, in the aggregate, all of the Transfer Shares
proposed to be sold by the Selling Investor, then none of such Transfer
Shares will be sold to either of said parties, and within a period ending
sixty (60) days after the expiration of the Company Option Period, the
Selling Investor may sell or otherwise dispose of the Transfer Shares as
are the subject of the Proposal, but (i) only for cash or cash equivalents,
and (ii) only in strict accordance with the terms and provisions set forth
in the Proposal.
(e) Any option granted under this Section 10.1 may be
exercised by notice in writing to the Selling Investor and the Company
stating that such option is exercised.
(f) In the event that the options under this Section 10.1 have
been exercised so as to purchase all of the Transfer Shares proposed to be
sold by the Selling Investor, delivery of the certificate or certificates
evidencing the Transfer Shares, properly endorsed, shall be made by the
Selling Investor against payment therefor within
15
<PAGE>
ten (10) days after the expiration of the Company Option Period at the
principal office of the Company, unless a different time and place or both
is agreed upon by the parties to such transaction, and the total purchase
price with respect to such option shall be paid in the manner and at the
time or times specified in the Proposal.
(g) Notwithstanding anything to the contrary contained in this
Agreement, a Management Investor shall be permitted to transfer those
shares of such Management Investor's Management Stock with respect to
which the Restrictions have lapsed, to a Permitted Transferee (as defined
below) of such Management Investor. For purposes of this Agreement,
"Permitted Transferee" shall mean (i) any member of the immediate family of
such Management Investor, (ii) any trust, all of the beneficiaries of which
are members of the immediate family of such Management Investor, or (iii)
the estate or personal representative of such Management Investor if such
Management Investor is deceased; PROVIDED, HOWEVER, that any Permitted
Transferee to whom such shares of Management Stock are transferred pursuant
to this paragraph (g) shall be required, as a condition of such transfer,
to execute and deliver a written assumption agreement by which such
assignee assumes all rights and obligations of a Management Investor under
this Agreement, including but not limited to (i) the restrictions imposed
by Sections 5 hereof, and (ii) the rights and obligations of FHP under
Section 6 hereof. Any reference to a "Management Investor" contained in
this Agreement shall be deemed to include such Management Investor's
Permitted Transferees.
11. MISCELLANEOUS.
11.1 REMEDIES. The parties to this Agreement acknowledge and agree
that breach of any of the covenants of FHP, the Company and the Management
Investors set forth in this Agreement may not be compensable by payment of money
damages and, therefore, that the covenants of FHP, the Company and the
Management Investors set forth in this Agreement may be enforced in equity by a
decree requiring specific performance. Without limiting the foregoing, if any
dispute arises concerning the sale or other disposition of any of the Management
Stock subject to this Agreement, the parties to this Agreement agree that an
injunction may be issued restraining the sale or other disposition of such
Management Stock or rescinding any such sale or other disposition, pending
resolution of such controversy. Such remedies shall be cumulative and non-
exclusive and shall be in addition to any other rights and remedies the parties
may have under this Agreement.
11.2 ATTORNEYS' FEES. If any party to this Agreement brings an
action against another party to enforce its rights under this Agreement, the
prevailing party shall be entitled to
16
<PAGE>
recover its costs and expenses, including without limitation reasonable
attorneys' fees and costs, incurred in connection with such action, including
any appeal of such action. In the event that a party brings such an action
against more than one of the other parties to this Agreement, any attorneys'
fees awarded against such other parties shall be equitably apportioned among
such other parties in light of all of the facts and circumstances surrounding
their involvement in such action.
11.3 NOTICES. Notices and other communication provided for herein
shall be in writing (including wire, telex, telecopy or similar writing) and
shall be sent, delivered, telexed or telecopied to:
The Company: Talbert Medical Management Corporation
9900 Talbert Avenue
Fountain Valley, CA 92708
Attn: President
With a copy to:
FHP: FHP International Corporation
9900 Talbert Avenue
Fountain Valley, CA 92708
Attn: Secretary
With a copy to:
The Management Kathryn M. Adair
Investors: 7021 Pinebrook Road
Park City, UT 84060
Gloria L. Austin
17 Whispering Wind
Irvine, CA 92714
William P. Bracciodieta
8121 Wadebridge Circle
Huntington Beach, CA 92646
Larry L. Georgopolous
12009 Ibex Avenue N.E.
Albuquerque, NM 87111
Gary E. Goldstein, M.D.
6 Amber Sky Drive
Rancho Palos Verdes, CA 90275
Richard D. Jacobs
17
<PAGE>
4176 W. Jasper
Chandler, AZ 85226
R. Judd Jessup
30962 Via Serenidad
Coto de Caza, CA 92679
Jack D. Massimino
25362 Gallup Circle
Laguna Hills, CA 92653
Barbara C. McNutt
5628 Willowcreek Road
N. Las Vegas, NV 89031
Kenneth S. Ord
11 Emerald Glen
Laguna Niguel, CA 92677
Westcott W. Price III
1505 Emerald Bay
Laguna Beach, CA 92651
Walter R. Stone
6492 Doral Drive
Huntington Beach, CA 92648
Margaret Van Meter
#1 Cala Churcha Street
Barrigada Heights, GU 96921
Michael J. Weinstock
8 Morning Sun
Irvine, CA 92715
11.4 NO THIRD PARTY BENEFICIARIES. Nothing contained in this
Agreement, express or implied, is intended to confer upon any person or entity
other than the parties hereto and their successors in interest and permitted
assignees, any rights or remedies under or by reason of this Agreement unless
expressly so stated otherwise in this Agreement.
11.5 ASSIGNMENT BY FHP. This Agreement shall be binding upon and
inure to the benefit of any successor or successors of FHP. This Agreement is
assignable by FHP to (i) any purchaser of all or substantially all of FHP's
shares of the capital stock of the Company, (ii) any wholly-owned subsidiary of
FHP, or (iii) the Company; PROVIDED, HOWEVER, that such assignee shall execute
and deliver a written assumption agreement by which such assignee assumes all
obligations of FHP under this Agreement. In the event of an assignment by FHP
pursuant to this Section 11.5, FHP shall have the ability to delegate the
functions to be performed by the Audit Committee hereunder
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<PAGE>
(including any discretionary functions) to any committee of such assignee with
substantially similar functions.
11.6 TIME IS OF THE ESSENCE. Time is of the essence in respect to
all provisions of this Agreement in which a definite time for performance is
specified.
11.7 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Exhibits
and Schedules specifically referred to herein represents the entire, final
agreement of the parties hereto with respect to the subject matter hereof,
superseding all prior agreements, understandings, discussions, negotiations and
commitments of any kind. This Agreement may not be amended or supplemented, nor
may any rights hereunder be waived, except in a writing signed by each of the
parties affected thereby.
11.8 SEVERABILITY. In the event that any provision or any part of
any provision of this Agreement is held to be illegal, invalid or unenforceable,
such illegality, invalidity or unenforceability shall not affect the validity or
enforceability of any other provision or part hereof.
11.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.10 GOVERNING LAW. The validity, interpretation, enforceability,
and performance of this Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
11.11 WAIVER OF JURY TRIALS; CONSENT TO JURISDICTION. WITH RESPECT
TO ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR ANY RELATED TRANSACTION, THE
PARTIES EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A JURY TRIAL AND AGREE THAT
ANY SUCH LITIGATION SHALL BE TRIED BY A JUDGE WITHOUT A JURY. Each party agrees
to non-exclusive personal jurisdiction and venue in the United States District
Court for the Central District of California (and any California State court
within that District) for that purpose, and appoints the person set forth in
Section 11.3 as its agent for service of process in such jurisdiction.
11.12 WAIVER. The waiver by any party of any instance of any other
party's noncompliance with any obligation or responsibility herein shall not be
deemed a waiver of other instances or of any party's remedies for such
noncompliance.
[the next page is the signature page]
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above mentioned.
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
--------------------------
Name: Burke F. Gumbiner
Title: Senior Vice President
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
---------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
/s/ Kathryn M. Adair /s/ Jack D. Massimino
-------------------- ---------------------
Kathryn M. Adair Jack D. Massimino
/s/ Gloria L. Austin /s/ Barbara C. McNutt
-------------------- ---------------------
Gloria L. Austin Barbara C. McNutt
/s/ William P. Bracciodieta /s/ Kenneth S. Ord
--------------------------- --------------------
William P. Bracciodieta Kenneth S. Ord
/s/ Larry L. Georgopolous /s/ Westcott W. Price III
------------------------- -------------------------
Larry L. Georgopolous Westcott W. Price III
/s/ Gary E. Goldstein, M.D. /s/ Walter R. Stone
--------------------------- --------------------
Gary E. Goldstein, M.D. Walter R. Stone
/s/ Richard D. Jacobs /s/ Margaret Van Meter
--------------------- ----------------------
Richard D. Jacobs Margaret Van Meter
/s/ R. Judd Jessup /s/ Michael J. Weinstock
------------------ ------------------------
20
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R. Judd Jessup Michael J. Weinstock
21
<PAGE>
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT, dated as of May 31, 1996
(the "Amendment"), is made by and among FHP International Corporation, a
Delaware corporation ("FHP"), Talbert Medical Management Corporation, a Delaware
corporation (the "Company"), Talbert Health Services Corporation, a Delaware
corporation ("THSC"), Kathryn M. Adair, Gloria L. Austin, William P.
Bracciodieta ("Bracciodieta"), Larry L. Georgopolous, Gary E. Goldstein, M.D.,
Richard D. Jacobs, R. Judd Jessup, Jack D. Massimino, Barbara C. McNutt, Kenneth
S. Ord, Westcott W. Price III, Walter R. Stone, Margaret Van Meter, and Michael
J. Weinstock. Defined terms not defined herein shall have the meanings assigned
to them in the Stock Purchase Agreement.
WHEREAS, FHP, the Company and the Management Investors are parties to that
certain Stock Purchase Agreement, dated as of March 15, 1996 (the "Stock
Purchase Agreement"); and
WHEREAS, the Management Stock has not yet been issued to the Management
Investors pursuant to the Stock Purchase Agreement; and
WHEREAS, Bracciodieta is no longer in the employ of the Company; and
WHEREAS, FHP, the Company and the Management Investors desire to amend the
Stock Purchase Agreement in these and certain other respects as set forth below.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto agree
as follows:
1. AMENDMENTS TO STOCK PURCHASE AGREEMENT. The Stock Purchase Agreement
is hereby amended as follows:
(a) PURCHASE OF CLASS A COMMON STOCK AND THSC COMMON STOCK.
(1) The recitals on page 1 of the Stock Purchase Agreement are
hereby amended to read as follows:
"A. WHEREAS, FHP has formed the Company to function as a
physician practice management company to provide practice
management services to certain professional corporations; and
"B. WHEREAS, FHP has formed THSC to provide ancillary
medical services; and
<PAGE>
"C. WHEREAS, FHP has acquired 9,100,000 shares of the Class
A Voting Common Stock of the Company, par value $.01 (one cent)
per share (the "TMMC Class A Common Stock", with the TMMC Class A
Common Stock and the Class B Common Stock of the Company, par
value $.01 (one cent) per share, collectively referred to herein
as the "TMMC Common Stock"), which shares of TMMC Class A Common
Stock comprise all of the issued and outstanding shares of the
common stock of the Company, for consideration in the amount of
$91,000.00; and
"D. WHEREAS, FHP has acquired 500 shares of the Common
Stock of THSC, no par value (the "THSC Common Stock"), which
shares of THSC Common Stock comprise all of the issued and
outstanding shares of the common stock of THSC, for consideration
in the amount of $1,000.00; and
"E. WHEREAS, the Company, FHP and THSC regard the services
provided to the Company by the Management Investors as valuable
to the Company, FHP, and THSC and have determined that it would
be to the advantage and in the best interests of the Company, FHP
and THSC to provide for the issuance of shares of TMMC Class A
Common Stock and THSC Common Stock to the Management Investors as
provided for in this Agreement (i) as an inducement to remain in
the service of the Company, FHP and THSC, and (ii) as an
incentive for increased efforts during such service; and
"F. WHEREAS, FHP desires to provide for the issuance of
shares of TMMC Class A Common Stock and THSC Common Stock to the
Management Investors, and the Management Investors wish to
acquire such shares from the Company and from THSC, respectively,
all on the terms and subject to the conditions set forth in this
Agreement."
(2) The first two sentences of Section 2.1 of the Stock Purchase
Agreement are hereby amended to read as follows:
"Subject to the terms and conditions of this Agreement, each
of the Management Investors, severally and not jointly, agrees to
purchase, and FHP agrees to cause the Company and THSC to, and
the Company and THSC, respectively, agree to, issue, sell and
transfer to each of the Management Investors, severally and not
jointly, at the Closing (as defined below), the following: (i)
for consideration in the amount of $.01 (one cent) per share, as
to each such Management Investor, the number of shares of the
TMMC Class A Common Stock (the "TMMC Stock") set forth in that
certain schedule signed by each of FHP, the Company, THSC
2
<PAGE>
and such Management Investor (each, a "Management Investor
Schedule"), and (ii) for consideration in the amount of $2.00
(two dollars) per share, as to each such Management Investor, the
number of shares of the THSC Common Stock (the "THSC Stock", with
the TMMC Stock and the THSC Stock collectively referred to herein
as the "Stock") set forth in the Management Investor Schedules.
The aggregate number of shares of TMMC Stock issued to the
Management Investors shall be 880,000 (the "TMMC Management
Stock"), and the TMMC Stock issued to the Management Investors,
collectively, initially shall comprise approximately 8.8% of the
total outstanding common stock of the Company (the "TMMC
Management Stock"); and the aggregate number of shares of THSC
Stock issued to the Management Investors shall be 49, and the
THSC Stock issued to the Management Investors, collectively,
initially shall comprise approximately 8.8% of the total
outstanding common stock of THSC (the "THSC Management Stock,"
with the TMMC Management Stock and the THSC Management Stock
collectively referred to herein as the "Management Stock")."
(3) Pursuant to this Amendment, (i) all rights and obligations
created under the Stock Purchase Agreement between (a) FHP and the Management
Investors with respect to the TMMC Management Stock, and (b) the Company and the
Management Investors with respect to the TMMC Management Stock, shall hereby
also create separate and identical rights and obligations between (x) FHP and
the Management Investors with respect to the THSC Management Stock, and (y) THSC
and the Management Investors with respect to the THSC Management Stock,
respectively, as if two separate and identical sets of such rights and
obligations were originally created thereunder, (ii) all other rights and
obligations created under the Stock Purchase Agreement between (a) FHP and the
Management Investors, and (b) the Company and the Management Investors, shall
hereby also create separate and identical rights and obligations between (x) FHP
and the Management Investors, and (y) THSC and the Management Investors,
respectively, as if two separate and identical sets of such rights and
obligations were originally created thereunder, (iii) all references in the
Stock Purchase Agreement to "the Company," in so far as such references relate
to such rights and obligations created between the Management Investors and the
Company described in clauses (i)(b) and (ii)(b), shall also be references to
THSC and shall relate to such separate and identical rights and obligations
between the Management Investors and THSC as described in clauses (i)(y) and
(ii)(y), above, and (iv) all other references to "the Company" in the Stock
Purchase Agreement shall also be references to THSC; PROVIDED, HOWEVER, that the
foregoing clauses (iii) and (iv) shall not apply to those references to "the
Company" contained in Sections 5.1, 5.3, 8 and 11.5 of the Stock Purchase
Agreement.
(4) All references to "Common Stock" in Section 6 and 7 of the
Stock Purchase Agreement are hereby amended to read "TMMC Common Stock or THSC
Common Stock, as appropriate".
3
<PAGE>
(5) Section 8 of the Stock Purchase Agreement is hereby amended
to read as follows:
"8. WITHHOLDING. The Management Investors acknowledge that
the Company, FHP or THSC, as appropriate, may withhold
compensation (in cash, or, at the option of the Company, FHP or
THSC, as appropriate, in stock) to satisfy all applicable
federal, state, and local income, employment and other tax
withholding requirements."
(6) The parties hereto acknowledge that there exists the
possibility that at some future date, THSC may be merged with or into the
Company, and in the event such merger occurs, it is presently contemplated that
upon the effective time of such merger (the "Effective Time"), each Management
Investor shall receive, in exchange for the shares of THSC Common Stock
purchased by such Management Investor pursuant to the Stock Purchase Agreement,
as amended by this Amendment (or, in the event that THSC and the Company are
merged into a new entity, for the shares of the THSC Common Stock and the shares
of the TMMC Common Stock so purchased by such Management Investor), the number
of shares of TMMC Common Stock (or shares of the common stock of the new entity)
which, when combined with the number of shares of TMMC Common Stock purchased by
such Management Investor pursuant to the Stock Purchase Agreement, as amended by
this Amendment (or which shares of the common stock of the new entity), would
result in the ownership by such Management Investor of the same percentage of
the total outstanding common stock of the Company (or of such merged entity)
immediately after the Effective Time as the percentage of the total outstanding
common stock of the Company owned by such Management Investor immediately prior
to the Effective Time. In such event, immediately following the Effective Time:
(i) all rights and obligations created under this Amendment
between (a) FHP and the Management Investors with respect to the THSC
Management Stock, and (b) THSC and the Management Investors with respect to
the THSC Management Stock, shall become rights and obligations between (x)
FHP and the Management Investors with respect to the TMMC Management Stock,
and (y) the Company and the Management Investors with respect to the TMMC
Management Stock, respectively, as if the separate and identical
obligations created pursuant to Section 1(a)(3)(i), above, had never been
created thereunder;
(ii) all other rights and obligations created pursuant to
this Amendment between (a) FHP and the Management Investors, and (b) THSC
and the Management Investors, shall become rights and obligations between
(x) FHP and the Management Investors, and (y) the Company and the
Management Investors, respectively, as if the separate and identical sets
of rights and obligations created pursuant to Section 1(a)(3)(ii), above,
had never been created thereunder;
4
<PAGE>
(iii) all references in the Stock Purchase Agreement, as
amended by this Amendment, to "the Company," in so far as such references
relate to such rights and obligations created pursuant to Section
1(3)(a)(iii), above, between the Management Investors and THSC, shall be
references only to the Company, and shall no longer be references to THSC,
and shall relate only to the rights and obligations between the Management
Investors and the Company as described in clauses (i)(y) and (ii)(y) of
this Section 1(a)(6); and
(iv) all other references to "the Company" in the Stock
Purchase Agreement, as amended by this Amendment, shall be references to
the Company only.
Each Management Investor hereby agrees and consents that the execution of this
Amendment by such Management Investor shall constitute an agreement by such
Management Investor to (i) consent in writing to a merger of THSC with or into
the Company pursuant to Section 228 of the Delaware General Corporation Law, as
amended (the "DGCL"), and (ii) refrain from demanding any appraisal rights to
which such Management Investor might otherwise be entitled pursuant to Section
262 of the DGCL, or pursuant to any other provision of applicable law, in
connection with such a merger.
(b) REMOVAL OF PARTY TO STOCK PURCHASE AGREEMENT. The Stock Purchase
Agreement is hereby amended to remove all references to "William P.
Bracciodieta" and "Bracciodieta" in the Stock Purchase Agreement. Accordingly,
William P. Bracciodieta shall not be a party to the Stock Purchase Agreement.
2. NOTICES. Notices and other communication provided for herein or in
the Stock Purchase Agreement shall be in writing (including wire, telex,
telecopy or similar writing) and shall be sent, delivered, telexed or
telecopied, if to THSC, to:
Talbert Health Services Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attn: President
3. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
4. NO OTHER AMENDMENTS. The Stock Purchase Agreement, as amended by this
Amendment, is and shall continue to be in full force and effect and is hereby in
all respects ratified and confirmed. Except as provided herein, nothing in this
Amendment shall waive or be deemed to waive or modify (except as expressly set
forth herein) any rights or obligations of any of the parties under the Stock
Purchase Agreement.
5
<PAGE>
5. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one instrument.
6
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
date first above mentioned.
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
------------------------------------
Name: Burke F. Gumbiner
Title: Senior Vice President
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
7
<PAGE>
/s/ Kathryn M. Adair /s/ Jack D. Massimino
- -------------------------------- -----------------------------------
Kathryn M. Adair Jack D. Massimino
/s/ Gloria L. Austin /s/ Barbara C. McNutt
- ------------------------------- -----------------------------------
Gloria L. Austin Barbara C. McNutt
/s/ William P. Bracciodieta /s/ Kenneth S. Ord
- ------------------------------- -----------------------------------
William P. Bracciodieta Kenneth S. Ord
/s/ Larry L. Georgopolous /s/ Westcott W. Price III
- ------------------------------- -----------------------------------
Larry L. Georgopolous Westcott W. Price III
/s/ Gary E. Goldstein /s/ Walter R. Stone
- ------------------------------- -----------------------------------
Gary E. Goldstein, M.D. Walter R. Stone
/s/ Richard D. Jacobs /s/ Margaret Van Meter
- ------------------------------- -----------------------------------
Richard D. Jacobs Margaret Van Meter
- ------------------------------- /s/ Michael J. Weinstock
R. Judd Jessup -----------------------------------
Michael J. Weinstock
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Margaret Van Meter 20,000 TMMC
#1 Cala Churcha Street 1 THSC
Barrigada Heights, GU 96921
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-----------------------------------
Name: Burke F. Gumbiner
---------------------------------
Title: Senior Vice President
--------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
----------------------------------
Title: Assistant Treasurer
---------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Margaret Van Meter
----------------------------------------
Margaret Van Meter
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Walter R. Stone 20,000 TMMC
6492 Doral Drive 1 THSC
Huntington Beach, CA 92648
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Walter R. Stone
----------------------------------------
Walter R. Stone
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Westcott W. Price III 67,500 TMMC
1505 Emerald Bay 4 THSC
Laguna Beach, CA 92651
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Westcott W. Price III
----------------------------------------
Westcott W. Price III
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Kenneth S. Ord 10,000 TMMC
11 Emerald Glen 1 THSC
Laguna Niguel, CA 92677
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Kenneth S. Ord
----------------------------------------
Kenneth S. Ord
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Barbara C. McNutt 15,000 TMMC
8250 Fox Tail Way 1 THSC
Las Vegas, NV 89123
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Barbara C. McNutt
----------------------------------------
Barbara C. McNutt
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Jack D. Massimino 500,000 TMMC
25362 Gallup Circle 27 THSC
Laguna Hills, CA 92653
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Jack D. Massimino
----------------------------------------
Jack D. Massimino
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
R. Judd Jessup 67,500 TMMC
30962 Via Serenidad 4 THSC
Coto de Caza, CA 92679
FHP International Corporation,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
----------------------------------------
R. Judd Jessup
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Richard D. Jacobs 25,000 TMMC
4176 W. Jasper 1 THSC
Chandler, AZ 85226
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Richard D. Jacobs
----------------------------------------
Richard D. Jacobs
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Gary E. Goldstein, M.D. 50,000 TMMC
6 Amber Sky Drive 3 THSC
Rancho Palos Verdes, CA 90275
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
---------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Gary E. Goldstein
----------------------------------------
Gary E. Goldstein, M.D.
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Larry L. Georgopolous 20,000 TMMC
12009 Ibex Avenue N.E. 1 THSC
Albuquerque, NM 87111
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Larry L. Georgopolous
----------------------------------------
Larry L. Georgopolous
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Gloria L. Austin 50,000 TMMC
17 Whispering Wind 3 THSC
Irvine, CA 92714
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Gloria L. Austin
----------------------------------------
Gloria L. Austin
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Kathryn M. Adair 25,000 TMMC
7021 Pinebrook Road 1 THSC
Park City, UT 84060
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Kathryn M. Adair
----------------------------------------
Kathryn M. Adair
8
<PAGE>
MANAGEMENT INVESTOR SCHEDULE
This Management Investor Schedule has been prepared pursuant to Section 2.1
of that certain Stock Purchase Agreement, dated as of March 15, 1996, by and
among FHP International Corporation, a Delaware corporation ("FHP"), Talbert
Medical Management Corporation, a Delaware corporation (the "Company"), Kathryn
M. Adair ("Adair"), Gloria L. Austin ("Austin"), William P. Bracciodieta, Larry
L. Georgopolous ("Georgopolous"), Gary E. Goldstein, M.D. ("Goldstein"), Richard
D. Jacobs ("Jacobs"), R. Judd Jessup ("Jessup"), Jack D. Massimino
("Massimino"), Barbara C. McNutt ("McNutt"), Kenneth S. Ord ("Ord"), Westcott W.
Price III ("Price"), Walter R. Stone ("Stone"), Margaret Van Meter ("Van
Meter"), and Michael J. Weinstock ("Weinstock"), as amended by that certain
Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996, by and
among the same parties, and Talbert Health Services Corporation, a Delaware
corporation ("THSC").
MANAGEMENT INVESTOR # OF SHARES
Michael J. Weinstock 10,000 TMMC
8 Morning Sun 1 THSC
Irvine, CA 92715
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
-------------------------------------
Name: Burke F. Gumbiner
-----------------------------------
Title: Senior Vice President
----------------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
-------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
---------------------------------
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------------
Name: Michael A. Montevideo
-----------------------------------
Title: Assistant Treasurer
----------------------------------
/s/ Michael J. Weinstock
----------------------------------------
Michael J. Weinstock
<PAGE>
AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT
This AMENDMENT No. 2 TO STOCK PURCHASE AGREEMENT, dated as of September 17,
1996 (the "Amendment"), is made by and among FHP International Corporation, a
Delaware corporation ("FHP"), Talbert Medical Management Corporation, a Delaware
corporation (the "Company"), Talbert Health Services Corporation, a Delaware
corporation ("THSC"), Kathryn M. Adair, Gloria L. Austin, Larry L. Georgopolous,
Richard D. Jacobs, Jack D. Massimino, Barbara C. McNutt, Kenneth S. Ord,
Westcott W. Price III, Walter R. Stone, Margaret Van Meter and Michael J.
Weinstock. Defined terms not defined herein shall have the meanings assigned to
them in the Stock Purchase Agreement.
WHEREAS, FHP, the Company and the Management Investors are parties to that
certain Stock Purchase Agreement, dated as of March 15, 1996, as amended by that
certain Amendment No. 1 to Stock Purchase Agreement, dated as of May 31, 1996
(collectively, the "Stock Purchase Agreement"); and
WHEREAS, FHP, PacifiCare Health Systems, Inc., a Delaware corporation
("PacifiCare"), N-T Holdings, Inc., a Delaware corporation, Neptune Merger
Corp., a Delaware corporation and Tree Acquisition Corp., a Delaware
corporation, have entered into that certain Amended and Restated Agreement and
Plan of Reorganization, dated September 17, 1996 (the "Reorganization
Agreement"); and
WHEREAS, the Reorganization Agreement provides that the common and
preferred stockholders of FHP will receive transferable rights (the "Rights") to
subscribe for 92.25% of the outstanding shares of either TMMC Common Stock or
the capital stock of an affiliated entity (the "Rights Offering"); and
WHEREAS, prior to the execution of the Stock Purchase Agreement, William P.
Bracciodieta ("Bracciodieta"), originally intended to be a party to the Stock
Purchase Agreement as a Management Investor, ceased to be in the employ of FHP,
and, after the execution of the Stock Purchase Agreement but prior to the
issuance of the Management Stock thereunder to the Management Investors, R. Judd
Jessup ("Jessup"), a party to the Stock Purchase Agreement as a Management
Investor, ceased to be in the employ of FHP, and, accordingly, no shares of
Management Stock were issued and sold to either Bracciodieta or Jessup pursuant
to the Stock Purchase Agreement; and
WHEREAS, in light of the execution of the Reorganization Agreement and the
termination of the employment of Bracciodieta and Jessup with the Company and
FHP, FHP, THSC, the Company and the Management Investors desire to amend the
Stock Purchase Agreement in certain respects as set forth below.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto agree
as follows:
1
<PAGE>
1. AMENDMENTS TO STOCK PURCHASE AGREEMENT.
(a) ADJUSTMENT OF NUMBERS AND PERCENTAGES. The second sentence of
Section 2.1 of the Stock Purchase Agreement is hereby amended to read as
follows:
"The aggregate number of shares of TMMC Stock issued to the Management
Investors shall be 812,500 (the "TMMC Management Stock"), and the TMMC
Stock issued to the Management Investors, collectively, initially shall
comprise 8.125% of the total outstanding common stock of the Company (the
"TMMC Management Stock"); and the aggregate number of shares of THSC Stock
issued to the Management Investors shall be 45, and the THSC Stock issued
to the Management Investors, collectively, initially shall comprise
approximately 8.125% of the total outstanding common stock of THSC (the
"THSC Management Stock", with the TMMC Management Stock and the THSC
Management Stock collectively referred to herein as the "Management
Stock")."
(b) EXPIRATION OF CERTAIN OPTIONS. At the Effective Time (as that
term is defined in the Reorganization Agreement), the Stock Purchase Agreement
shall be amended to add the following as Section 12:
"12. EXPIRATION OF CERTAIN OPTIONS. Notwithstanding anything to the
contrary contained in this Agreement (including, without limitation, the
provisions of Sections 3.2 and 5.4, above):
12.1 TERMINATION OF FHP MANAGEMENT INVESTORS WITHOUT CAUSE. In
the event that the employment with FHP of any of the Management Investors
who are officers of FHP (the "FHP Management Investors") is terminated
without cause, any Restrictions remaining applicable to the Management
Stock owned by such FHP Management Investor shall terminate, and all
unvested Management Stock owned by such FHP Management Investor shall vest.
Such Restrictions shall be deemed to terminate, and such Management Stock
shall be deemed to vest, prior to the time FHP's repurchase option provided
for in Section 5.1, above, arises; PROVIDED, HOWEVER, that in such event,
the Management Stock owned by such FHP Management Investor shall remain
subject to the options provided by Sections 5.2 and 5.3, above, until the
first to occur of the expiration of such options pursuant to the terms of
Section 5, above, or the expiration of such options pursuant to the terms
of Section 12.2, below.
12.2 CHANGE IN CONTROL OF THE COMPANY. Both the option granted
under Section 5.1 and the Performance Purchase Option granted under Section
5.3 shall expire as to all Management Investors upon a Change in Control
(as herein defined) of TMMC which occurs at any time after the date of the
expiration of the subscription period during which the Rights are
exercisable under the Rights Offering (the "Expiration Date"). For
purposes of this Agreement, "Change in Control" means:
(a) The acquisition by any individual entity or group
(within the meaning of Section 13(d) or 14(d)(2) of the Exchange Act) (a
"Person") of
2
<PAGE>
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of over 50% of either (i) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock") or
(ii) the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); PROVIDED, HOWEVER, that for
purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the
Company, (ii) any acquisition by FHP or PacifiCare, or (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or PacifiCare, or any corporation controlled by
the Company or PacifiCare; or
(b) Individuals who, as of the Expiration Date, constitute
the Board of Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors of the
Company; PROVIDED, HOWEVER, that any individual becoming a director
subsequent to the Expiration Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board of Directors of the Company."
2. FHP PURCHASE OF STOCK. The parties hereto consent to the purchase by
FHP from, and the issuance, sale and transfer to FHP by, (i) the Company of
87,500 shares of TMMC Common Stock, for consideration in the amount of $.01 per
share, and (ii) THSC of 5 shares of THSC Common Stock, for consideration in the
amount of $2.00 per share. Such purchases by FHP shall occur as soon as
practicable after the execution of this Amendment, and pursuant to a resolution
of the Board of Directors of each of the Company and THSC adopted as of
September 17, 1996.
3. FHP CAPITALIZATION OF THE COMPANY. The parties hereto consent to any
capital contributions which have been or will be made to the Company by FHP
pursuant to Section 4.15(b) of the Reorganization Agreement.
4. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
5. NO OTHER AMENDMENTS. The Stock Purchase Agreement, as amended by this
Amendment, is and shall continue to be in full force and effect and is hereby in
all respects ratified and confirmed. Except as provided herein, nothing in this
Amendment shall waive or be deemed to waive or modify (except as expressly set
forth herein) any rights or obligations of any of the parties under the Stock
Purchase Agreement.
3
<PAGE>
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one instrument.
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
date first above mentioned.
FHP International Corporation, Talbert Health Services Corporation,
a Delaware corporation a Delaware corporation
By: /s/ Burke F. Gumbiner By: /s/ Michael A. Montevideo
--------------------------- --------------------------------
Name: Burke F. Gumbiner Name: Michael A. Montevideo
------------------------- ------------------------------
Title: Senior Vice President Title: Assistant Treasurer
------------------------ -----------------------------
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
---------------------------
Name: Michael A. Montevideo /s/ Kathryn M. Adair
------------------------- -----------------------------------
Title: Assistant Treasurer Kathryn M. Adair
------------------------
/s/ Gloria L. Austin /s/ Larry L. Georgopolous
------------------------------ -----------------------------------
Gloria L. Austin Larry L. Georgopolous
/s/ Richard D. Jacobs /s/ Jack D. Massimino
------------------------------ -----------------------------------
Richard D. Jacobs Jack D. Massimino
/s/ Barbara C. McNutt /s/ Kenneth S. Ord
------------------------------ -----------------------------------
Barbara C. McNutt Kenneth S. Ord
/s/ Westcott W. Price III /s/ Walter R. Stone
------------------------------ -----------------------------------
Westcott W. Price III Walter R. Stone
/s/ Margaret Van Meter /s/ Michael J. Weinstock
------------------------------ -----------------------------------
Margaret Van Meter Michael J. Weinstock
4
<PAGE>
MANAGEMENT STOCK EXCHANGE AGREEMENT
[AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT]
This Amendment No. 3 to Stock Purchase Agreement ("Amendment") is made
and entered into as of February 14, 1997 by and among FHP International
Corporation, a Delaware corporation ("FHP"), Talbert Medical Management Holdings
Corporation, a Delaware corporation ("Holdings"), Talbert Medical Management
Corporation, a Delaware corporation (the "Company"), Talbert Health Services
Corporation, a Delaware corporation ("THSC"), Kathryn M. Adair, Gloria L.
Austin, Larry L. Georgopolous, Gary E. Goldstein, M.D., Richard D. Jacobs, Jack
D. Massimino, Barbara C. McNutt, Kenneth S. Ord, Westcott W. Price III, Walter
R. Stone, Margaret Van Meter, and Michael J. Weinstock. Defined terms not
defined herein shall have the meanings assigned to them in the Stock Purchase
Agreement (as defined below).
WHEREAS, FHP, the Company, THSC and the Management Investors are
parties to that certain Stock Purchase Agreement dated as of March 15, 1996, as
amended on May 31, 1996 and September 17, 1996 (the "Stock Purchase Agreement").
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc., FHP intends to sell its holdings of common
stock of the Company and THSC to Holdings, which has been formed by FHP for the
purpose of acquiring all of the capital stock of the Company and THSC.
WHEREAS, concurrently with the FHP Merger, Holdings will distribute
rights to purchase common stock of Holdings (the "Holdings Stock") to the common
and preferred stockholders of FHP pursuant to a registration statement on Form
S-1 (the "Offering").
WHEREAS, the Management Investors collectively own 228,000 shares of
TMMC Stock and 41.75 shares of THSC Stock.
WHEREAS, the Management Investors desire to sell their TMMC Stock and
THSC Stock for the consideration described herein, including the Holdings Stock.
WHEREAS, the FHP, the Company, THSC and the Management Investors
desire to amend the Stock Purchase Agreement in these and certain other respects
as set forth below.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the parties hereby agree
as follows:
<PAGE>
1. EXCHANGE OF TMMC STOCK AND THSC STOCK FOR HOLDINGS STOCK.
The Management Investors hereby exchange, assign, transfer and convey
to FHP all of their right, title and interest in and to, and their ownership of,
the TMMC Stock and THSC Stock in exchange for 228,000 shares of Holdings Stock,
distributed as to each Management Investor in a ratio of one (1) share of
Holdings Stock for one (1) share of TMMC Stock plus 41.75/228,000 share of THSC
Stock owned by each such Management Investor as set forth in the Management
Investor Schedules (as such Management Investor Schedules have been adjusted to
reflect the reverse stock-split of the Company effected on September 17, 1996).
The Holdings Stock received by each such Management Investor will be referred to
as "Holdings Management Stock."
2. CLOSING.
The exchange of TMMC Stock and THSC Stock for Holdings Stock as
contemplated by this Amendment (the "Closing") will take place at the same place
and on the same day as the closing of the FHP Merger.
3. CLOSING DELIVERIES.
(a) BY THE MANAGEMENT INVESTORS. At the Closing, the Management
Investors will deliver to Holdings certificates evidencing the TMMC Stock and
THSC Stock. Each certificate will be properly endorsed for transfer to or
accompanied by a duly executed stock power in favor of Holdings and will be in a
form acceptable for transfer on the books of TMMC and THSC.
(b) BY HOLDINGS. At the Closing, the Holdings will deliver to the
Management Investors certificates evidencing the Holdings Stock. Each
certificate will be properly endorsed for transfer to or accompanied by a duly
executed stock power in favor of each Management Investor and will be in a form
acceptable for transfer on the books of Holdings.
4. AMENDMENTS TO STOCK PURCHASE AGREEMENT.
a. Section 2 of the Stock Purchase Agreement is hereby amended as
follows:
i. The second sentence of Section 2.1 of the Stock Purchase
Agreement is hereby amended by deleting the phrase "(the "THSC Management
Stock", with the TMMC Management Stock and the THSC Management Stock
collectively referred to herein as the "Management Stock")" and replacing
it with the phrase "(the "THSC Management Stock", with the TMMC Management
Stock exchanged for 228,000 shares of the common stock ("Holdings Common
Stock") of Talbert Medical Management Holdings Corporation ("Holdings")
(the "Holdings Management Stock"))."
2
<PAGE>
ii. The third sentence of Section 2.1 of the Stock Purchase
Agreement is hereby amended to read as follows:
"Stock certificates evidencing the Holdings Management Stock, in
addition to blank stock powers executed by each Management Investor, shall
be held by the Assistant Secretary of Holdings (the "Escrow Holder"), and
shall continue to be held by the Escrow Holder for the periods set forth in
Section 3 below, subject to the rights and limitations set forth in this
Agreement."
b. All references to "Management Stock" in the Stock Purchase
Agreement are hereby amended to read "Holdings Management Stock."
c. Section 5 of the Stock Purchase Agreement is amended as follows:
i. All references to "the Company" in section 5.1 are hereby
amended to also be references to Holdings.
ii. Section 5.3(a) of the Stock Purchase Agreement is hereby
amended to read as follows:
"If Holdings fails to meet the Financial Goal, as adjusted, for
the fiscal year 1996, as approved by the Audit Committee of the FHP
Board of Directors in accordance with the procedures outlined in
Section 5.3(d) below, FHP shall have the option to purchase from each
Management Investor that portion of the Management Stock with respect
to which the Restrictions lapsed on July 1, 1996 comprising 20% of the
total amount of such Management Stock."
iii. Section 5.3(b) of the Stock Purchase Agreement is hereby
amended to read as follows:
"If Holdings fails to meet the Financial Goal, as adjusted, for
the fiscal year 1997, as approved by the Audit Committee of FHP's
Board of Directors (the "Audit Committee") in accordance with the
procedures outlined in Section 5.3(d) below, FHP shall have the option
to purchase from each Management Investor that portion of the
Management Stock with respect to which the Restrictions lapsed on
July 1, 1997 comprising 20% of the total amount of such Management
Stock."
iv. All references to "the Company" in Section 5.3 are hereby
amended to be read "Holdings."
d. All references to "TMMC Common Stock or THSC Common Stock" in
Sections 6 and 7 of the Stock Purchase Agreement are hereby amended to read
"Holdings Common Stock."
3
<PAGE>
e. Section 8 of the Stock Purchase Agreement is hereby amended to
read as follows:
"8. WITHHOLDING. The Management Investors acknowledge that
Holdings, the Company, FHP or THSC, as appropriate, may withhold
compensation (in cash, or, at the option of Holdings, the Company, FHP
or THSC, as appropriate, in stock) to satisfy all applicable federal,
state and local income, employment and other tax withholding
requirements."
f. All references to "the Company" in section 12 are hereby amended
to be references to Holdings. All references to "Outstanding Company Common
Stock" are hereby amended to be references to "Outstanding Holdings Common
Stock" and all references to "Outstanding Company Voting Securities" are hereby
amended to be references to "Outstanding Holdings Voting Securities."
5. OTHER AGREEMENTS REGARDING THE STOCK PURCHASE AGREEMENT.
a. The parties to this agreement hereby agree that the Holdings Stock
acquired herein by the Management Investors falls within the definition of
"Additional Securities" as such term is defined in the Stock Purchase Agreement,
and is subject to the same conditions as the TMMC Stock and THSC Stock with
respect to which they were exchanged.
b. The parties hereby agree that the Offering is a distribution to
the public which triggers the expiration of the "Drag-Along Rights" and "Tag-
Along Rights" contained in Section 6 of the Stock Purchase Agreement and the
"Right of First Refusal" contained in Section 10.1 of the Stock Purchase
Agreement.
c. The parties hereby agree that the Registration Rights in Section 7
of the Stock Purchase Agreement will not be exercisable in connection with the
Offering or in connection with an offering by FHP pursuant to its shelf
registration rights.
d. The parties hereby agree that the restrictions on transfer of the
Management Stock contained in Section 10 of the Stock Purchase Agreement will
not prevent any transactions contemplated by this Amendment.
6. NOTICES. Notices and other communications provided for herein or in the
Stock Purchase Agreement shall be in writing (including wire, telex, telecopy or
similar writing) and shall be sent, delivered, telexed or telecopied, if to
Holdings, to:
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, CA 92626-1417
Attn: President
Telecopier: (714) 436-4860
4
<PAGE>
with copies to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: C. James Levin, Esq.
Telecopier: (213) 669-6407
7. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the law of the State of Delaware, without reference to its
conflicts of law rules.
8. NO OTHER AMENDMENTS. The Stock Purchase Agreement, as amended previously
and by this Amendment, is and shall continue to be in full force and effect and
is hereby in all respects ratified and confirmed. Except as provided herein,
nothing in this Amendment shall waive or be deemed to waive or modify (except as
expressly set forth herein) any rights or obligations of any of the parties
under the Stock Purchase Agreement.
9. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one instrument.
[remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment as
of the date first written above.
FHP International Corporation,
a Delaware corporation
By: /s/ Burke F. Gumbiner
------------------------------
Burke F. Gumbiner
Senior Vice President
Talbert Medical Management Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
Talbert Health Services Corporation,
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
Talbert Medical Management Holdings Corporation
a Delaware corporation
By: /s/ Michael A. Montevideo
------------------------------
Name: Michael A. Montevideo
Title: Assistant Treasurer
S-1
<PAGE>
/s/ Kathryn M. Adair /s/ Jack D. Massimino
- ----------------------------- ----------------------------
Kathryn M. Adair Jack D. Massimino
/s/ Gloria L. Austin /s/ Barbara C. McNutt
- ----------------------------- ----------------------------
Gloria L. Austin Barbara C. McNutt
/s/ Larry L. Georgopolous /s/ Westcott W. Price III
- ----------------------------- ----------------------------
Larry L. Georgopolous Westcott W. Price III
/s/ Gary E. Goldstein, M.D. /s/ Walter R. Stone
- ----------------------------- ----------------------------
Gary E. Goldstein, M.D. Walter R. Stone
/s/ Richard D. Jacobs /s/ Margaret Van Meter
- ----------------------------- ----------------------------
Richard D. Jacobs Margaret Van Meter
/s/ Kenneth S. Ord /s/ Michael J. Weinstock
- ----------------------------- ----------------------------
Kenneth S. Ord Michael J. Weinstock
S-2
<PAGE>
AMENDMENT NO. 4 TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT TO STOCK PURCHASE AGREEMENT ("Amendment") is made and
entered into as of February 14, 1997 by FHP International Corporation, a
Delaware corporation ("FHP"), as separate agreements between FHP and each of
Westcott W. Price III, Kenneth S. Ord and Michael J. Weinstock (each an
"Executive"), with reference to the following facts:
A. Each Executive is a party to a separate Employment Agreement with
FHP dated as of February 1, 1996 (each, as previously amended, such
Executive's "Employment Agreement").
B. FHP, Talbert Medical Management Corporation and Talbert Health
Services Corporation, each a Delaware corporation which is a wholly owned
subsidiary of FHP (the "Company" and "THSC," respectively), the Executives,
and certain other persons are parties to that certain Stock Purchase
Agreement made and entered into as of March 15, 1996, as amended by Amendment
No. 1 to Stock Purchase Agreement dated as of May 31, 1996, Amendment No. 2
to Stock Purchase Agreement dated as of September 17, 1996, and Amendment No.
3 to Stock Purchase Agreement dated as of February 14, 1997 (collectively,
the "Talbert Stock Purchase Agreement").
C. FHP, N-T Holdings, Inc., a Delaware corporation ("PacifiCare
Holding"), and certain other corporations are parties to that certain Amended
and Restated Agreement and Plan of Reorganization dated as of November 11,
1996 (the "Reorganization Agreement"), pursuant to Section 4.15 of which
PacifiCare Holding is required to cause the issuance of rights to
shareholders of FHP to purchase, directly or indirectly through one or more
other corporations formed to facilitate such purchase, all of FHP's interest
in TMMC and THSC. In accordance with Section 4.15, the issuance of such
rights to purchase stock of Talbert Medical Management Holdings Corporation,
a Delaware corporation formed to acquire FHP's interest in TMMC and THSC
("TMMHC"), has been registered under the Securities Act of 1933 (the "Talbert
Rights Offering"). TMMC and THSC collectively, and TMMHC if it acquires TMMC
and THSC in connection with the Talbert Rights Offering, are referred to
herein as "Talbert," and stock of TMMC and THSC, or of TMMHC if the
Executives acquire stock of TMMHC pursuant to the Talbert Stock Purchase
Agreement, is referred to herein as "Talbert Stock."
-1-
<PAGE>
D. FHP and the Executives deem it to be in their mutual best interests
to amend the Talbert Stock Purchase Agreement to delete certain restrictions
imposed thereby upon stock of Talbert owned by the Executives, provided the
Talbert Rights Offering results in the issuance of Talbert Stock to the
public.
NOW, THEREFORE, the parties agree as follows:
1. DELETION OF PERFORMANCE PURCHASE OPTIONS. Subject to and upon the
expiration of seven (7) days following the closing of an issuance of Talbert
Stock upon the exercise of rights issued in the Talbert Rights Offering (such
closing the "Talbert IPO Closing"), the Talbert Stock Purchase Agreement with
respect to each Executive shall be and hereby is amended by deleting the
provisions of Section 5.3 thereof (relating to the "Performance Purchase
Options" as therein defined).
2. UPDATING OF PARACHUTE PAYMENT CALCULATIONS. FHP shall cause Deloitte
& Touche LLP, as the "Accounting Firm" (as defined in Section 11(b) of the
Employment Agreement of each Executive), to make calculations for each
Executive, as of the date of the Talbert IPO Closing and assuming
effectiveness of the amendment of the Talbert Stock Purchase Agreement
pursuant to Section 1 of this Amendment (such calculations as to an
Executive, a "Parachute Recalculation"), as to (i) whether a Payment (as
defined in Section 11 of his Employment Agreement) or benefit paid or
required to be paid to him by FHP is or would be an excess parachute payment
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (an "Excess Parachute Payment"), and (ii) the amount of Talbert Stock
(such amount, a "Parachute Adjustment"), if any, that such Executive would
have to forfeit pursuant to Section 2(b) below in order to avoid treatment of
any such Payment or benefit as an Excess Parachute Payment. With respect to
each Executive, the Parachute Recalculation shall be deemed to be
determinations required to be made under Section 11 of his Employment
Agreement.
a. NO EXCESS PARACHUTE PAYMENT. If the Parachute Recalculation for an
Executive indicates that no Excess Parachute Payment is or has been required
to be made by FHP to Executive, then the amendment pursuant to Section 1 of
this Amendment shall be deemed to be fully effective.
b. EXCESS PARACHUTE PAYMENT. If, but for the provision of this Section
2(b), the Parachute Recalculation for an Executive indicates that a Parachute
Adjustment is required in order to avoid treatment of a Payment or benefit
referred to above as an Excess Parachute Payment to such Executive, then, (i)
effective upon the expiration of seven (7) days following the Talbert IPO
Closing, such Executive shall
-2-
<PAGE>
be deemed to have forfeited to FHP that number of his shares of Talbert Stock
corresponding to the Parachute Adjustment for such Executive (and Executive
shall promptly surrender the certificate or certificates for such number of
shares to FHP), and (ii) the amendment pursuant to Section 1 hereof shall be
deemed to be fully effective as to the balance of shares of Talbert Stock
owned by such Executive.
3. LIMITATION IN THE EVENT OF EXCESS PARACHUTE PAYMENTS. All amounts
payable to the Executives for services are intended to be reasonable
compensation therefor. Notwithstanding the foregoing, should the Internal
Revenue Service determine, or the applicable court if such Internal Revenue
Service determination is disputed, that payment to Executive of any amount
payable under his Employment Agreement, together with any other amounts that
must be included in such determination, will result in the payment to him of
an Excess Parachute Payment, then such Executive shall repay to the Company,
the minimum amount ("Overpayment") that would have to be repaid such that the
Parachute Adjustment with respect to that Executive would be zero. Any
forfeiture by such Executive of Talbert Stock pursuant to Section 2(b) hereof
shall be treated as such a repayment on the date of forfeiture to the extent
of the fair market value of such Talbert Stock as of such date. Any
Overpayment shall be treated for all purposes as a loan by FHP to Executive
from the date such Overpayment was made in an amount equal to the value of
such Overpayment as of such date, which loan Executive shall repay to FHP,
together with interest at the applicable federal rate under Section
7872(f)(2)(B) of the Internal Revenue Code of 1986, as amended, within thirty
(30) business days after receipt by
-3-
<PAGE>
Executive of a final determination by the Internal Revenue Service, or
appropriate court as the case may be.
4. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the law of the State of Delaware, without
reference to its conflicts of law rules.
5. NO OTHER AMENDMENTS. The Talbert Stock Purchase Agreement, as
amended by this Amendment, is and shall continue to be in full force and
effect and is hereby in all respects ratified and confirmed. Except as
provided herein, nothing in this Amendment shall waive or modify or be deemed
to waive or modify (except as expressly set forth herein) any rights or
obligations of any of the parties under the Talbert Stock Purchase Agreement.
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute but one instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
FHP International Corporation,
a Delaware corporation
By: /s/ Nick Franklin
-----------------------
Name: Nick Franklin
-----------------------
Title: Senior Vice President
-----------------------
/s/ Westcott W. Price III
------------------------------
Westcott W. Price III
/s/ Kenneth S. Ord
------------------------------
Kenneth S. Ord
/s/ Michael J. Weinstock
------------------------------
Michael J. Weinstock
-4-
<PAGE>
The undersigned parties to the Talbert Stock Purchase Agreement consent
to the foregoing Amendment.
Talbert Medical Management Corporation
a Delaware corporation
By: /s/ Jack Massimino
-----------------------
Name: Jack Massimino
-----------------------
Title: President and CEO
-----------------------
Talbert Health Services Corporation
a Delaware corporation
By: /s/ Jack Massimino
-----------------------
Name: Jack Massimino
-----------------------
Title: President and CEO
-----------------------
/s/ Kathryn M. Adair
------------------------------
Kathryn M. Adair
/s/ Gloria Austin
------------------------------
Gloria L. Austin
/s/ Larry L. Georgopolous
------------------------------
Larry L. Georgopolous
/s/ Richard D. Jacobs
------------------------------
Richard D. Jacobs
/s/ Jack D. Massimino
------------------------------
Jack D. Massimino
/s/ Barbara C. McNutt
------------------------------
Barbara C. McNutt
------------------------------
Walter R. Stone
-5-
<PAGE>
April
__th
1 9 9 7
(213) 669-6000
253,682-25
LA1-730926
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, California 92626-1417
Ladies and Gentlemen:
At your request, we have examined the registration statement on Form S-1
(File No. 333-17679), as amended (the "Registration Statement"), filed by
you, Talbert Medical Management Holdings Corporation, a Delaware corporation
(the "Company"), with the Securities and Exchange Commission (the
"Commission") for purposes of registering 2,772,000 Rights (the "Rights") to
purchase Common Stock, $.01 par value (the "Common Stock") of the Company and
2,772,000 shares of Common Stock, issuable upon exercise of the Rights under
the Securities Act of 1933 (the "Act"), as amended, Amendment No. 1 to such
Registration Statement, Amendment No. 2 to such Registration Statement and
the prospectus dated April , 1997 (the "Prospectus").
We are familiar with the proceedings heretofore taken by the Company
in connection with the authorization and proposed issuance of the Rights and the
Common Stock pursuant to the "Offering" (as defined in the Registration
Statement).
Subject to the proposed additional proceedings being taken as now
contemplated by us as your counsel prior to the issuance of the Rights, it is
our opinion that upon the issuance of the Rights in connection with the
Offering in the manner referred to in the Registration Statement, the Rights
will be legally and validly issued securities of the Company; and the
<PAGE>
Page 2 - April ____, 1997
shares of Common Stock to be issued upon exercise of the Rights when so
issued and delivered in the manner referred to in the Registration Statement,
will be duly authorized by all necessary corporate action on the part of the
Company, validly issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm name under the
heading "LEGAL MATTERS" in the Prospectus constituting part of the
Registration Statement. This opinion is furnished to you in connection with
the authorization and proposed issuance of the Rights and the Common Stock
pursuant to the Offering, is solely for your benefit, and may not be relied
upon by, nor may copies be delivered to, any other person without our prior
written consent.
Respectfully submitted,
<PAGE>
April
____
1 9 9 7
253,682-025
770358.V1
(213) 669-6467
Talbert Medical Management
Holdings Corporation
3540 Howard Way
Costa Mesa, CA 92626-1417
RE: TRANSFERABLE RIGHTS TO SUBSCRIBE TO SHARES
OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
Ladies and Gentlemen:
This opinion is delivered to you in connection with the Registration
Statement on Form S-1 (No. 333-17679, the "Registration Statement") filed
with the Securities and Exchange Commission by Talbert Management Holdings
Corporation, a Delaware corporation ("TMMHC"), in connection with the
delivery to shareholders of FHP International Corporation ("FHP") of
transferable rights (the "Rights") to subscribe to shares of TMMHC, as part
of the consideration payable in the merger (the "Merger") of FHP and
PacifiCare Health Systems, Inc.
We have reviewed the tax disclosure set forth in the Prospectus which
is included in the Registration Statement (the "Prospectus"). In our opinion,
the statements contained in the Prospectus under the heading "THE OFFERING -
Certain Federal Income Tax Consequences" fairly and accurately present the
information required to be presented.
This opinion is based on current authorities and upon facts and
assumptions as of this date. It is subject to change in the event of a
change in the applicable law or a change in the interpretation of such law by
the courts or by the Internal Revenue Service. There can be no assurance
that legislative or administrative changes or court decisions will not be
forthcoming
<PAGE>
Page 2 - Talbert Medical Management Holdings Corporation -
April __, 1997
that would significantly modify this opinion. Any such changes may or may
not be retroactive with respect to transactions prior to the date of such
changes. This opinion has no binding effect or official status, and
accordingly, no assurance can be given that the position set forth herein
will be sustained by a court, if contested. No ruling will be obtained from
the Internal Revenue Service with respect to the Merger or the delivery of
the Rights.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "THE
OFFERING - Certain Federal Income Tax Consequences" in the Prospectus. This
letter is furnished by us as counsel for TMMHC and is solely for the benefit
of TMMHC.
Respectfully submitted,
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is entered into as of
February 14, 1997, between Talbert Medical Management Holdings Corporation, a
Delaware corporation (the "Buyer") and FHP International Corporation, a Delaware
corporation (the "Seller").
RECITALS
WHEREAS, in connection with the Seller's merger (the "FHP Merger")
with PacifiCare Health Systems, Inc. ("PacifiCare"), the Seller intends to sell
its shares of common stock of Talbert Medical Management Corporation, a Delaware
corporation ("TMMC"), and Talbert Health Services Corporation, a Delaware
corporation ("THSC"), to the Buyer, which has been formed for the purpose of
acquiring all of the capital stock of TMMC and THSC.
WHEREAS, the Seller owns 2,772,000 shares of common stock, par value
$.01 per share, of TMMC, and 546 shares of common stock, par value $.01 per
share, of THSC, constituting 92.4% of the outstanding common stock of each of
TMMC and THSC (the "Talbert Shares").
WHEREAS, the Buyer has previously acquired 228,000 shares of common
stock, par value $.01 per share, of TMMC and 44 shares of common stock, par
value $.01 per share, of THSC, in each case constituting all outstanding shares
of the common stock of each of TMMC and THSC not held by the Seller, pursuant to
a Management Stock Exchange Agreement of even date herewith among the Buyer and
the various management investors named herein.
WHEREAS, the Seller desires to sell, and the Buyer desires to buy, the
Talbert Shares for the consideration described herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the Seller and the Buyer
hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following will have the
following meanings:
1
<PAGE>
"Agreement" means this Stock Purchase Agreement between the Buyer and
the Seller as amended or supplemented.
"Commission" means the Securities and Exchange Commission.
"Encumbrance" means any claim, charge, easement, encumbrance, lease,
covenant, security interest, lien, option, pledge, rights of others, or
restriction (whether on voting, sale, transfer, disposition or otherwise),
whether imposed by agreement, understanding, law, equity or otherwise, except
for any restriction on transfer generally arising under any applicable federal
or state securities law.
ARTICLE 2. PURCHASE OF STOCK
SECTION 2.1 PURCHASE OF STOCK BY BUYER. The Seller hereby sells,
assigns, transfers and conveys to the Buyer all of the Seller's right, title and
interest in and to, and its ownership of, the Talbert Shares in exchange for
rights to purchase 2,772,000 shares of the Buyer's common stock, par value $.01
per share, that when issued will constitute 92.4% of the Buyer's outstanding
common stock (the "Rights"), plus a note (the "Note") with a payoff amount equal
to the proceeds of a fully subscribed offering of the Rights to the Seller's
common and preferred stockholders in connection with the FHP Merger (the
"Offering"). If the Offering is not fully subscribed, the Buyer will sell to
the Seller all of its shares of common stock not subscribed for in the Offering
in exchange for the cancellation of the remaining indebtedness under the Note.
SECTION 2.2 CLOSING. The Buyer's purchase of the Talbert Shares as
contemplated by this Agreement (the "Closing") will take place at the same place
and on the same day as the closing of the FHP Merger (the "Closing Date").
SECTION 2.3 CLOSING DELIVERIES.
(a) BY THE SELLER. At the Closing, the Seller will deliver to
the Buyer certificates evidencing the Talbert Shares. Each certificate
will be properly endorsed for transfer to or accompanied by a duly executed
stock power in favor of the Buyer and will be in a form acceptable for
transfer on the books of TMMC and THSC.
(b) BY THE BUYER. At the Closing, the Buyer will deliver to the
Seller the Note. Certificates evidencing the Rights will be delivered
directly to the Seller's common and preferred stockholders, as contemplated
in the registration statement on Form S-1 filed with the Commission with
respect to the Offering (the "Registration Statement").
2
<PAGE>
ARTICLE 3. TAX CONSEQUENCES
SECTION 3.1 IRC Section 338(h)(10) ELECTION. In connection with the
purchase of the Talbert Shares, the Seller and the Buyer will discuss the
possibility of an election under Section 338(h)(10) of the Internal Revenue Code
of 1986, as amended. No such election will be made by the Buyer and the Seller
without the prior written consent of N-T Holdings, Inc., a Delaware corporation
(the "Parent"), which consent will not be withheld unless there is an adverse
effect on the Parent (including through an adverse effect on FHP).
ARTICLE 4. REPRESENTATIONS AND WARRANTIES
SECTION 4.1 SELLER'S REPRESENTATIONS AND WARRANTIES. In order to
induce the Buyer to enter into this transaction, the Seller represents and
warrants that the Seller owns all of the Talbert Shares beneficially and of
record. All of the Talbert Shares are owned free and clear of any Encumbrance.
The Buyer is acquiring good and marketable title to and complete ownership of
the Talbert Shares, free of any Encumbrance.
SECTION 4.2 BUYER'S REPRESENTATIONS AND WARRANTIES. In order to
induce the Seller to enter into this transaction, the Buyer represents and
warrants as follows:
(a) CAPITALIZATION. The authorized capital of the Buyer consists of
15 million shares of common stock, par value $.01 per share, and 1.2 million
shares of preferred stock, par value $.01 per share. There are presently
228,000 issued and outstanding shares of the Buyer's Common Stock. There are no
outstanding options, warrants or other rights to purchase any equity securities
of the Buyer.
(b) RESTRICTIONS ON TRANSFER. The Buyer hereby acknowledges and
agrees that the transfer of the Talbert Shares under this Agreement has not been
registered under the Securities Act of 1933, as amended (the "Act"), or
qualified with the securities regulatory agency of any state and may not be
resold or otherwise disposed of unless registered under the Act and qualified
with the securities regulatory agency of any state that has jurisdiction over
any such transfer or unless an exemption from such registration or qualification
is available. The Buyer will transfer the Talbert Shares only in accordance
with the applicable requirements of all federal and state securities laws. The
Buyer acknowledges that the certificate(s) evidencing the Talbert Shares may
bear a legend regarding restrictions on transfer.
(c) RISK. The Buyer recognizes that investment in TMMC and THSC
involves substantial risks, and it has taken full cognizance of and understands
all of the risk factors related to the purchase of the Talbert Shares and its
knowledge of TMMC and experience in financial and business matters is such that
it is capable of evaluating the risks of an investment in the Talbert Shares.
3
<PAGE>
ARTICLE 5. CONDITIONS OF THE BUYER'S OBLIGATIONS
The obligations of the Buyer under this Agreement are subject to the
fulfillment of the following conditions at or prior to the Closing:
SECTION 5.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties of the Seller contained in Section 4.1 above are
true and correct as of the date hereof, and will be true and correct on and as
of the Closing Date.
SECTION 5.2 CAPITAL CONTRIBUTION. The Seller will contribute to TMMC
an amount of cash sufficient to increase TMMC's net worth to approximately $60
million (the "Capital Contribution"); provided that such amount shall not exceed
$70 million. The Capital Contribution will be made by wire transfer of
immediately available funds to an account in the name of TMMC.
ARTICLE 6. CONDITIONS OF THE SELLER'S OBLIGATIONS
The obligations of the Seller under this Agreement are subject to the
fulfillment of the following conditions at or prior to the Closing:
SECTION 6.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties of the Buyer contained in Section 4.2 above are
true and correct as of the date hereof, and will be true and correct on and as
of the Closing Date.
SECTION 6.2 REGISTRATION OF RIGHTS. The Registration Statement filed
with the Commission by the Buyer with respect to the Offering will have been
declared effective by the Commission.
ARTICLE 7. GENERAL
SECTION 7.1 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of California disregarding
conflict of law provisions.
SECTION 7.2 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
SECTION 7.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties and covenants of both the Buyer and the Seller
contained in or made pursuant to this Agreement will survive the execution and
delivery of this Agreement.
4
<PAGE>
SECTION 7.4 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all parties hereto.
SECTION 7.5 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 7.6 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 7.7 COUNTERPARTS. This Agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 7.8 THIRD PARTY BENEFICIARY. The parties to this Agreement
hereby acknowledge and agree that the Parent is an intended third party
beneficiary of the rights of FHP under this Agreement, and in accordance
therewith, is entitled to enforce or seek remedies with respect to any of such
rights in law or in equity.
[remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Stock Purchase
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date provided first written above.
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
-------------------------
Westcott W. Price III
President and Chief Executive
Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: /s/ Jack D. Massimino
--------------------------
Jack D. Massimino
President and Chief Executive
Officer
S-1
<PAGE>
STANDSTILL AGREEMENT
This Standstill Agreement (this "Agreement") is entered into as of
February 14, 1997, between FHP International Corporation, a Delaware corporation
(FHP International Corporation, with all of its current and future affiliates
and associates, is hereinafter referred to as "FHP") and Talbert Medical
Management Holdings Corporation, a Delaware corporation (the "Company").
RECITALS
WHEREAS, FHP, as of the date hereof, owns rights (the "Rights") to
purchase 2,772,000 shares of Common Stock of the Company, par value $.01 per
share (the "Common Stock"), that when issued will constitute 92.4% of the
Company's outstanding securities with the power to vote with respect to the
election of directors generally ("Voting Securities").
WHEREAS, the Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (the "Form
S-1") with respect to the offering to FHP's stockholders of the Rights held by
FHP and the underlying shares of the Company's Common Stock (the "Offering").
WHEREAS, if the Offering is not fully subscribed, FHP will receive
from the Company shares of Common Stock not subscribed for in the Offering (any
such shares received by FHP are the "Unsubscribed Shares," which together with
all Voting Securities subsequently acquired by FHP, are the "FHP Shares").
WHEREAS, FHP and the Company are entering into this Agreement to
define the future relationship between FHP and the Company in respect of the
Voting Securities and certain other matters in consideration of the mutual
covenants contained herein. Nothing in this Agreement will prevent the
consummation of sales of Common Stock pursuant to the exercise of Rights.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the Company and FHP hereby
agree as follows:
ARTICLE 1. REPRESENTATIONS AND WARRANTIES
SECTION 1.1 FHP'S REPRESENTATIONS AND WARRANTIES. In order to induce
the Company to enter into this Agreement, FHP represents and warrants that FHP
owns Rights to purchase 2,772,000 shares of Common Stock, which represent all of
the Voting Securities Beneficially Owned by FHP as of the date hereof.
<PAGE>
SECTION 1.2 COMPANY'S REPRESENTATIONS AND WARRANTIES. In order to
induce FHP to enter this Agreement, the Company represents and warrants that the
authorized capital of the Company consists of 15 million shares of Common Stock,
par value $.01 per share, and 1.2 million shares of preferred stock, par value
$.01 per share. There are presently 228,000 outstanding shares of Common Stock.
The Company has also issued to FHP Rights to purchase 2,772,000 shares of Common
Stock. The Company has granted options to purchase 70,250 shares of Common
Stock. The Company has declared, in connection with the adoption of its
Stockholder Rights Agreement, a dividend distribution as of the expiration date
of the Rights (the "Expiration Date") to all holders of Common Stock of a right
to purchase a unit initially consisting of one one-hundredth of a share of
Junior Participating Preferred Stock. There are no other outstanding options,
warrants or rights to purchase any equity securities of the Company.
ARTICLE 2. SALES BY FHP
SECTION 2.1 SALES BY FHP.
(a) With the exception of the transactions contemplated by the
Offering, FHP will not sell any FHP Shares until 180 days after the Expiration
Date (the "Waiting Period").
(b) After the Waiting Period, FHP will be permitted to sell all or
any portion of its total holdings of Common Stock, subject to compliance with
(i) federal and state securities laws, (ii) if applicable, Sections 3.2 or 3.5
of this Agreement, and (iii) the restrictions contained in Section 3.1 of this
Agreement.
ARTICLE 3. REGISTRATION RIGHTS
SECTION 3.1 RESTRICTIONS ON TRANSFER. FHP agrees that it will not,
directly or indirectly, sell, transfer or otherwise dispose of FHP Shares
constituting more than 3% of the outstanding Common Stock of the Company to any
person or group of persons who are affiliates (as defined under Rule 12b-2 of
the regulations promulgated under the Securities Exchange Act of 1934, as
amended) ("Affiliates") except in an underwritten public offering.
SECTION 3.2 SHELF REGISTRATION. The Company will file a registration
statement on Form S-3 (a "Shelf Form S-3") providing for the sale by FHP,
pursuant to Rule 415 of the Commission under the Securities Act, and/or any
similar rule that may be adopted by the Commission, of the FHP Shares and the
Company will use all commercially reasonable efforts to cause the Shelf Form S-3
to become and remain continuously effective for the period beginning on the
first anniversary of the Expiration Date and ending on the date FHP may sell all
of the remaining FHP Shares it holds free of any restrictions under the federal
securities laws (including any restrictions under Rule 144) or, if earlier, on
the date the distribution described in the Shelf Form S-3 is complete.
SECTION 3.3 REGISTRATION PROCEDURES PURSUANT TO SECTION 3.2. In
connection with the Company's obligations pursuant to Section 3.2 hereof, the
Company will:
2
<PAGE>
(a) prepare and file with the Commission the Shelf Form S-3, provided
that before filing a Shelf Form S-3 or prospectus or any amendments or
supplements thereto, the Company will furnish to FHP's counsel copies of all
such documents proposed to be filed; and the Company will use its reasonable
efforts to cause the Shelf Form S-3 to become effective by the date set forth in
Section 3.2 or as soon as practicable thereafter;
(b) prepare and file with the Commission such amendments and
supplements to the Shelf Form S-3 and the prospectus used in connection
therewith as may be necessary to maintain the effectiveness of the Shelf
Form S-3 (for the applicable period specified in Section 3.2 hereof), and
comply with the provisions of the Securities Act with respect to the disposition
of all of the FHP Shares during such applicable period in accordance with the
intended methods of disposition by FHP as set forth in the Shelf Form S-3 (which
will include sales on the securities exchange or market system on which the
Common Stock trades, or in private transactions, or underwritten public
offerings, at fixed prices, or market prices, or negotiated prices);
(c) promptly notify FHP and provide copies of all related documents
(i) when the Shelf Form S-3, the prospectus or any prospectus supplement or any
amendment has been filed, and, with respect to a Shelf Form S-3 or any post-
effective amendment, when the same has become effective, (ii) of any request by
the Commission for amendments or supplements to the Shelf Form S-3 or the
prospectus or for additional or supplemental information, (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of the Shelf
Form S-3 or the written threat or initiation of any proceedings for that
purpose, (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the FHP Shares for sale in any
jurisdiction or the written threat or initiation of any proceeding for that
purpose, or (v) at any time when a prospectus is required to be delivered under
the Securities Act in connection with the Shelf Form S-3, the happening of any
event as a result of which the Shelf Form S-3, prospectus, any prospectus
supplement, or any document incorporated by reference in any of the foregoing
contains an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they are made, not misleading;
(d) make reasonable best efforts to obtain the withdrawal of any
order suspending the effectiveness of the Shelf Form S-3 or any post-effective
amendment thereto or any state filing made in connection therewith at the
earliest practicable date;
(e) furnish to FHP such number of copies of the Shelf Form S-3, each
amendment and supplement thereto (in each case including all exhibits thereto),
the prospectus included in the Shelf Form S-3 and such other documents as FHP
may reasonably request in order to facilitate the disposition of the FHP Shares
being offered;
(f) cause all such FHP Shares to be listed on each securities
exchange or market system on which the Company's Common Stock is then listed or
designated;
3
<PAGE>
(g) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission;
(h) use all commercially reasonable efforts to (i) register or
qualify the FHP Shares under such other securities laws or Blue Sky laws of such
jurisdictions as FHP will reasonably request, (ii) keep such registrations or
qualifications in effect for so long as the Shelf Form S-3 remains in effect and
(iii) take any and all such actions as may be reasonably necessary or advisable
to enable FHP to consummate the disposition in such jurisdictions of the FHP
Shares; PROVIDED, HOWEVER, that the Company will not be required for any such
purpose to (A) qualify generally to do business as a foreign corporation in any
jurisdiction wherein it would not otherwise be required to qualify or (B)
consent to general service of process in any such jurisdiction; and
(i) cooperate with FHP to effect the offering and to facilitate the
timely preparation and delivery of certificates representing FHP Shares to be
sold under the Shelf Form S-3 and not bearing any restrictive legends and such
other actions as may be reasonably necessary to complete the offering.
SECTION 3.4 SUPPLEMENTS; AMENDMENTS. Upon the occurrence of any
event contemplated by Section 3.3(c)(v), the Company will, as soon as reasonably
practicable, prepare and furnish to FHP a reasonable number of copies of a
prospectus supplemented or amended so that, as thereafter delivered to the
purchasers of FHP Shares, such prospectus will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
SECTION 3.5 PIGGYBACK REGISTRATIONS. The Company will notify FHP in
writing at least thirty (30) days prior to the filing of any registration
statement under the Act for purposes of an underwritten public offering of
securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
excluding registration statements relating to employee benefit plans or with
respect to corporate reorganizations or other transactions under Rule 145 of the
Act) and will afford FHP an opportunity to include in such underwritten offering
all or part of the FHP Shares. Should FHP desire to include in any such
offering all or any part of the FHP Shares, it will, within fifteen (15) days
after the above-described notice from the Company, so notify the Company in
writing. If FHP decides not to include all of the FHP Shares in any such
offering, FHP will nevertheless continue to have the right to include FHP Shares
in any subsequent registration statement or registration statements as may be
filed by the Company with respect to underwritten offerings of its securities.
The right of FHP to be included in a registration pursuant to this
Section 3.5 will be conditioned upon FHP's participation in such underwriting.
If FHP intends to distribute FHP Shares through such underwriting, FHP will
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding any
other provision of the Agreement, if
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the underwriter determines in good faith that marketing factors require a
limitation of the number of shares to be underwritten, the number of shares that
may be included in the underwriting will be allocated first to the Company;
second to FHP and any other stockholder of the Company (other than FHP) who is
not also an employee or director of the Company, on a pro rata basis; and third,
to any other stockholder of the Company that is also an employee or director of
the Company on a pro rata basis. No such reduction will reduce the securities
being offered by the Company for its own account to be included in the
registration and underwriting.
SECTION 3.6 EXPENSES. All expenses incurred by the Company in
complying with Section 3.2 and 3.5 hereof, including registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees of the National Association of
Securities Dealers, Inc., listing or quotation fees and fees of transfer agents
and registrars, will be borne in full by the Company. FHP will be responsible
for all registration and filing fees, underwriting commissions, transfer taxes,
discounts and fees with respect to the FHP Shares and the fees and expenses of
counsel and accountants for FHP.
SECTION 3.7 INDEMNIFICATION BY THE COMPANY. In connection with any
registration statement that the Company may file pursuant to this Agreement, the
Company will, and it hereby agrees to, indemnify and hold harmless FHP and each
of its directors and officers, and each other person, if any, that controls any
such person within the meaning of the Securities Act, from and against any and
all losses, claims, damages or liabilities, and expenses (including without
limitation reasonable fees of counsel and any amounts paid in any settlement
effected with the consent of the Company) to which any of FHP and/or such
director, officer or controlling person thereof may become subject under the
Securities Act, the common law or otherwise, insofar as such losses, claims,
damages or liabilities (or any actions or proceedings, whether commenced or
threatened and whether civil, criminal or administrative, in respect thereof) or
expenses arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement, or
any preliminary, final or summary prospectus contained therein, or any amendment
or supplement thereto or (ii) any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the statement
therein, in light of the circumstances in which they were made, not misleading;
PROVIDED, HOWEVER, that the Company will not be liable to any such person in any
such case to the extent that any such loss, claim, damage, liability (or action
or proceeding, whether commenced or threatened, in respect thereof) or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any registration statement, or
prospectus, or amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by such person
expressly for use therein; and PROVIDED, FURTHER, that the Company will not be
liable to any such person under the indemnity agreement in this Section 3.7 to
the extent that any such loss, claim, damage or liability (or action or
proceeding, whether commenced or threatened, in respect thereof) or expense
results from the fact that FHP Shares were sold to a person
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to whom there was not sent or given a copy of the registration statement or
prospectus or of the prospectus as then amended or supplemented.
(b) In connection with the registration statement in which the FHP
Shares are registered, FHP will, and FHP hereby agrees to indemnify and hold
harmless the Company, each director and officer of the Company and such other
person, if any, who controls the Company within the meaning of the Securities
Act, from and against any and all losses, claims, damages or liabilities, and
expenses (including without limitation reasonable fees of counsel and any
amounts paid in settlement effected with the consent of FHP) to which the
Company, such director or officer or controlling person may become subject under
the Securities Act, the common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened and whether civil, criminal or administrative, in respect thereof) or
expenses arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact in or omission or alleged omission to state a
material fact required to be stated in the registration statement or any
prospectus contained therein, or any amendment or supplement thereto, or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, such statement or alleged statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by FHP expressly for use therein; PROVIDED, THAT the
obligation to indemnify will be limited to the net amount of proceeds received
by FHP from the sale of FHP Shares pursuant to the registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding with respect to
which a claim for indemnification may be made pursuant to this Section 3.7 or a
written threat to commence such action or proceeding, the indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
give written notice thereof (including a reasonable explanation of the
circumstances in connection therewith and copies of all writings received
relating thereto) to the latter; PROVIDED, HOWEVER, that the failure of any
indemnified party to give notice as provided herein will not relieve the
indemnifying party of any obligations under this Section 3.7 unless such failure
to provide notice prejudices in any material way the rights of the indemnifying
party to conduct the defense of such action or proceeding. In case any such
action is brought against an indemnified party, the indemnifying party will be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after such
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof unless the indemnifying party has
failed to assume the defense of such claim and to employ counsel reasonably
satisfactory to such indemnified person. No indemnifying party will consent to
entry of any judgment or enter into any settlement with respect to a claim made
against an indemnified party without the consent of the indemnified party, which
consent will not be unreasonably withheld, or unless such judgment or settlement
includes as an unconditional
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term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in connection with the circumstances out of
which the action or proceeding arose for all persons that may be entitled to or
obligated to provide indemnification or contribution under this Section 3.7. No
indemnified party will consent to entry of any judgment or enter into any
settlement of any action the defense of which has been assumed by an
indemnifying party without the consent of such indemnifying party, which consent
will not be unreasonably withheld. An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim will not be obligated to pay
the fees and expenses of more than one counsel for all parties indemnified by
the indemnifying party with respect to such claim.
(d) If for any reason the indemnification provided for in Sections
3.7(b) or 3.7(c) is unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
specifically covered by the indemnification provisions set forth in Sections
3.7(b) or 3.7(c), then the indemnifying party will contribute to the amount paid
or payable by the indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and the indemnified party, as well as
any other relevant equitable considerations; PROVIDED, that the obligation to
contribute will be individual to FHP and will be limited to the net amount of
proceeds received by FHP from the sale of the FHP Shares pursuant to the
registration statement. The relative fault of such indemnifying party and
indemnified party will be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The parties
hereto agree that it would not be just and equitable if contribution pursuant to
this Section 3.7 were determined by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this paragraph. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
SECTION 3.8 NON-ASSIGNABILITY OF REGISTRATION RIGHTS. The rights to
cause the Company, or its successors or assigns to register the FHP shares
pursuant to this Agreement are reserved solely for the use and benefit of FHP
and may not be assigned or transferred by FHP to any other person other than to
an Affiliate of FHP. A merger or consolidation of or transfer of all or
substantially all the assets of FHP or a change of control of FHP (a
"Fundamental Transaction") will not be deemed an assignment for purposes of this
Section 3.8 and the FHP Shares held by FHP immediately prior to the consummation
of a Fundamental Transaction will remain subject to this Agreement subsequent to
such Fundamental Transaction.
SECTION 3.9 BLACKOUT. In the event that the Company determines in
good faith that it would be seriously detrimental to the Company and its
stockholders to allow the
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Shelf Form S-3 to remain effective during the pendency of a transaction that the
Company deems to be material for the purposes of disclosure under the Exchange
Act, and that it would be seriously detrimental to amend the Shelf Form S-3 or
file a Form 8-K under the Exchange Act to disclose such material event, it may
furnish a certificate signed by the Chairman of the Board of Directors or the
President of the Company to FHP setting forth the Company's basis for such
determination (a "Determination Certificate"). Ten business days following the
delivery of a Determination Certificate, the Company will be entitled to suspend
the effectiveness of the Shelf Form S-3 (provided that such suspension does not
conflict with the terms of any underwriting agreement) for a period of not more
than 60 days. Within 10 days before the expiration of such 60-day period, the
Company may deliver another Determination Certificate and may increase the
period of such suspension to a total period not to exceed 90 days. Following
the expiration of the 60-day suspension period or 90-day suspension period, as
applicable, and for a period of 180 days thereafter, the Company may not suspend
the effectiveness of the Shelf Form S-3 without the prior written consent of
FHP.
ARTICLE 4. VOTING
SECTION 4.1 VOTING. FHP agrees that, during the term of this
Agreement, for so long as FHP Beneficially Owns any FHP Shares, FHP will (a) be
present, in person or represented by proxy, at all shareholder meetings of the
Company so that all Voting Securities Beneficially Owned by FHP may be counted
for the purpose of determining the presence of a quorum at such meetings and (b)
vote or consent, or cause to be voted or a consent to be given, with respect to
all Voting Securities Beneficially Owned by FHP on all matters submitted to
shareholders for a vote or consent in the same proportion as Voting Securities
are voted by holders unaffiliated with FHP.
ARTICLE 5. STANDSTILL PROVISIONS
SECTION 5.1 STANDSTILL PROVISIONS. FHP agrees that, during the term
of this Agreement, without the Company's prior written consent, FHP will not:
(a) acquire, announce an intention to acquire, offer or propose to
acquire, or agree to acquire, directly or indirectly, by purchase or otherwise,
Beneficial Ownership of any Voting Securities, or direct or indirect rights to
options to acquire (through purchase, exchange, conversion or otherwise) any
Voting Securities;
(b) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" (within the meaning of the meaning of Rule 14a-1
under the Exchange Act) to vote any Voting Securities, seek to advise, encourage
or influence any person or entity with respect to the voting of any Voting
Securities, initiate or propose any shareholder proposal or induce or attempt to
induce any other person to initiate any shareholder proposal;
8
<PAGE>
(c) make any statement or proposal, whether written or oral, to the
Board of Directors of the Company, or to any director, officer or agent of the
Company, or make any public announcement or proposal whatsoever with respect to
a merger or other business combination, sale or transfer of assets,
recapitalization, dividend, share repurchase, liquidation or other extraordinary
corporate transaction with the Company or any other transaction which could
result in a change of control, or solicit or encourage any other person to make
any such statement or proposal;
(d) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the 1934 Act) with respect to any securities of
the Company, other than a group which FHP is a member of as of the date hereof
(provided that any "group" formed in connection with the disposition of FHP
Shares pursuant to Article 3 will be permitted);
(e) deposit any FHP Shares into a voting trust or subject any FHP
Shares to any arrangement or agreement with respect to the voting of any FHP
Shares other than this Agreement;
(f) execute any written consent with respect to the Company, except
in accordance with Section 4;
(g) otherwise act, alone or in concert with others, to seek to
exercise any control over the management, Board of Directors or policies of the
Company;
(h) make a public request to the Company (or its directors, officers,
shareholders, employees or agents) to amend or waive any provisions of this
Agreement, the Certificate of Incorporation or Bylaws of the Company, or the
Stockholder Rights Agreement of the Company, including without limitation any
public request to permit FHP or any other person to take any action in respect
of the matters referred to in this Section 5.1;
(i) take any action that might require the Company to make a public
announcement regarding the possibility of any transaction referred to in
paragraph (c) above or similar transaction or, advise, assist or encourage any
other persons in connection with the foregoing;
(j) propose a nominee for director, or express support or opposition
for any nominee for director; or
(k) disclose any intention, plan or arrangement inconsistent with the
foregoing.
ARTICLE 6. GENERAL
SECTION 6.1 NOTIFICATION AS TO CERTAIN MATTERS. FHP will notify the
Company of any change in FHP's Beneficial Ownership involving in the aggregate
not less than 30,000
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<PAGE>
shares of Voting Securities not later than two business days after such change
and from time to time, upon request, will notify the Company of the number of
shares of Voting Securities Beneficially Owned by FHP and of the names and
addresses of all persons included in the definition of FHP hereunder, including,
without limitation, affiliates to whom FHP Shares have been transferred in
accordance with Article 3. The Company will notify FHP from time to time, upon
request, of the number of Voting Securities outstanding.
SECTION 6.2 SPECIFIC PERFORMANCE. Each of FHP and the Company
acknowledges that the other party would not have an adequate remedy at law for
money damages if any of the covenants or agreements of the other party in this
Agreement were not performed in accordance with its terms and therefore agrees
that the other party will be entitled to specific enforcement of such covenants
or agreements and to injunctive and other equitable relief in addition to any
other remedy to which it may be entitled, at law or in equity.
SECTION 6.3 NOTIFICATION OF RESTRICTIONS. Any certificates
representing the FHP Shares will bear the following legend, which legend will
remain until such time as the securities represented by the certificates are
transferred in accordance with the provisions of this Agreement:
THESE SECURITIES ARE SUBJECT TO THE PROVISIONS OF AN AGREEMENT BETWEEN
THE ISSUER AND FHP INTERNATIONAL CORPORATION AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN ACCORDANCE THEREWITH.
SECTION 6.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties, covenants and agreements contained in this
Agreement will survive the execution of this Agreement and any investigation at
any time by FHP, the Company, or on behalf of either of them.
SECTION 6.5 ENTIRE AGREEMENT. This Agreement, together with the
other agreements of the parties of even date herewith, contains the entire
understandings of the parties with respect to the subject matter of the
agreements. This Agreement may not be amended except by a writing signed by the
parties. Except as specifically provided herein, this Agreement is not
assignable by either of the parties. This Agreement is binding upon the
respective successors of the parties and upon transferees of Voting Securities
who are affiliates or associates of FHP.
SECTION 6.6 SEVERABILITY. If any terms, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restriction of this Agreement will remain in full force and
effect, unless the action would substantially impair the benefits to either
party of the remaining provisions of this Agreement.
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<PAGE>
SECTION 6.7 NOTICES. Any notices and other communications required
to be given pursuant to this Agreement will be delivered by hand, by registered
or certified mail, postage prepaid, return receipt requested, by private
courier, by facsimile or by telex, as follows:
(a) If to the Company:
Talbert Medical Management Holdings Corporation
3540 Howard Way
Costa Mesa, CA 92626-1417
Attention: President
Telecopier: (714) 436-4860
with copies to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071
Attention: C. James Levin, Esq.
Telecopier: (213) 669-6407
(b) If to FHP International Corporation:
FHP International Corporation
3120 Lake Center Drive
Santa Ana, CA 92704
Attention: Secretary
Telecopier: (714) 825-5710
With copies to:
Konowiecki & Rank
First Interstate World Center
633 W. Fifth Street
Los Angeles, CA 90071-2007
Attention: Joseph Konowiecki
Telecopier: (213) 229-0992
SECTION 6.8 TERM AND EFFECTIVENESS.
(a) This Agreement will become effective upon the Expiration Date,
UNLESS the amount of Unsubscribed Shares is in excess of twenty percent (20%) of
the outstanding Voting Securities on the Expiration Date, in which event this
Agreement will be null and void.
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(b) This Agreement will expire on the seventh anniversary of the
Expiration Date.
(c) Article 2 and Section 6.1 will not apply at any time that FHP
Beneficially Owns less than 3% of the outstanding shares of Voting
Securities. Article 3 will not apply to the extent FHP Beneficially Owns less
than 3% of the outstanding shares of Voting Securities upon the Expiration
Date, and the holding period for restricted securities under Rule 144 has
been reduced to one year.
SECTION 6.9 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of California disregarding
conflict of law provisions.
SECTION 6.10 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, which together will constitute a single agreement.
[remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date provided first written above.
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
----------------------------------
Westcott W. Price III
President and Chief Executive
Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: /s/ Jack D. Massimino
----------------------------------
Jack D. Massimino
President and Chief Executive
Officer
S-1
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SECOND AMENDED AND RESTATED
REAL ESTATE AND EQUIPMENT MASTER TRANSFER AGREEMENT
This Second Amended and Restated Real Estate and Equipment Master
Transfer Agreement ("AGREEMENT"), dated February _____, 1997 for reference
purposes and effective as of January 1, 1996 (the "EFFECTIVE DATE"), is made
among FHP, Inc., a California corporation, FHP of Utah, Inc., a Utah
corporation, FHP of New Mexico, a New Mexico corporation (collectively, "FHP",
or each an "FHP COMPANY"), and Talbert Medical Management Corporation, a
Delaware corporation ("TMMC"), who hereby amend and entirely restate the Real
Estate and Equipment Master Transfer Agreement among the same parties dated as
of January 1, 1996, as the same was amended and restated by the Amended and
restated Real Estate and Equipment Master Transfer Agreement among the same
parties dated December 6, 1996 for reference purposes, with reference to the
following facts:
A. Each FHP Company is the owner or lessee of one or more medical
and/or administrative facilities described below and the furniture, fixtures and
equipment ("FF&E") located therein. The FF&E shall consist of the following
categories of personal property only: (i) furniture, (ii) data processing
equipment, (iii) medical equipment, (iv) minor equipment, (v) PBX equipment,
(vi) art, (vii) soft costs and (viii) leasehold improvements installed by or at
the expense of FHP in certain of the Leased Facilities and HMO Funding
Facilities, and shall be more particularly provided for and described in the
Master FF&E Lease Agreement provided for in Section 4 hereof.
B. Each medical and administrative facility that is owned by an FHP
Company and intended to be the subject of this Agreement is described on
attached Exhibit A (collectively, the "OWNED FACILITIES", and individually, an
"OWNED FACILITY").
C. Each medical and administrative facility that is leased by an FHP
Company and intended to be the subject of this Agreement is described on
attached Exhibit B (collectively, the "LEASED FACILITIES", and, individually, a
"LEASED FACILITY").
D. Each medical and administrative facility leased by FHP, Inc.
pursuant to the Lease Agreement, dated August 2, 1990 between HMO Funding, Inc.
and FHP, Inc., as amended (collectively, the "HMO FUNDING LEASE"), is listed on
attached Exhibit C (collectively, the "HMO FUNDING FACILITIES", and,
individually, an "HMO FUNDING FACILITY").
E. Subject to the terms and conditions of this Agreement, FHP
intends to transfer the Owned Facilities, the Leased Facilities, the HMO Funding
Facilities and the FF&E to TMMC, and TMMC intends to accept such transfers and
assume the obligations arising therefrom.
Therefore, in consideration of the above facts and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Parties agree as follows:
1. LEASE OF THE OWNED FACILITIES. TMMC shall lease each Owned Facility
from the FHP Company listed on attached Exhibit A as owning each such Owned
Facility, and each such FHP Company shall lease each Owned Facility to TMMC
pursuant to a separate lease agreement, which shall be in substantially the form
and contain substantially the terms and conditions of the Second Amended and
Restated Lease Agreement attached as Exhibit D.
2. ASSIGNMENT AND ASSUMPTION OF LEASED FACILITIES AND LEASE OF FF&E.
Each FHP Company listed in attached Exhibit B as a lessee and/or sublessee of a
Leased Facility hereby assigns its leasehold and subleasehold interests in each
such lease and sublease to TMMC, and TMMC hereby accepts each such assignment of
leases and subleases on the terms and conditions of the Amended and Restated
Master Assignment of Leases attached as Exhibit E. The foregoing assignment and
acceptance of such assignment shall survive the expiration of this Agreement.
TMMC shall provide such reasonable cooperation and assistance as may be required
by FHP or any successor in connection with its efforts to secure the agreement
of any or all lessors or sublessors of the Leased Facilities that FHP and any
such successor shall be forever released and discharged from any and all
liabilities under each lease or sublease of a Leased Facility assigned by FHP to
TMMC pursuant to this Section 2.
3. SUBLEASE OF HMO FUNDING FACILITIES. TMMC shall sublease or sub-ground
lease, as the case may be, each HMO Funding Facility, from the appropriate FHP
Company, and such FHP Company shall sublease or sub-ground lease each HMO
Funding Facility to TMMC, pursuant to separate sublease agreements, which shall
be in substantially the form and contain substantially the terms and conditions
of the Second Amended and Restated Sublease Agreement attached as Exhibit F.
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4. LEASE OF FF&E. TMMC shall lease from each FHP Company the FF&E
situated in the Owned Facilities, Leased Facilities and HMO Funding Facilities
and each such FHP Company shall lease such FF&E to TMMC on the terms and
conditions of the Master FF&E Lease Agreement attached as Exhibit G.
5. TERM. The term of this Agreement shall commence on January 1, 1996
and expire ___________ ( ) days after the date on which all of the agreements
provided for herein have expired.
6. MISCELLANEOUS.
6.1 NOTICES AND ADDRESSES. The addresses for the parties for
delivery of any notices shall be as follows:
If to any FHP Company:
FHP International Corporation
3120 Lake Center Drive
Santa Ana, CA 92704
Attention: Secretary
If to TMMC:
Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attention: President
All notices and documents shall be delivered either by (i)
messenger or courier service, (ii) by nationally recognized overnight courier
service (such as Federal Express), or (iii) by registered or certified U.S.
Mail, postage prepaid, return receipt requested. Delivery shall be effective
only upon actual receipt. Any party to this Agreement may change any of the
information set forth in this Section 6.1 in connection with such party by
notice given in accordance with the foregoing provisions.
6.2 FURTHER ASSURANCES. Each party hereto shall execute,
acknowledge and deliver to each other all documents, and shall take all actions,
reasonably required by such other party from time to time to confirm or effect
the matters set forth herein, or otherwise to carry out the purposes of this
Agreement.
6.3 ATTORNEYS' FEES. In the event that any litigation is
commenced concerning or arising out of this Agreement, or any of the leases,
subleases or assignments contemplated hereby, the party or parties prevailing in
such litigation shall be entitled to recover, in addition to such other relief
as may be granted, its/their reasonable costs and expenses, including without
limitation reasonable attorneys' fees and court costs, whether or not taxable,
as awarded by a court of competent jurisdiction.
6.4 MODIFICATIONS. This Agreement may not be modified orally or
in any other manner except by an agreement in writing signed by the parties
hereto or their respective successors-in-interest.
6.5 ASSIGNMENT. This Agreement is personal to the parties
hereto, and the rights and obligations hereunder are accordingly not assignable
either in whole or in part.
6.6 GOVERNING LAW. This Agreement shall be governed by the laws
of the State of California.
6.7 EXHIBITS. All exhibits attached to this Agreement are
incorporated herein by reference, it being agreed by FHP and TMMC that, except
as hereinafter otherwise provided, mutually agreed upon revised versions of any
or all of Exhibits A, B, C, D and G may be substituted for such exhibits from
time to time to reflect the addition or deletion of Owned Facilities, Leased
Facilities, HMO Funding Facilities or FF&E to or from said exhibits; provided
that such revised exhibits shall only be effective after they have been mutually
agreed upon and duly executed on behalf of each FHP Company and TMMC.
Notwithstanding the foregoing, it is understood and agreed that neither mutual
agreement nor execution on behalf of TMMC shall be necessary to effectuate the
deletion from Exhibit A or Exhibit G of any facility or FF&E which has been sold
or otherwise transferred to a new owner or the deletion from Exhibit C, and the
addition to Exhibit A, if
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<PAGE>
appropriate, of any facility which has been acquired from HMO Funding, Inc. by
FHP or any successor.
6.8 SUPERSEDING EFFECT. To the extent any of the Owned
Facilities and/or the Leased Facilities were previously transferred to TMMC,
this Agreement shall supersede such transfers, and any agreements or other
documentation evidencing such prior transfers are hereby amended and restated in
their entirety by this Agreement.
6.9 COUNTERPARTS. This Agreement may be executed in
counterparts with the same force and effect as if the parties had executed one
instrument, and each such counterpart shall constitute an original hereof.
FHP, Inc., a California corporation
By: /s/ Westcott W. Price III
-----------------------------------------
Westcott W. Price III, President and Chief
Executive Officer
FHP of Utah, Inc., a Utah corporation
By: /s/ Westcott W. Price III
-----------------------------------------
Westcott W. Price III
Chief Executive Officer
FHP of New Mexico, Inc., a New Mexico corporation
By: /s/ Westcott W. Price III
-----------------------------------------
Westcott W. Price III, President and Chief
Executive Officer
Talbert Medical Management Corporation, a Delaware
corporation
By: /s/ Jack D. Massimino
-----------------------------------------
Jack D. Massimino, President and Chief
Executive Officer
-3-
<PAGE>
MASTER TRANSFER AGREEMENT
LIST OF EXHIBITS
Exhibit A List of Owned Facilities
Exhibit B List of Leased Facilities
Exhibit C List of HMO Funding Facilities
Exhibit D Second Amended and Restated Lease Agreement
Exhibit E Amended and Restated Master Lease Assignment
Exhibit F Second Amended and Restated Sublease Agreement
Exhibit G Master FF&E Lease Agreement
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<PAGE>
SECOND AMENDED AND RESTATED LEASE AGREEMENT
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Second Amended and Restated Lease Agreement ("LEASE"),
dated February __, 1997 for reference purposes and made effective as of January
1, 1996 (the "EFFECTIVE DATE), is made by and between the lessor identified on
the signature page of this Lease ("LESSOR") and Talbert Medical Management
Corporation, a Delaware corporation ("LESSEE") (collectively the "PARTIES", or
individually a "PARTY") to amend and entirely restate that certain Amended and
Restated Lease Agreement dated December 6, 1996 for reference purposes and made
effective as of the Effective Date between the Parties as to the Premises
provided for in Paragraph 1.2 below.
1.2 PREMISES: That certain building which is located at the address set
forth in Exhibit I hereto and contains the square footage set forth on Exhibit
I, together with the land on which it is situated (the "PREMISES"), said
Premises, together with the FF&E situated therein, having the projected net book
value as of the Effective Date shown on Exhibit II hereto.
1.3 FF&E: As used in this Lease, the term "FF&E" shall mean the
furniture, fixtures and equipment located on the Premises and consisting of the
following categories of personal property only: (a) furniture, (b) data
processing equipment, (c) medical equipment, (d) minor equipment, (e) PBX
equipment, (f) art and (g) soft costs, said FF&E being the subject of a separate
Master FF&E Lease Agreement between the Parties.
1.4 TERM AND EXTENSIONS: Five (5) years (the "INITIAL TERM") commencing
on January 1, 1996 ("COMMENCEMENT DATE") and ending on December 31, 2000
("EXPIRATION DATE"); provided that (except as otherwise provided in Paragraph
(iv) of that certain letter agreement dated December 11, 1996, between FHP,
Inc., FHP of Utah, Inc. and FHP of New Mexico, Inc., on the one hand, and
Lessee, on the other, said letter agreement being attached hereto as Exhibit
III), at the end of the Initial Term, the term of this Lease shall be
automatically extended for an additional five (5) year period to December 31,
2005 (the "FIRST EXTENSION TERM"). In addition, and provided the term of this
Lease has been extended for the First Extension Term and Lessee is not then in
DEFAULT OR BREACH (as defined in Paragraph 11.1), Lessee shall have two (2)
further extension options which may be exercised by written notice from Lessee
to Lessor at least one (1) year prior to the end of the First Extension Term or
the "SECOND EXTENSION TERM" (as hereinafter defined), as the case may be, to
extend the term of this Lease for an additional five years each (the first such
five year period, commencing on January 1, 2006, being the "SECOND EXTENSION
TERM", and the second such five year period, commencing on January 1, 2011,
being the "THIRD EXTENSION TERM"). Any of the First Extension Term, Second
Extension Term or Third Extension Term shall be referred to herein as an
"EXTENSION TERM".
1.5 BASE RENT: During the term of this Lease, Lessee shall pay Base Rent
("BASE RENT") in the following amounts:
(a) During the first year of the Initial Term, Lessee shall pay as
Base Rent a monthly amount equal to the sum of (A) 0.6667% (eight percent (8%)
per annum) of the net book value as of the Effective Date, set forth in Exhibit
II hereto for the Premises (including the FF&E therein) as of the Commencement
Date plus (B) an amount equal to the monthly depreciation expense for the
Premises (using Lessor's depreciation schedules in effect as of the Commencement
Date) calculated as of the end of each calendar month.
EXHIBIT D TO MASTER TRANSFER AGREEMENT
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(b) From January 1, 1997 through December 31, 2000, Lessee shall pay
as Base Rent the monthly amount set forth on Exhibit I, said amount being
derived by multiplying the square footage shown on Exhibit I by the monthly rent
per square foot shown on Exhibit I.
(c) As of the commencement of an Extension Term of this Lease, the
Base Rent for such Extension Term shall be adjusted to reflect prevailing market
rent (including the addition of a provision requiring an annual Consumer Price
Index adjustment, or similar cost of living adjustment, if such adjustments are
at such time customary market terms for similar properties in the relevant
market) for similar space (excluding FF&E) in comparable facilities in the
general vicinity in which the Premises are located ("FAIR MARKET RENT"). If
Lessor and Lessee are unable to agree upon Fair Market Rent within one hundred
fifty (150) days prior to the commencement of the relevant Extension Term,
Lessor and Lessee each shall, no later than 140 days prior to the commencement
of the relevant extension term, appoint, at its own expense, one appraiser with
expertise in commercial real estate leasing transactions to determine the Fair
Market Rent, such determination to be made and presented in writing within 20
calendar days after his or her appointment. Fair Market Rent shall be the mean
of the fair market rents determined by the appraisers if the determination of
the appraiser appointed by Lessor is no more than five (5) percentage points
greater than the other appraiser's determination. If the determination of the
appraiser appointed by Lessor is more than five percentage points greater than
the other appraiser's determination, the appraisers jointly shall, no later than
110 days prior to the commencement of the relevant Extension Term, appoint a
third appraiser (who shall be a real estate appraiser who has not provided
services to Lessor or Lessee during the immediately preceding three (3) years
and who has at least five (5) years of full-time commercial appraisal experience
in the geographic area in which the Premises are located) and, after the third
appraiser's determination, such determination to be made and presented in
writing within 20 calendar days after his or her appointment. Fair Market Rent
shall be the mean of (a) the third appraiser's determination and (b) the
determination of the one of the other appraisers whose determination is nearer
in amount to the determination of the third appraiser. The fees and expenses of
the third appraiser shall be divided equally between Lessor and Lessee.
1.6 PERMITTED USE: Any lawful purposes.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises for the Initial Term and any Extension Terms, at the
rental, and upon all of the terms, covenants and conditions set forth in this
Lease. The parties recognize that this Lease is what is generally considered to
be a "triple net" lease whereby all risks and liabilities of ownership are
assumed by the Lessee.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee on an "as is"
basis without any representations or warranties, express or implied, to the full
extent permitted under Applicable Law (as defined in Paragraph 4.3, below). All
repairs and modifications to the Premises (whether structural or non-structural,
capital or non-capital), including, without limitation, those required to
conform the Premises or any parts thereof to the requirements of any Applicable
Law now in effect or enacted in the future, shall be performed at the sole cost
and expense of Lessee. Notwithstanding any factors judicially developed as a
means of allocating the obligation to make alterations to leased premises to
comply with present or future Applicable Law, it is the intention of the Parties
that such obligations are those of Lessee and are accordingly reflected in rent
payments and other consideration under this Lease.
3. RENT.
Lessee shall cause payment of Base Rent and other rent or charges to be
received by Lessor (collectively "RENT") in lawful money of the United States,
without offset, deduction or prior demand, in arrears on or before the fifteenth
(15th) day of each month immediately following each month of the Initial Term
and any Extension Term, with final payment due on the fifteenth (15th) day of
the month following the end of such term.
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4. USE.
4.1 USE. Lessee shall use the Premises in accordance with all Applicable
Law. Lessee shall not use or permit the use of the Premises in a manner that
creates waste or a nuisance, or that disturbs owners and/or occupants of, or
causes damage to, neighboring premises or properties.
4.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law. "REPORTABLE USE" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying any of the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but in compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of Lessee's business permitted on the Premises, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor.
(b) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, and its agents, employees, and ground lessors, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control.
4.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
all governmental authorities of competent jurisdiction and any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and ground water conditions, (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage, spill
or release of any Hazardous Substance or storage tank), now in effect or which
may hereafter come into effect, and (iv) compliance with the terms and
conditions of the Americans with Disabilities Act. Whether or not reflecting a
change in policy from any previously existing policy Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with copies
of all documents and information, including, but not limited to, permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Law specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation, warning,
complaint or report pertaining to or involving failure by Lessee or the Premises
to comply with any Applicable Law.
4.4 INSPECTION; COMPLIANCE. Lessor shall have the right to enter the
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease and all Applicable Law and to
employ experts and/or consultants in connection therewith and/or
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to advise Lessor with respect to Lessee's activities, including but not limited
to the installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse the
Lessor for the costs and expenses of such inspections.
5. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
5.1 LESSEE'S OBLIGATIONS. Lessee shall, at Lessee's sole cost and expense
and at all times, keep the Premises and all parts thereof in good order,
condition and repair, structural and non-structural (whether or not such portion
of the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises, and whether or not any required repairs
considered are capital or non-capital), including, without limiting the
generality of the foregoing, landscaping and all equipment or facilities serving
the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, and life-safety systems. Without limiting the
generality of the foregoing provision, Lessee shall maintain the Premises in a
manner and in a condition which is at least consistent with comparable buildings
in the immediate area in which the Premises is located.
5.2 LESSOR'S OBLIGATIONS. It is intended by the Parties that Lessor have
no obligation, in any manner whatsoever, to repair or maintain the Premises, or
the improvements located thereon, whether structural or non-structural, all of
which obligations are intended to be those of the Lessee under Paragraph 5.1
hereof. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises. Lessee and Lessor expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Lessee the right to make repairs at the
expense of Lessor or to terminate this Lease by reason of, any needed repairs.
5.3 ALTERATIONS AND INDEMNIFICATION.
(a) ALTERATIONS. Lessee may make any interior alterations or
modifications to the Premises (collectively, "ALTERATIONS") that are not
Structural Alterations (as defined below) without Lessor's prior consent,
provided (i) on the expiration or earlier termination of this Lease, Lessee
shall, at Lessor's election and at Lessee's sole cost, restore all or any
portion of the Premises to the condition existing prior to the installation or
construction of the Alteration(s), (ii) no such Alteration shall affect the
exterior or the structural integrity of the Premises (which shall include the
foundation, bearing walls and structural roof), any telephone closets,
stairwells, elevators, plumbing systems, sprinkler systems (connected to the
building core), life safety systems, HVAC systems (including primary and
secondary loops connected to the building core), and other mechanical or
electrical systems (collectively, "STRUCTURAL ALTERATIONS"), (iii) for any
Alterations where the estimated cost exceeds $50,000, Lessee shall provide
Lessor with at least ten (10) business days prior written notice of the
commencement of construction to permit Lessor the opportunity to post a notice
of non-responsibility pursuant to Applicable Law, and (iv) Lessee shall (A)
obtain, at Lessee's sole cost, all required governmental permits and licenses
required for any proposed Alteration, (B) if required by Lessor, provide Lessor
with copies of all such permits and licenses, and -C- comply with all conditions
imposed on Lessee by such permits and/or licenses. Any Alterations by Lessee
during the Term shall be done in a good and workmanlike manner, with good and
sufficient materials, and in compliance with all Applicable Law. Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications, if any, therefor. Any request for a consent to any Structural
Alteration may be withheld in Lessor's sole and absolute discretion.
(b) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or material man's lien against the Premises or any interest therein.
If any such lien attaches or Lessee receives notice of any such lien, Lessee
shall cause the lien to be released and removed of record within ten (10) days
after Lessor's demand. Despite any other provision of this Lease, if the lien
is not released and removed within ten (10) days after Lessor delivers notice of
the lien to Lessee, Lessor may immediately take all action necessary to release
and remove the lien, without any duty to investigate the validity of such lien,
unless lessee has commenced legal action to contest, dispute, or defend the
claims of the lienholder and the validity of such lien and continues to
prosecute such action to a successful judgment releasing the lienholder's lien
against Lessee or Lessor's
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interest in the Premises. All expenses (including reasonable attorney's fees)
incurred by Lessor in connection with release of the lien shall be considered
rent under this Lease and be immediately due and payable by Lessee. If Lessee
shall, in good faith, contest the validity of any such lien, claim or demand,
then Lessee shall, at its sole expense defend and protect itself, Lessor and the
Premises against the same and shall pay and satisfy any such adverse judgment
that may be rendered thereon before the enforcement thereof against the Lessor
or the Premises.
5.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as provided herein, all Alterations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Alterations. Unless otherwise instructed per subparagraphs 5.3(a) and 5.4(b)
hereof, all Alterations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon and be surrendered by
Lessee with the Premises.
(b) REMOVAL. Lessor may require that any or all Alterations be
removed by the expiration or earlier termination of this Lease. Lessor may
require the removal or restoration at any time of all or any part of any
Alterations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Term or any earlier termination date, with all of
the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease.
6. INSURANCE; INDEMNITY.
6.1 PAYMENT FOR INSURANCE. Lessee shall carry and pay for all insurance
required under this Paragraph 6.
6.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the Term a Commercial General Liability policy of insurance protecting Lessee
and Lessor (as an additional insured) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis for the
Premises providing single limit coverage in an amount not less than $5,000,000
per occurrence. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary and not contributory with any similar insurance that may be carried
by Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall have no obligation to carry any
insurance under this Lease.
6.3 PROPERTY INSURANCE. Lessee shall obtain and keep in force during the
term of this Lease a policy or policies, naming Lessor as additional insured,
with loss payable to Lessee insuring the Premises for loss or damage caused by
the usual all-risk perils. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time. In the event of a damage or destruction of the Premises, Lessor may elect
that such insurance proceeds be paid to and disbursed through a third-party
escrow or construction disbursement account selected by Lessor.
6.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least A- 14 as set forth in the most current issue of "Best's Insurance
Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 6. Lessee shall
cause to be delivered to Lessor certified copies of policies of such insurance
or certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancelable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall prior to the expiration of such
policies, furnish
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Lessor with evidence of renewals or "insurance binders" evidencing renewal
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee to Lessor upon demand. If
Lessee shall fail to procure and maintain the insurance required to be carried
by Lessee under this Paragraph 6, Lessor may, but shall not be required to,
procure and maintain the same, but at Lessee's expense.
6.5 WAIVER OF SUBROGATION. Without affecting any other rights or remedies
and without imposing on Lessor an obligation to procure property insurance,
Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under this
Paragraph 6. The effect of such releases and waivers of the right to recover
damages shall not be limited by the amount of insurance carried or required, or
by any deductibles applicable thereto.
6.6 INDEMNITY. Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, employees, and contractors, from and
against any and all claims, loss of rents and/or damages, costs, liens,
judgments, penalties, permits, attorney's and consultant's fees, expenses and/or
liabilities (collectively, "CLAIMS") arising out of, involving, or dealing with,
the occupancy of the Premises by Lessee, the conduct of Lessee's business, any
act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease, and any active or passive negligence of Lessor whether any such Claims
are caused in whole or in part by such active and/or passive negligence of
Lessor. In case any action or proceeding is brought against Lessor by reason of
any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid
any such Claim in order to be so indemnified.
6.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause (including, without limitation, the active or passive negligence of
Lessor), whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Notwithstanding Lessor's active or passive negligence or breach of this Lease,
Lessor shall under no circumstances be liable for injury to Lessee's business or
for any loss of income or profit therefrom.
7. DAMAGE OR DESTRUCTION.
7.1 LESSEE'S OBLIGATIONS. If all or any part of the Premises are
destroyed, whether or not by a loss that is caused by a risk required to be
insured under this Lease, this Lease shall continue in full force and effect
without interruption, reduction, or abatement of rent or other expenses
hereunder. Upon occurrence of such damage or destruction, Lessee shall, at
Lessee's sole cost and expense, forthwith repair or restore the Premises to the
condition existing before the occurrence of such damage and destruction. In the
event this Lease expires prior to the completion of such repair, Lessee shall,
at Lessor's election, either (i) continue with full repair and restoration of
the Premises, or (ii) deliver to Lessor an amount determined by Lessor's
construction consultant to be necessary to complete such repair or restoration.
Lessor shall have no obligation to Lessee whatsoever in the event of any damage
or destruction to the Premises or any parts thereof.
7.2 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
8. REAL PROPERTY TAXES.
8.1 PAYMENT OBLIGATION. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 8.2, applicable to the Premises during the Term. All such
payments shall be made at least ten (10) days prior to the delinquency date of
the applicable installment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such Real Property Taxes have been paid. If Lessee
shall fail to pay any Real Property Taxes required by this Lease to be paid by
Lessee,
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Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
8.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax imposed upon the Premises by
any authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage or other improvement district thereof, levied against any legal
or equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the Term, including but not limited to a
change in the ownership of the Premises or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof, and
whether or not contemplated by the Parties.
8.3 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon the Alterations located within the
Premises.
9. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon.
10. ASSIGNMENT AND SUBLETTING.
10.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage or otherwise transfer or encumber or
sublet (collectively, "ASSIGN" or "ASSIGNMENT") all or any part of Lessee's
interest in this Lease or in any of the Premises without Lessor's prior written
consent, which consent shall not be unreasonably withheld subject to the terms
and conditions set forth below, which the Parties agree are reasonable:
a. Any assignment shall not: (i) be effective without the express
written assumption by such assignee or sublessee (either, a "TRANSFEREE") of the
obligations of Lessee under this Lease, or (ii) release Lessee of any of its
direct and primary obligations hereunder to Lessor.
b. Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
c. The consent of Lessor to any assignment shall not constitute a
consent to any subsequent assignment by Lessee or to any subsequent or
successive assignment by the assignee sublessee. However, Lessor may consent to
subsequent assignments or any amendments or modifications thereto without
notifying Lessee or anyone else liable on the Lease or sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or sublease.
d. In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any one else
responsible for the performance of the Lessee's obligations under this Lease,
including any sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor or Lessee.
e. Each request for consent to an assignment shall be in writing,
accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any. Lessee agrees to provide Lessor
with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
f. Upon receiving Lessee's notice requesting consent to an
assignment, together with all information required pursuant to Paragraph
10.1(e), above, then, without limiting the foregoing, Lessor may refuse to
consent on any commercially reasonable grounds, and refusal to
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so consent shall be deemed reasonable if the proposed assignment or subletting
does not meet the following conditions:
i. The assignment or subletting shall be on the same terms and
conditions set forth in Lessee's notice given to Lessor;
ii. No assignment or subletting shall be valid, and no Transferee
shall take possession of any of the Premises until an original of the duly
executed counterpart of the assignment documentation has been delivered to
Lessor;
iii. No Transferee shall have been negotiating with Lessor in the
last six (6) months for space in a building owned by Lessor;
iv. The proposed use of the Premises by the Transferee shall be
permitted by the use provisions of this Lease and in accordance with all
Applicable Laws;
v. The Transferee has the financial capability to fulfill the
obligations imposed by the assignment or subletting;
vi. The Transferee has a reputation in the community for financial
reliability and the bank or other financial references support in full the
financial statements delivered to Lessor on behalf of the Transferee;
vii. The Transferee demonstrates, in Lessor's business judgment, that
it is able to perform the obligations on Transferee's part to be performed under
this Lease;
viii. The Transferee shall not have been involved in any civil,
criminal or administrative litigation or proceedings which is unsatisfactory in
the reasonable opinion of Lessor; and
ix. The Transferee intends to use the Premises for the provision of
medical services or as medical office space.
10.2 ASSIGNMENT TO AN AFFILIATE. Notwithstanding the foregoing provisions
of Paragraph 10.1, above, Lessee may assign this Lease to an Affiliate of Lessee
without the prior consent of Lessor, provided Lessor receives notice of such
intent to assign at least ten (10) days prior to the effective date of the
assignment. An "AFFILIATE" for purposes of this Paragraph 10.2 shall mean any
entity which directly controls, is under common control with, or is directly or
indirectly controlled by Lessee or FHP International Corporation, a Delaware
corporation. Notwithstanding such permitted assignment, Lessee shall remain
directly and primarily liable to Lessor for all obligations and liabilities of
"Lessee" under this Lease.
10.3 TALBERT MEDICAL GROUP. Notwithstanding the foregoing provisions of
Paragraphs 10.1 and 10.2, above, Lessee may allow employees, agents,
contractors, representatives, invitees, guests, visitors and customers of
Talbert Medical Group, including any physicians or physician groups having a
management agreement or management agreements with Lessee, to use all or any
portion of the Premises at any time and from time to time (collectively, the
"TMG USE"). TMG Use shall not include a subletting or an assignment of Lessee's
interest under this Lease. However, TMG Use shall not require notice to Lessor
or Lessor's consent. Lessee shall remain directly responsible to Lessor for any
such TMG Use as if the TMG Use were directly by Lessee.
11. DEFAULT; BREACH; REMEDIES.
11.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
observe, comply with or perform any of the terms, covenants, conditions or rules
applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence
of any one or more of the following Defaults, and, where a grace period for cure
after notice is specified herein, the failure by Lessee to cure such Default
prior to the expiration of the applicable grace period, and shall entitle Lessor
to pursue the remedies set forth in Paragraph 11.2:
(a) NONPAYMENT OF RENT. Failure to pay any installment of Base
Rent or other rent due and payable hereunder, upon the date when
payment is due, such failure continuing for a period of ten (10)
business days after written notice of such failure, it being
understood and agreed that Lessor shall not be required to comply with
the foregoing grace period and notice provisions more often than twice
in any twelve (12) month period; or
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(b) OTHER OBLIGATIONS. Failure to perform any obligation,
agreement or covenant under this Lease, other than Lessee's obligation
to pay Base Rent, such failure continuing for thirty (30) calendar
days after written notice of such failure or such longer period as is
reasonably necessary to remedy such failure, provided that Lessee
shall continuously and diligently pursue such remedy until such
failure is cured.
11.2 REMEDIES. In the event of a Default of this Lease by Lessee, within
thirty (30) days after written notice to Lessee (or in case of an emergency,
without notice), Lessor may at its option (but without obligation to do so),
perform such duty or obligation on Lessee's behalf, including but not limited to
the obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such performance
by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor.
In the event of a Breach of this Lease by Lessee, with or without further notice
or demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of all or any of the
Premises by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall
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immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided, (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent. Efforts by Lessor to mitigate damages caused by
Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, and, for such purposes,
Lessee acknowledges that the restrictions on assignment set forth in Paragraph
10, above, are reasonable limitations.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
Provided, however, in the event of a Breach occurring to Premises located
in the State of Utah, Lessor shall have the following remedies rather than the
remedies set forth in the preceding provisions of this Paragraph 11.2:
(x) Terminate the Lessee's rights under this Lease by written notice,
or reenter and take possession of the Premises by lawful means with or without
terminating this Lease; and
(y) Lessee shall pay to Lessor the cost of recovering possession of
the Premises, all costs of reletting, including reasonable renovation,
remodeling and alteration of the Premises, the amount of any commissions paid by
Lessor in connection with such reletting, and all other costs and damages
arising out of Lessee's default, including attorney's fees and costs.
Notwithstanding any termination or reentry, the liability of Lessee for the rent
payable under this Lease shall not be extinguished for the balance of the Term,
and Lessee agrees to compensate on demand for any deficiency arising from
reletting the Premises.
11.3 BREACH BY LESSOR. In the event of any actual or alleged breach by
Lessor of any obligation to be performed by Lessor under this Lease, Lessee
shall have the sole remedy of damages or injunctive relief; under no
circumstances shall Lessee have the right to terminate this Lease.
12. CONDEMNATION. If any of the Premises or any portion thereof are taken
under the power of eminent domain or sold under the threat of the exercise of
said power (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of any of the Premises, or more than twenty-five percent (25%) of
the land area not occupied by any building, is taken by condemnation, Lessee
may, at Lessee's option, to be exercised in writing within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced in
the same proportion as the rentable floor area of the Premises taken bears to
the total rentable floor area of the building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises taken is
land on which there is no building. Any award for the taking of all or any part
of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance
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damages; provided, however, that Lessee shall be entitled to any compensation,
separately awarded to Lessee for Lessee's relocation expenses and/or loss of
Lessee's Trade Fixtures. In the event that this Lease is not terminated by
reason of such condemnation, Lessor may, to the extent of its net severance
damages received, over and above the legal and other expenses incurred by Lessor
in the condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such repair.
In the alternative, Lessor shall have the right to assign all such severance
damages to Lessee, in which case Lessee shall forthwith undertake the full
repair or restoration of the Premises at Lessee's sole cost and expense.
13. TENANCY STATEMENT.
13.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate stating
whether the Responding Party is aware of any default of the Requesting Party,
the remaining Lease term, any unexercised options, the Base Rent payable, the
extent of any Base Rent paid in advance, and such other information as may be
reasonably requested by the Requesting Party.
13.2 If Lessor desires to finance, refinance, or sell any of the Premises,
any part thereof, or the building of which such Premises are a part, Lessee
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee as may be reasonably required by such lender or
purchaser, including but not limited to Lessee's most recent financial
statements.
14. LESSOR'S LIABILITY. In the event of a transfer of Lessor's title or
interest in any of the Premises or in this Lease, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor.
15. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
16. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
17. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
18. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
19. NOTICES. All notices required or permitted by this Lease shall be in
writing and shall be delivered to Lessor or Lessee at the following addresses,
or at such other address(es) as either party may, from time to time, by like
notice designate:
If to Lessor: 3120 Lake Center Drive
Santa Ana, CA 92704
Attention: Secretary
If to Lessee: 3540 Howard Way
Costa Mesa, CA 92626
Attention: President
All notices and documents shall be delivered either by (i) messenger or courier
services, (ii) by nationally recognized overnight courier service (such as
Federal Express), or (iii) by registered or certified U.S. Mail, postage
prepaid, return receipt requested. Delivery shall be effective only upon actual
receipt. Either party to this Lease may change any of the information set forth
in this Section 19 by written notice given to the other in accordance with the
foregoing provisions.
20. WAIVER. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition
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hereof, or of any subsequent Default or Breach by Lessee of the same or of any
other term, covenant or condition hereof. Lessor's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to, or approval of, any subsequent or similar act by Lessee, or be
construed as the basis of an estoppel to enforce the provision or provisions of
this Lease requiring such consent.
21. RECORDING. Neither this Lease nor a memorandum thereof shall be recorded.
22. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of any of
the Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
23. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
24. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
25. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and, except as
otherwise expressly provided herein, be governed by the laws of the State in
which the Premises are located. Any litigation, arbitration or other method of
dispute resolution between the Parties concerning this Lease shall be initiated
and determined in the County of Orange, California.
26. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
26.1 SUBORDINATION. This Lease shall be subject and subordinate to any
ground lease, mortgage, deed of trust, or other hypothecation or security device
(collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon any of
the Premises, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the entity holding any such Security Device (a "LENDER")
shall have no duty, liability or obligation to perform any of the obligations of
Lessor under this Lease, but that in the event of Lessor's default with respect
to any such obligation, Lessee will give any such Lender whose name and address
have been furnished Lessee in writing for such purpose notice of Lessor's
default and allow such Lender thirty (30) days following receipt of such notice
for the cure of said default before invoking any remedies Lessee may have by
reason thereof. If any Lender shall elect to have this Lease superior to the
lien of its Security Device and shall give written notice thereof to Lessee,
this Lease shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.
26.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
26.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
26.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease will not be disturbed so long as
Lessee is not in Breach hereof and attorns to the record owner of the Premises.
26.4 SELF-EXECUTING. The agreements contained in this Paragraph 26 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of any of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
27. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part, as Lessor may reasonably deem necessary.
28. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to
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be observed and performed under this Lease, Lessee shall have quiet possession
of the Premises for the entire term hereof subject to all of the provisions of
this Lease.
29. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
The Parties hereto have executed this Lease as of the date first above written.
Lessor: Lessee:
_________________________________, Talbert Medical Management Corporation
a __________ corporation
By: _____________________________ By: _____________________________
Westcott W. Price III Jack D. Massimino
Its: ___________________ Its: President and Chief
Executive Officer
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EXHIBIT I TO
SECOND AMENDED AND RESTATED LEASE AGREEMENT
A. Premises Address: ______________________________________________
______________________________________________
______________________________________________
B. Square Footage: ______________________________________________
C. Base Rent (January 1, 1997
through December 31, 2000): $_______________________
D. Monthly Rent Per Square Foot
(January 1, 1997 through
December 31, 2000): $_______________________
[NOTE: SEE ATTACHED SCHEDULE I FOR INFORMATION REGARDING EACH LEASED FACILITY]
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EXHIBIT II TO
SECOND AMENDED AND RESTATED LEASE AGREEMENT
The projected net book value as of January 1, 1996 of the Premises
(including the FF&E therein) located at _____________________, ______________,
_______________ is $________________.
NOTE: THE INFORMATION FOR THIS EXHIBIT APPEARS IN EXHIBIT A TO MASTER TRANSFER
AGREEMENT.]
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EXHIBIT III TO
SECOND AMENDED AND RESTATED LEASE AGREEMENT
SEE ATTACHED LETTER DATED DECEMBER 11, 1996 AND THE ATTACHMENTS THERETO.
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AMENDED AND RESTATED MASTER ASSIGNMENT OF LEASES
All initially capitalized terms not otherwise defined in this Amended
and Restated Master Assignment of Leases ("ASSIGNMENT") shall have the same
meaning as ascribed to them in the Second Amended and Restated Real Estate and
Equipment Master Transfer Agreement of even date to which this Amended and
Restated Master Assignment of Leases is attached and into which it is
incorporated by reference (the "MASTER TRANSFER AGREEMENT"). This Assignment,
dated February __, 1997 for reference purposes and effective on the Effective
Date, is made in Orange County, California between each FHP Company listed on
attached Exhibit B to the Master Transfer Agreement (each, an "ASSIGNOR" or
collectively, "ASSIGNORS"), and Talbert Medical Management Corporation, a
Delaware corporation ("ASSIGNEE"), to amend and entirely restate that certain
Master Assignment of Leases dated as of the Effective Date between Assignors and
Assignee, with reference to the following facts:
A. Each Assignor is the lessee or sublessee of one or more Leased
Facilities under those certain leases and subleases described more particularly
on Exhibit B attached to the Master Transfer Agreement (collectively, the
"LEASES").
B. Pursuant to the Master Transfer Agreement, Assignors desire to
assign all of their respective right, title and interest as lessees and
sublessees in the Leases to Assignee.
Therefore, based on the above facts and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. Each Assignor hereby respectively assigns to Assignee all of such
Assignor's right, title and interest as lessee and/or sublessee in those Leases
in which such Assignor has an interest as lessee or sublessee (including,
without limitation, any and all options, rights of first refusal, rights of
first notice and any other preferential rights in favor of the lessee or
sublessee in the Leases to the full extent such rights are assignable), and
Assignee accepts these assignments and assumes and agrees to perform, as direct
obligations to each and every lessor or sublessor, as applicable, under such
Leases, all the obligations of Assignors as lessees and/or sublessees under the
Leases, which obligations arise on or after the Effective Date.
2. Assignee shall and does indemnify and hold harmless Assignors and
each of them against all liability, damages, judgments, claims, actions or
demands (collectively, "CLAIMS") against them or any of them arising out of or
in any way connected with the lessee's and/or sublessee's obligations under the
Leases, which obligations arise on or after the Effective Date.
3. Assignors shall and do indemnify and hold harmless Assignee
against all Claims against Assignee arising out of or in any way connected with
the lessee's and/or sublessee's obligations under the Leases, which obligations
arise before the Effective Date.
4. Assignee shall have no right to further assign or sublet any of
the Leased Facilities or the leaseholds or subleaseholds thereunder except to an
Affiliate of Assignee. For purposes of this paragraph 4, an "AFFILIATE" shall
mean any entity that directly or indirectly controls, is controlled by or is
under common control with Assignee or FHP International Corporation, a Delaware
corporation. Notwithstanding the foregoing provisions of this Section 4,
Assignee may allow employees, agents, contractors, representatives, invitees,
guests, visitors and customers of any Talbert Medical Group, including any
physicians or physician groups having a management agreement or management
agreements with Assignee, to use all or any portion of the Leased Facilities at
any time and from time to time (collectively, the "TMG USE"). TMG Use shall not
be considered a subletting or an assignment of Assignee's interest under the
Leases for which notice to Assignor or Assignor's consent shall be required.
Assignee shall remain directly responsible to Assignor for any such TMG Use as
if the TMG Use were directly by Assignee.
5. This Assignment is subject to the terms and provisions of the
Master Transfer Agreement, (which, by this reference, is incorporated herein and
made a part hereof), all subleases of the Leases and the Leased Facilities, and
the transfer of the leaseholds under this Assignment includes the benefits and
obligations arising under such subleases.
The parties hereto have executed this Assignment by their execution of
the Master Transfer Agreement to which this Assignment is attached.
EXHIBIT E TO MASTER TRANSFER AGREEMENT
<PAGE>
SECOND AMENDED AND RESTATED SUBLEASE AGREEMENT
This Second Amended and Restated Sublease Agreement ("Sublease"), dated
February __, 1997 for reference purposes and effective as of January 1, 1996
(the "EFFECTIVE DATE"). is made in Orange County, California between the
sublessor identified on the signature page of this Sublease ("SUBLESSOR") and
Talbert Medical Management Corporation, a Delaware corporation ("SUBLESSEE"),
who hereby amend and restate that certain Amended and Restated Master Sublease
Agreement dated December __, 1996 for reference purposes and made effective as
of the Effective Date between the same parties, with reference to the following
facts:
A. Sublessor is the lessee or sub-ground lessee of a facility owned by
HMO Funding, Inc., which is located at the address set forth in Exhibit I hereto
(hereinafter the "HMO FUNDING FACILITY"), pursuant to a Lease Agreement dated
August 2, 1990 between Sublessor and HMO Funding, Inc. (the "MASTER LEASE").
B. Sublessor desires to sublease the HMO Funding Facility to Sublessee
and Sublessee desires to sublease the HMO Funding Facility from Sublessor.
Therefore, based on the above facts and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. SUBLEASE. As of the Effective Date, Sublessor hereby subleases
to Sublessee, and Sublessee subleases from Sublessor, the HMO Funding Facility
on the terms and conditions hereinafter set forth. Sublessee shall perform all
obligations of Sublessor under the Master Lease, if any, with respect to the HMO
Funding facility accruing from and after the Effective Date.
2. SUBLEASE TERM. The term of this Sublease shall commence on the
Effective Date and expire one (1) day prior to the expiration of the "Initial
Term" or the "Extended Term", as the case may be, of the Master Lease with
respect to the HMO Funding Facility provided for herein.
3. USE. The HMO Funding Facility shall be used and occupied by
Sublessee for the uses permitted under the Master Lease and for no other
purpose.
4. SUBRENTAL. From the Effective Date, Sublessee shall pay to
Sublessor a monthly subrental equal to all monthly rental, operating expenses,
fees, and other expenses due under the Master Lease for the HMO Funding
Facility, payable in arrears in twelve (12) monthly installments, each of which
shall be paid on the fifteenth (15th) day of each month immediately following
the month for which the payment was due, with final payment due on the fifteenth
(15th) of the month following expiration of the Sublease term.
5. INCORPORATION OF TERMS OF THE MASTER LEASE.
5.1 This Sublease is subject and subordinate to the Master Lease.
Subject to the modifications set forth in this Sublease, the terms of the Master
Lease are incorporated herein by reference, and shall, as between Sublessor and
Sublessee (as if they were Lessor and Lessee, respectively, under the Master
Lease) constitute the terms of this Sublease except to the extent that they are
inapplicable to, inconsistent with, or modified by, the terms of this Sublease.
In the event of any inconsistencies between the terms and provisions of the
Master Lease and the terms and provisions of this Sublease, the terms and
provisions of this Sublease shall govern. Sublessee acknowledges that it has
reviewed the Master Lease and is familiar with the terms and conditions thereof.
5.2 For the purposes of incorporation herein, the terms of the Master
Lease are subject to the following additional modifications:
(a) In all provisions of the Master Lease (under the terms
thereof and without regard to modifications thereof for purposes of
incorporation into
EXHIBIT F TO MASTER TRANSFER AGREEMENT
1
<PAGE>
this Sublease) requiring the approval or consent of HMO Funding, Inc.,
Sublessee shall be required to obtain the approval or consent of both
Sublessor and HMO Funding, Inc.
(b) In all provisions of the Master Lease requiring Sublessor
to submit, exhibit to, supply or provide HMO Funding, Inc. with
evidence, certificates, or any other matter or thing, Sublessee shall
be required to submit, exhibit to, supply or provide, as the case may
be, the same to both HMO Funding, Inc. and Sublessor. In any such
instance, Sublessor shall first determine, in its sole discretion, if
such evidence, certificate or other matter or thing shall be required
and, to the extent provided, satisfactory.
(c) Sublessor shall have no obligation to restore or rebuild
any portion of the HMO Funding Facility after any destruction or
taking by eminent domain, and all such obligations are hereby assumed
by Sublessee during the Sublease term.
6. SUBLESSEE'S OBLIGATIONS. Sublessee covenants and agrees that all
obligations of Sublessor under the Master Lease shall be done or performed by
Sublessee with respect to the HMO Funding Facility, and Sublessee's obligations
shall run to Sublessor and HMO Funding, Inc. as Sublessor may determine in its
sole discretion to be appropriate or be required by the respective interests of
Sublessor and HMO Funding, Inc. Sublessee agrees to indemnify Sublessor, and
hold it harmless, from and against any and all claims, damages, losses, expenses
and liabilities (including reasonable attorneys' fees) incurred as a result of
the non-performance, non-observance or non-payment of any of Sublessor's
obligations under the Master Lease which, as a result of this Sublease, became
an obligation of Sublessee. If Sublessee makes any payment to Sublessor
pursuant to this indemnity, Sublessee shall be subrogated to the rights of
Sublessor concerning said payment. Sublessee shall not do, nor permit to be
done, any act or thing which is, or with notice or the passage of time would be,
a default under this Sublease or the Master Lease. Any default by HMO Funding,
Inc. under the Master Lease shall not constitute as between Sublessor and
Sublessee a default by Sublessor or an eviction, actual or constructive, of
Sublessee and no such default shall excuse Sublessee from the performance or
observance of any of its obligations to be performed or observed under this
Sublease, or entitle Sublessee to receive any reduction in or abatement of the
rent provided for in this Sublease.
7. DEFAULT BY SUBLESSEE. In the event Sublessee shall be in default
of any covenant of, or shall fail to honor any obligation under, this Sublease,
Sublessor shall have available to it against Sublessee all of the remedies
available (a) to HMO Funding, Inc. under the Master Lease in the event of a
similar default on the part of Sublessor thereunder or (b) at law.
8. QUIET ENJOYMENT. So long as Sublessee pays all of the rent and
other amounts due hereunder and performs all of Sublessee's other obligations
hereunder, Sublessor shall do nothing to affect Sublessee's right to peaceably
and quietly have, hold and enjoy the HMO Funding Facility.
9. CONDITION OF PREMISES. Sublessee acknowledges that it is
subleasing the HMO Funding Facility "as-is" and that Sublessor is not making any
representation or warranty concerning the condition of the HMO Funding Facility
and that Sublessor is not obligated to perform any work to prepare the HMO
Funding Facility for Sublessee's occupancy.
10. ASSIGNMENT AND SUBLETTING. Sublessee shall have no right to
assign or further sublet the HMO Funding Facility or any portion thereof or any
right or privilege appurtenant thereto except to an Affiliate of Sublessee. For
purposes of this paragraph 11, an "AFFILIATE" shall mean any entity that
directly or indirectly controls, is controlled by or is under common control
with Sublessee or FHP International Corporation, a Delaware corporation.
Notwithstanding the foregoing provisions of this paragraph 11, Sublessee may
allow employees, agents, contractors, representatives, invitees, guests,
visitors and customers of Talbert Medical Group, including any physicians or
physician groups having a management agreement or management agreements with
Sublessee, to use all or any portion
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<PAGE>
of the HMO Funding Facility at any time and from time to time (collectively, the
"TMG USE"). TMG Use shall not include a subletting or an assignment of
Sublessee's interest under this Sublease. However, TMG Use shall not require
notice to Sublessor or Sublessor's consent. Sublessee shall remain directly
responsible to Sublessor for any such TMG Use as if the TMG Use were directly by
Sublessee.
11. NOTICES. All notices required or permitted by this Sublease
shall be in writing and shall be delivered to Sublessor or Sublessee at the
following addresses, or at such other address(es) as either party may, from time
to time, by like notice designate:
If to Sublessor: 3120 Lake Center Drive
Santa Ana, California 92704
Attention: Secretary
If to Sublessee: 3540 Howard Way
Costa Mesa, California 92626
Attention: President
All notices and documents shall be delivered either by (i) messenger or courier
services, (ii) by nationally recognized overnight courier service (such as
Federal Express), or (iii) by registered or certified U.S. Mail, postage
prepaid, return receipt requested. Delivery shall be effective only upon actual
receipt. Either party to this Sublease may change any of the information set
forth in this Section 11 by written notice given to the other in accordance with
the foregoing provisions.
The parties hereto have executed this Sublease as of the date first
above written.
Sublessor: Sublessee:
______________________________, Talbert Medical Management Corporation
a ________________ corporation
By:___________________________ By:_______________________________
Westcott W. Price III Jack D. Massimino
Its:__________________________ Its: President and Chief Executive Officer
3
<PAGE>
EXHIBIT I TO
SECOND AMENDED AND RESTATED SUBLEASE AGREEMENT
HMO Funding Facility Address:
__________________________________
__________________________________
__________________________________
4
<PAGE>
MASTER FF&E LEASE AGREEMENT
All initially capitalized terms not otherwise defined herein shall have the
same meaning as ascribed to them in the Second Amended and Restated Real Estate
and Equipment Master Transfer Agreement of even date to which this Master FF&E
Lease Agreement is attached and into which it is incorporated by reference (the
"MASTER TRANSFER AGREEMENT"). This Master FF&E Lease Agreement ("EQUIPMENT
LEASE"), dated February __, 1997 for reference purposes and made effective as of
the Effective Date, is made by and between each FHP Company listed on Exhibit A
to the Master Transfer Agreement (each a "LESSOR") and Talbert Medical
Management Corporation, a Delaware corporation ("LESSEE") (collectively the
"PARTIES", or individually a "PARTY").
1. FF&E: The FF&E (hereinafter "EQUIPMENT") provided for in this
Equipment Lease shall consist of only the following categories of personal
property which are owned by an FHP Company and located in an Owned Facility
leased to TMMC, a Leased Facility, the lease or sublease of which has been
assigned to TMMC, or an HMO Funding Facility which has been subleased to TMMC
(said Facilities being hereinafter collectively referred to as "FACILITIES", and
individually as a "FACILITY", and said leases and subleases being hereinafter
collectively referred to as the "FACILITY LEASES", and individually as a
"FACILITY LEASE"): (a) furniture, (b) data processing equipment, (c) medical
equipment, (d) minor equipment, (e) PBX equipment, (f) art, (g) soft costs and
(h) leasehold improvements installed by or at the expense of Lessor in certain
of the Leased Facilities and HMO Funding Facilities. The Equipment at each
Facility is more particularly described by reference to its net book value (at
December 31, 1996) on Exhibit I hereto.
2. LETTING; CONDITION OF THE EQUIPMENT: Lessor hereby leases to Lessee,
and Lessee hereby leases from Lessor, the Equipment for the Term, at the rental,
and upon all of the terms, covenants and conditions set forth in this Equipment
Lease. Lessee acknowledges that it is leasing the Equipment on an "AS IS" basis
without representations or warranties, express or implied.
3. TERM AND EXTENSIONS: The term ("TERM") of this Equipment Lease shall
commence on January 1, 1996 (the "Commencement Date") and shall continue until
the expiration of all Facility Leases; provided, however, that the Term of this
Equipment Lease with respect to the particular Equipment located in any given
Owned Facility shall expire on December 31, 2000, and the Term with respect to
Equipment located in any given Leased Facility or HMO Funding Facility shall
expire concurrently with the expiration of the Facility Lease relating to such
Facility (including any extension options and terms thereunder). Upon the
expiration or termination of all Facility Leases, except for the terms and
provisions hereof that expressly survive the expiration or termination of this
Equipment Lease, this Equipment Lease (and all terms and provisions hereof)
shall be of no further force or effect.
4. RENT: During the Term of this Equipment Lease, Lessee shall pay Rent
(as hereinafter defined) in the following amounts:
(a) From January 1, 1996 through December 31, 1996, Lessee shall pay
as Base Rent for the Equipment a monthly amount equal to the sum of (A) 0.6667%
(eight percent (8%) per annum) of the book value of the Equipment in each
Facility as of the Effective Date, plus (B) the monthly depreciation expense of
the Equipment in such Facility calculated at the end of each calendar month
using the FHP depreciation schedules in place as of the Effective Date.
(b) From January 1, 1997 through December 31, 2000, Lessee shall pay
as Base Rent for the Equipment in each Facility the monthly amounts set forth on
Exhibit II hereto.
EXHIBIT G TO MASTER TRANSFER AGREEMENT
1
<PAGE>
(c) After December 31, 2000, Lessee shall pay as Base Rent for the
Equipment the monthly amounts mutually agreed upon by Lessor and Lessee no later
than December 1, 2000 and by December 1 of each year thereafter during the
remaining Term of this Equipment Lease to be the then fair rental value of the
Equipment identified in the inventory provided for in Section 24 hereof, said
monthly amounts being hereinafter referred to as the "Monthly Equipment Rent".
In the event Lessor and Lessee are unable to reach agreement regarding the
Monthly Equipment Rent for such Equipment by such December 1 date, they shall
jointly select a neutral appraiser to do so. In the event the Parties are
unable to agree upon a neutral appraiser by December 15 of that year, the matter
shall be referred immediately to the American Arbitration Association (Orange
County office), which shall select the appraiser by December 20 of that year,
and the appraiser so selected shall finally determine and advise the Parties of
the Monthly Equipment Rent for the Equipment no later than December 31 of that
year. Such determination shall be final and binding on the Parties. The costs
of the neutral appraiser and/or the American Arbitration Association shall be
shared equally by Lessor and Lessee. For purposes of this Section 4(c), the
Monthly Equipment Rent for the Equipment shall be determined as described above
and shall be effective as of the first day of the following month (i.e.,
January).
Lessee shall cause payment of Base Rent and other rent or charges, if any, to be
received by Lessor (collectively "RENT") in lawful money of the United States,
without offset, deduction or prior demand in arrears on or before the fifteenth
(15th) day of each month immediately following the month of the Term during
which the Equipment was leased to Lessee, with final payment due on the
fifteenth (15th) day of the month following the end of such Term..
5. PERMITTED USE: Lessee shall use the Equipment for the purposes for
which it is intended and shall, at Lessee's sole cost and expense, maintain the
Equipment in good condition and repair, subject to ordinary wear and tear and
general obsolescence. No Lessor shall have any obligation to maintain, repair
or replace any of the Equipment.
6. INSURANCE:
a) Lessee shall obtain and keep in force during the term of this
Equipment Lease a policy or policies, naming Lessor as additional insured, with
loss payable to Lessee insuring the Equipment for loss or damage caused by the
usual all-risk perils. The amount of such insurance shall be equal to the full
replacement cost of the Equipment, as the same shall exist from time to time.
In the event of a damage or destruction of the Equipment, Lessor may elect that
such insurance proceeds be paid to and disbursed through a third-party escrow
account selected by Lessor. Lessor shall have no obligation to carry any
insurance under this Equipment Lease.
(b) Insurance required hereunder shall be in companies duly licensed
to transact business in the state where the Equipment is located, and
maintaining during the policy term a "General Policyholders Rating" of at least
A-14 as set forth in the most current issue of "Best's Insurance Guide." Lessee
shall not do or permit to be done anything which shall invalidate the insurance
policies referred to in this Paragraph 6. Lessee shall cause to be delivered to
Lessor certified copies of policies of such insurance or certificates evidencing
the existence and amounts of such insurance with the insureds and loss payable
clauses as required by this Equipment Lease. No such policy shall be cancelable
or subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall, prior to the expiration of such policies, furnish Lessor
with evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If Lessee shall fail
to procure and maintain the insurance required to be carried by Lessee under
this Paragraph 6, Lessor may, but shall not be required to, procure and maintain
the same, but at Lessee's expense.
2
<PAGE>
7. INDEMNITY
(a) Lessee shall indemnify, protect, defend and hold harmless
Lessors and their respective agents, employees, and contractors, from and
against any and all claims, losses of rent and/or damages, costs, liens,
judgments, penalties, permits, attorney's and consultant's fees, expenses and/or
liabilities (collectively, "CLAIMS") arising out of, involving, or in dealing
with, the possession, use or operation of the Equipment by Lessee, any act,
omission or neglect occurring on or after the Effective Date of Lessee, its
agents, contractors, employees or invitees with respect to the Equipment, and
out of any Default or Breach by Lessee in the performance in a timely manner of
any obligation on Lessee's part to be performed under this Equipment Lease. In
case any action or proceeding is brought against any Lessor by reason of any of
the foregoing matters, Lessee upon notice from such Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to such Lessor and such
Lessor shall cooperate with Lessee in such defense. Such Lessor need not have
first paid any such claim in order to be so indemnified.
(b) Lessors shall indemnify, protect, defend and hold harmless Lessee
and its agents, employees and contractors from and against any and all Claims
against Lessee arising out of, involving, or in dealing with the ownership,
possession, use or operation of the Equipment by Lessors, any act, omission or
neglect occurring before the Effective Date of Lessors or any of their
respective agents, contractors, employees or invitees with respect to the
Equipment, and out of any Default or Breach by Lessors in the performance in a
timely manner of any obligation on Lessors' part to be performed under this
Equipment Lease. In case any action or proceeding is brought against Lessee by
reason of any of the foregoing matters, Lessor upon notice from Lessee shall
defend the same at Lessors' expense by counsel reasonably satisfactory to Lessee
and Lessee shall cooperate with Lessors in such defense. Lessee need not have
first paid any such claim in order to be so indemnified.
(c) The terms and provisions of this Section 7 shall survive the
expiration or any termination of this Equipment Lease (or any part hereof).
8. INSPECTION. Lessors shall have the right to enter the Facilities in
which the Equipment is located at any time, without notice to Lessee, in case of
an emergency, and otherwise at reasonable times, but only after reasonable prior
written notice to Lessee, for the purpose of inspecting the condition of the
Equipment.
9. LESSEE'S COMPLIANCE WITH LAW. Lessee shall, at Lessee's sole cost and
expense, fully diligently and in a timely manner, comply with all laws, rules,
regulations, ordinances, directives and requirements of all governmental
authorities of competent jurisdiction relating in any manner to Lessee's
possession, use or operation of the Equipment.
10. PERSONAL PROPERTY TAXES: Lessee shall pay prior to delinquency all
taxes assessed against and levied upon any Equipment that accrue during the
period that such Equipment is leased by Lessee pursuant to this Equipment Lease
11. ASSIGNMENT AND SUBLETTING:
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber or sublet (collectively,
"ASSIGN") all or any part of Lessee's interest in this Equipment Lease or in any
of the Equipment without Lessor's prior written consent, which consent shall not
be unreasonably withheld.
(b) Notwithstanding the foregoing provisions of this Paragraph 11,
Lessee may assign this Equipment Lease to an Affiliate of Lessee without the
prior consent of
3
<PAGE>
Lessor, provided Lessor receives notice of such intent to assign at least ten
(10) days prior the effective date of the assignment. An "AFFILIATE" for
purposes of this Paragraph 11(b) shall mean any entity which directly controls,
is under common control with, or is directly or indirectly controlled by Lessee
or FHP International Corporation, a Delaware corporation. Notwithstanding such
permitted assignment, Lessee shall remain directly and primarily liable to
Lessor for all obligations and liabilities of "Lessee" under this Equipment
Lease.
(c) Notwithstanding the foregoing provisions of Paragraphs 11(a) and
11(b) above, Lessee may allow employees, agents, contractors, representatives,
invitees, guests, visitors and customers of any Talbert Medical Group, including
any physicians or physician groups having a management agreement or management
agreements with Lessee, to use all or any portion of the Equipment at any time
and from time to time (collectively, the "TMG USE"). TMG Use shall not include
a subletting or an assignment of Lessee's interest under this Lease. However,
TMG Use shall not require notice to Lessor or Lessor's consent. Lessee shall
remain directly responsible to Lessor for any such TMG Use as if the TMG Use
were directly by Lessee.
12. DAMAGE OR DESTRUCTION. If all or any part of the Equipment is
destroyed, whether or not by a loss that is caused by a risk required to be
insured under this Equipment Lease, this Equipment Lease shall continue in full
force and effect without interruption, reduction, or abatement of rent or other
expenses hereunder. Upon occurrence of such damage or destruction, Lessee
shall, at Lessee's election, either (i) at Lessee's sole cost and expense,
forthwith replace the Equipment or repair or restore the Equipment to the
condition existing before the occurrence of such damage and destruction, or (ii)
deliver to Lessor an amount reasonably determined by Lessor to be necessary to
complete such repair, restoration or replacement. In the event this Equipment
Lease expires prior to the completion of such repair, restoration or
replacement, Lessee shall, at Lessor's election, either (i) continue with full
repair, restoration or replacement of the Equipment, or (ii) deliver to Lessor
an amount reasonably determined by Lessor to be necessary to complete such
repair, restoration or replacement. Lessor shall have no obligation to Lessee
whatsoever in the event of any damage or destruction to the Equipment or any
parts thereof. The provisions of this Section 12 regarding Lessee's obligation
to repair, replace or restore the Equipment shall survive the expiration or
termination of this Equipment Lease.
13. DEFAULT; BREACH; REMEDIES:
(a) A "DEFAULT" is defined as a failure by the Lessee to observe,
comply with or perform any of the terms, covenants, conditions or rules
applicable to Lessee under this Equipment Lease. A "BREACH" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, and shall
entitle Lessor to pursue the remedies set forth in Paragraph 13(b):
(i) Failure to pay any installment of Rent due and payable
hereunder, upon the date when payment is due, such failure continuing for a
period of ten (10) business days after written notice of such failure, it being
understood and agreed that Lessor shall not be required to comply with the
foregoing grace period and notice provisions more often than twice in any twelve
(12) month period; or
(ii) Failure to perform any obligation, agreement or covenant
under this Equipment Lease, other than Lessee's obligation to pay Rent, such
failure continuing for thirty (30) calendar days after written notice of such
failure or such longer period as is reasonably necessary to remedy such failure,
provided that Lessee shall continuously and diligently pursue such remedy until
such failure is cured.
(b) In the event of a Default of this Equipment Lease by Lessee,
within
4
<PAGE>
thirty (30) days after written notice to Lessee (or in case of an emergency,
without notice), Lessor may at its option (but without obligation to do so),
perform such duty or obligation on Lessee's behalf. The reasonable costs and
expenses of any such performance by Lessor shall be due and payable by Lessee to
Lessor upon invoice therefor. In the event of a Breach of this Equipment Lease
by Lessee, with or without further notice or demand, and without limiting Lessor
in the exercise of any right or remedy which Lessor may have by reason of such
Breach, Lessor may:
(i) Terminate Lessee's right to possession of all or any of the
Equipment by any lawful means, in which case this Equipment Lease and the Term
hereof shall terminate and Lessee shall immediately surrender possession of the
Equipment to Lessor. In such event Lessor shall be entitled to recover from
Lessee all amounts necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform its obligations under this
Equipment Lease or which in the ordinary course of things would be likely to
result therefrom; or
(ii) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Equipment
is located.
The expiration or termination of this Lease and/or the termination of Lessee's
right to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the Term
hereof or by reason of Lessee's possession or use of the Equipment.
(c) In the event of any actual or alleged breach by Lessor of any
obligation to be performed by Lessor under this Equipment Lease, Lessee shall
have the sole remedy of damages or injunctive relief; under no circumstances
shall Lessee have the right to terminate this Equipment Lease.
14. RIGHT OF FIRST OFFER
a) With respect to any Equipment located in any Leased Facility or
HMO Funding Facility, Lessee shall have a right of first offer to acquire the
Equipment located in such Facility in the manner provided in this Section 14 at
any time during the period commencing on the commencement date of the Facility
Lease for such Facility and expiring one (1) year after the expiration or
earlier termination of such Facility Lease.
b) With respect to any Equipment located in any Owned Facility,
Lessee shall have a right of first offer to acquire the Equipment located in
such Facility in the manner provided in this Section 14 at any time during the
period commencing on January 1, 1996 and expiring on December 31, 2001.
c) Lessor shall notify Lessee in writing (THE "FIRST OFFER NOTICE")
when Lessor determines that any of the Equipment will become available for sale
to third parties. The First Offer Notice shall identify the Equipment to be
sold and shall set forth the proposed sale price and all economic and other
material terms upon which Lessor is willing to sell the Equipment.
d) If Lessee wishes to exercise its right of first offer with
respect to the Equipment described in the First Offer Notice, then within ten
(10) days after delivery of the First Offer Notice to Lessee, Lessee shall
deliver written notice (THE "FIRST OFFER EXERCISE NOTICE") to Lessor of Lessee's
intention to exercise its right of first offer with respect to the Equipment
identified in the First Offer Notice on the terms and conditions contained in
such First Offer Notice. If Lessee does not so notify Lessor within such ten
(10) day period, then Lessee shall be deemed to have elected not to acquire the
Equipment, and, during the six (6) month period commencing on the day after the
date that Lessee elects or is deemed to have elected not to acquire the
Equipment, Lessor shall be free to sell the Equipment described in the First
Offer Notice to anyone to whom Lessor desires on terms and conditions no less
5
<PAGE>
favorable to Lessor than the terms and conditions set forth in the First Offer
Notice. If Lessor has not sold the Equipment to a third party as permitted
hereinabove within such six (6) month period, then Lessor shall be obligated to
re-offer the Equipment to Lessee in accordance with the terms and provisions of
this Section 14 prior to selling the same to a third party.
e) If Lessee exercises its right of first offer with respect to any
such Equipment, Lessor and Lessee shall consummate the transaction (THE
"CLOSING") within thirty (30) days after delivery to Lessee of the First Offer
Notice. At Closing, Lessor shall convey the Equipment described in the First
Offer Notice to Lessee by executing and delivering a bill of sale and such other
documentation as may be reasonably required to fully convey such Equipment to
Lessee, and Lessee shall pay and deliver to Lessor the purchase price for the
Equipment and any other amounts to be paid and delivered to Lessor pursuant to
the First Offer Notice. All closing costs shall be shared by Lessor and Lessee
in the manner that is customary for such transactions in the jurisdiction where
such Equipment is located. If the Closing fails to occur for any reason other
than the Lessor's default within such thirty (30) day period, then Lessee's
right of first offer shall terminate and Lessor shall be free to sell the
Equipment to any third party in accordance with the terms and provisions of
subsection (c) above and subject to the six (6) month time limitation set forth
therein.
15. NOTICES. All notices required or permitted by this Equipment Lease
shall be in writing and shall be delivered to Lessor or Lessee at the following
addresses, or at such other address(es) as either party may, from time to time,
by like notice designate:
If to Lessor: 3120 Lake Center Drive
Santa Ana, California 92704
Attention: Secretary
If to Lessee: Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, California 92626
Attention: President
All notices and documents shall be delivered either by (i) messenger or courier
services, (ii) by nationally recognized overnight courier service (such as
Federal Express), or (iii) by registered or certified U.S. Mail, postage
prepaid, return receipt requested. Delivery shall be effective only upon actual
receipt. Either party to this Equipment Lease may change any of the information
set forth in this Section 15 by written notice given to the other in accordance
with the foregoing provisions.
16. WAIVER. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Equipment Lease requiring such consent.
17. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
18. COVENANTS AND CONDITIONS. All provisions of this Equipment Lease to
be observed or performed by Lessee are both covenants and conditions.
19. BINDING EFFECT; CHOICE OF LAW. This Equipment Lease shall be binding
upon the parties, their personal representatives, successors and assigns and,
except as otherwise expressly provided herein, be governed by the laws of the
state in which the Equipment is
6
<PAGE>
located. Any litigation, arbitration or other method of dispute resolution
between the Parties concerning this Equipment Lease shall be initiated and
determined in the County of Orange, California.
20. QUIET POSSESSION. Upon payment by Lessee of the Rent for the
Equipment and the observance and performance of all of the covenants, conditions
and provisions on Lessee's part to be observed and performed under this
Equipment Lease, Lessee shall have quiet possession of the Equipment for the
entire term hereof subject to all of the provisions of this Equipment Lease.
21. SURRENDER OF EQUIPMENT. Upon the expiration or earlier termination of
this Equipment Lease with respect to the Equipment in any Facility, and except
as otherwise provided in Sections 12 and 14 hereof, Lessee shall, at its sole
cost and expense, surrender such Equipment to Lessor at such Facility. Such
Equipment shall be surrendered to Lessor in good condition and repair, except
for ordinary wear and tear and general obsolescence. Lessor and Lessee
acknowledge that (i) the Facility Leases provided for in that certain Second
Amended and Restated Real Estate and Equipment Master Transfer Agreement (First
Amendment to Exhibits), dated as of February ___, 1997, and executed by and
between Lessor and Lessee collectively, the "Terminated Leases") have been
terminated and (ii) all of the Equipment located in the Facilities which are the
subject of the Terminated Leases (the "Relocated Equipment") has been relocated
to other Facilities. Notwithstanding any other provision of this Equipment
Lease to the contrary, Lessor hereby consents to such relocation of the
Relocated Equipment, and Lessor and Lessee agree that, with respect to the
Relocated Equipment, this Equipment Lease including but not limited to the rent
provisions of Section 4 hereof, shall continue in full force and effect. The
term of this Equipment Lease with respect to each item of Relocated Equipment
shall expire concurrently with the expiration of the Facility Lease of the
Facility to which such item was relocated.
22. SEVERABILITY. The invalidity of any provision of this Equipment
Lease, as determined by a court of competent jurisdiction, shall in no way
affect the validity of any other provision hereof.
23. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Equipment Lease.
24. INVENTORY. For purposes of Section 4(c) hereof, and to specifically
identify the Equipment located in the Facilities, Lessor and Lessee hereby agree
that as soon as practicable, but in no event later than June 30, 1997, they will
conduct a physical inventory of the Equipment actually located in each Facility
and attach a listing of such equipment to this Equipment Lease as Exhibit III.
It is understood and agreed among the Parties that the results of the inventory
shall have no impact on the rent payable to Lessors pursuant to Sections 4(a)
and 4(b) hereof; however such results shall be used to identify the Equipment
actually held by Lessee and returnable to Lessors; to determine the Monthly
Equipment Rent to be paid pursuant to Section 4(c) hereof, and in connection
with any purchase rights or obligations of Lessee hereunder.
25. ATTORNEY'S FEES. In the event that any litigation is commenced
concerning or arising out of this Equipment Lease, the Party or Parties
prevailing in such litigation shall be entitled to recover, in addition to such
other relief as may be granted, its/their reasonable costs and expenses,
including without limitation reasonable attorney's fees and court costs, whether
or not taxable, as awarded by a court of competent jurisdiction.
The parties hereto have executed this Equipment Lease by their execution of
the Master Transfer Agreement to which this Equipment Lease is attached.
7
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EXHIBIT I TO
MASTER FF&E LEASE AGREEMENT
The net book values as of December 31, 1996 of the Equipment situated in
each Facility are set forth on the attached schedule.
8
<PAGE>
EXHIBIT II TO
MASTER FF&E LEASE AGREEMENT
The monthly Base Rents to be paid from January 1, 1997 through December 31,
2000 by Lessee for the Equipment situated in each Facility are set forth on the
attached schedule.
9
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EXHIBIT III TO
MASTER FF&E LEASE AGREEMENT
Listings of the Equipment actually situated in each Facility are attached
to this schedule.
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SECOND AMENDED AND RESTATED
REAL ESTATE AND EQUIPMENT MASTER TRANSFER AGREEMENT
(FIRST AMENDMENT TO EXHIBITS)
This First Amendment to Exhibits ("FIRST AMENDMENT") to the above
referenced Agreement ("MASTER TRANSFER AGREEMENT"), dated the ___ day of
February, 1997, is made among FHP, Inc., a California corporation, FHP of Utah,
Inc., a Utah corporation, FHP of New Mexico, Inc., a New Mexico corporation
(collectively, "FHP", or each an "FHP COMPANY"), and Talbert Medical Management
Corporation, a Delaware corporation ("TMMC"), who hereby agree as follows:
1. DEFINITIONS. Except as may be otherwise defined in this First
Amendment, all initially capitalized terms in this First Amendment shall have
the same meanings as ascribed to them in the Master Transfer Agreement.
2. EXHIBIT A to the Master Transfer Agreement is hereby amended by
the deletion therefrom of the following property, said deletion to be effective
as of the date and for the reason set forth beside such listing:
<TABLE>
<CAPTION>
Address Effective Date* Reason for Deletion
----------------------- --------------- -------------------
<S> <C> <C>
2490 South State Street 5/16/96 Property sold to Paracelsus
Salt Lake City, Utah 84115 on May 16, 1996
</TABLE>
3. Exhibit B to the Master Transfer Agreement is hereby amended by the
deletion therefrom of the following properties (including the FF&E and leasehold
improvements therein), said deletions to be effective as of the dates and for
the reasons set forth beside each listing:
<TABLE>
<CAPTION>
Address Effective Date* Reason for Deletion
-------------------- --------------- -------------------
<S> <C> <C>
13260 N. 94th Dr., Suite 200 12/31/96 Early termination exercised.
Peoria, AZ 85381 Lease term ended on
December 31, 1996.
1604 S. Edward 8/31/96 Lease expired on August 31,
Tempe, AZ 85281 1996. TMMC now leases the
space directly.
2569 Woodland Drive 7/01/96 TMMC vacated. Property is
Anaheim, CA 92801 now used by the Department of
Human Relations which is part
of FHP, effective July 1, 1996.
18153 Brookhurst 7/01/96 TMMC vacated. Property is
Anaheim, CA 92801 now used by the Department of
Human Relations which is part
of FHP, effective July 1, 1996.
10540 Chapman Avenue 12/31/96 Early termination exercised.
Garden Grove, CA 92640 Lease term ended on December 31,
1996.
21500-21520 S. Pioneer Blvd. 1/30/97 Lease expired on January 30, 1997.
Hawaiian Gardens, CA 90716
18800 Delaware, Suites 500 & 700 9/30/96 Center closed. Lease expired on
Huntington Beach, CA 92648 September 30, 1996.
10821 Bloomfield Road 4/03/96 Lease expired on April 30, 1996.Los Alamitos, CA 90720
6370 Magnolia 12/31/96 Lease expired on December 31, 1996.
Riverside, CA 92506 TMMC leases directly from the
landlord.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Address Effective Date* Reason for Deletion
-------------------- --------------- ---------------------
<S> <C> <C>
1840 E. 17th Street, Suite 110 2/01/96 Lease expired. TMMC vacated in
Santa Ana, CA 92701 January 1996, effective February 1,
1996.
1950 E. 17th Street, Suite 300 2/01/96 Lease expired. TMMC vacated in
Santa Ana, CA 92701 January 1996, effective February 1,
1996.
3400 South West Temple 3/01/96 TMMC vacated on March 1, 1996.
Salt Lake City, Utah 84115 FHP is now the sole tenant.
</TABLE>
* The Effective Dates are based solely on information provided by TMMC and are
subject to confirmation by the parties.
4. COUNTERPARTS. This First Amendment may be executed in counterparts
with the same force and effect as if the parties had executed one instrument,
and each such counterpart shall constitute an original hereof.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment on the date first above written.
FHP, Inc., a California corporation
By: /s/ Westcott W. Price III
----------------------------------
Westcott W. Price III, President and
Chief Executive Officer
FHP of Utah, Inc., a Utah corporation
By: /s/ Westcott W. Price III
----------------------------------
Westcott W. Price III
Chief Executive Officer
FHP of New Mexico, a New Mexico corporation
By: /s/ Westcott W. Price III
----------------------------------
Westcott W. Price III, President and
Chief Executive Officer
Talbert Medical Management Corporation, a
Delaware corporation
By: /s/ Jack D. Massimino
----------------------------------
Jack D. Massimino, President and Chief
Executive Officer
2
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT BETWEEN
TALBERT MEDICAL MANAGEMENT CORPORATION
AND FHP INTERNATIONAL CORPORATION
This Administrative Services Agreement (the "Agreement") is entered into by
and between Talbert Medical Management Corporation ("TMMC") and FHP
International Corporation ("FHP") and becomes effective upon the Effective Time,
as that term is defined in the Agreement and Plan of Reorganization among
PacifiCare Health Systems, Inc., NT Holdings, Inc., Neptune Merger Corporation,
Tree Acquisition and FHP International Corporation.
RECITALS
WHEREAS, TMMC was formerly owned and operated by FHP; and
WHEREAS, in order to ensure continuity in TMMC's operations, TMMC desires
to obtain, and FHP desires to provide, certain administrative services as
described below.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. DESCRIPTION OF SERVICES. Throughout the term of this Agreement, FHP
shall provide to TMMC certain administrative services related to TMMC's business
operations, as described in Exhibit A, which is attached hereto and incorporated
herein.
2. FEES. As compensation for the provision of services pursuant to
Section 1 of this Agreement, TMMC shall pay FHP monthly fees in the amount
described in Exhibit A hereof. Payment for each month shall be due and payable
on or before the fifth (5th) of that month.
3. TERM AND TERMINATION
a. The term of this Agreement shall commence at the Effective Time
and shall continue as set forth on Exhibit A.
b. This Agreement may be terminated, in whole or in part, by either
party, with or without cause, upon the provision of prior written notice to the
other party hereto, as described in Exhibit A hereof.
c. This Agreement may be terminated by the mutual written agreement
of the parties.
1
<PAGE>
d. Either party may terminate this Agreement with thirty (30) day
prior written notice if the other party commits a material breach of any
provision of this Agreement. The notice must specify the nature of the material
breach and the breaching party shall have twenty (20) days from receipt of such
notice to correct, or commence correcting, the material breach to the other
party's satisfaction. In the event the breaching party fails to cure or
commence to cure within the twenty (20) day period to the satisfaction of the
other party (which non-breaching party may request such certificates and
documentation as it deems appropriate to evidence such cure or commencement to
cure), this Agreement shall automatically terminate upon completion of the
thirty (30) day notice, notwithstanding any other provision of this Agreement.
e. The rights and obligations stated in Sections 4-6, 8, 10 and 12
of this Agreement shall survive the termination of this Agreement.
4. RESPONSIBILITY FOR OWN ACTS. Except as otherwise provided herein,
each party shall be responsible and liable for any claims, liabilities, demands,
lawsuits and expenses, including attorney's fees, relating to the acts or
omissions of that party, its agents and employees committed in the performance
of this Agreement. In the event that a claim is made against either or both
parties, relating to the performance of this Agreement, it is the intent of both
parties to cooperate in the defense of such claims and to cause their insurers
to do likewise. However, each party shall have the right to take any and all
action it believes necessary to protect its interests.
5. DISCLAIMER: LIMITATION OF LIABILITY.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, FHP DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE.
THE LIMIT OF FHP'S LIABILITY (WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT
LIABILITY IN TORT OR BY STATUTE OR OTHERWISE), TO TMMC OR TO ANY THIRD PARTY
CONCERNING PERFORMANCE OR NON-PERFORMANCE BY FHP, OR IN ANY MANNER RELATED TO
THIS AGREEMENT, FOR ANY AND ALL CLAIMS SHALL NOT IN THE AGGREGATE EXCEED THE
FEES PAID TO FHP BY TMMC HEREUNDER WITH RESPECT TO THE SERVICES PROVIDED
HEREUNDER. TMMC'S EXCLUSIVE REMEDY FOR ANY OF THE ABOVE-MENTIONED CLAIMS SHALL
BE FOR FHP, UPON RECEIPT OF WRITTEN NOTICE, TO USE ITS BEST EFFORTS TO CURE THE
BASIS OF SUCH CLAIM AT ITS EXPENSE, AND FAILING THAT, THE RETURN OF FEES PAID TO
FHP FOR THE WORK RELATED TO THE BASIS OF SUCH CLAIM.
2
<PAGE>
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR
PUNITIVE LOSS, DAMAGES OR EXPENSES (INCLUDING, BUT NOT LIMITED TO, LOSS OF DATA,
INTERRUPTION OF SERVICE, OR LOST PROFITS) EVEN IF FHP HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH POTENTIAL LOSS, DAMAGE OR EXPENSES. ANY ACTION BY EITHER
PARTY MUST BE BROUGHT WITHIN TWO YEARS AFTER THE CAUSE OF ACTION ARISES.
THE ALLOCATIONS OF LIABILITY SET FORTH IN THIS SECTION 5 REPRESENT THE
AGREED UPON AND BARGAINED FOR UNDERSTANDING OF FHP AND TMMC AND FHP'S
COMPENSATION FOR SERVICES RENDERED HEREUNDER REFLECTS SUCH ALLOCATIONS.
6. CONFIDENTIALITY. The parties agree to be bound by the confidentiality
and nondisclosure covenants set forth on Exhibit B hereto.
7. RELATIONSHIP BETWEEN THE PARTIES. FHP and TMMC are independent
contractors. Nothing in this Agreement shall be construed to create a
principal-agent, employer-employee, master-servant, partnership or joint venture
relationship.
8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9. ASSIGNMENT. The rights and/or obligations of this Agreement may not
be assigned, delegated, transferred, conveyed or sold without the prior written
consent of the other party, except that either party may assign or transfer the
rights and/or obligations arising under this Agreement, in whole or in part, to
a corporate affiliate.
10. ATTORNEY'S FEES. If any action at law, in arbitration, or in equity
is necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to payment by the other party of reasonable attorneys'
fees, costs and expenses, in addition to any other relief to which the
prevailing party may be entitled.
11. SEVERABILITY. If any provision of this Agreement is deemed to be
invalid or unenforceable by a court of competent jurisdiction or in arbitration,
the same shall be deemed severable from the remainder of this Agreement and
shall not cause the invalidity or unenforceability of the remainder of the
Agreement.
12. WAIVER. Either party's failure to perform any covenant or condition
set forth in this Agreement shall not act as a waiver of the same or any other
covenant or condition of this Agreement.
3
<PAGE>
13. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties and shall bind and inure to the benefit of both parties and
their successors and assigns. No change, amendment or alteration shall be
effective unless in writing and signed by both parties. This Agreement shall
supersede all prior written and/or oral agreements between the parties that
pertain to the subject of this Agreement, including any amendments, addendum,
letters of understanding and any other documents relating thereto, and both
parties agree to terminate any prior agreements pertaining to the subject of
this Agreement on the effective date of this Agreement.
14. FORCE MAJEURE. Neither TMMC nor FHP shall be responsible for delays
or errors in its performance under this Agreement occurring by reasons or
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties, fire, flood or catastrophe, acts of
God, insurrection, war, riots or failure of transportation, communication or
power supply; provided, however, that should any such delay continue for more
than 90 days, the Agreement may be terminated by the party not affected by the
delay.
IN WITNESS WHEREOF, the parties hereby execute this Agreement.
FHP International Corporation Talbert Medical Management Corporation
By: /s/ Westcott W. Price III By: /s/ Jack D. Massimino
-------------------------- --------------------------
Name: Westcott W. Price III Name: Jack D. Massimino
------------------------ ------------------------
Title: President and Chief Title: President and Chief
Executive Officer Executive Officer
----------------------- -----------------------
4
<PAGE>
EXHIBIT A TO THE
ADMINISTRATIVE SERVICES AGREEMENT BETWEEN
TALBERT MEDICAL MANAGEMENT CORPORATION
AND FHP INTERNATIONAL CORPORATION
INFORMATION SERVICES
For the monthly fee of $207,417, FHP shall provide, for the following categories
of services, personnel and system environments as necessary to operate, maintain
and, when appropriate, engineer the following categories of service. Services
will be consistent with what is currently provided to Talbert as a subsidiary of
FHP. The categories of services are as follows:
PHARMACY SYSTEM SUPPORT
All interaction with pharmacy system vendors, ComCoTec, ESI, and POS systems.
Problem determination in coordination with Service Desk and Network Operations.
INFORMATION ACCESS CONSULTATION
Provide skilled Oracle DBA knowledge to assist TMMC with data warehouse project.
Assist in separating TMMC data currently stored in FHP UR repository.
HUMAN RESOURCES (HR-1) / DATACCOUNT CONNECTIVITY/TIME CLOCK LOCATIONS
Provide consultation to HR and Payroll staff to separate TMMC from other FHP
environments. Consolidate TMMC on one HR-1 server and setup environment for
centralized data entry and link to Dataccount. Project underway, must complete.
All system knowledge support currently comes from FHP resources.
IS SERVICE DESK
Receive all incoming calls for help for any TMMC system or to initiate moves,
adds, changes for data and voice equipment. This function triages calls,
documents all calls with trouble tickets to enable tracking, escalation, and
reporting. Some problem resolution based on training for TMMC systems and
general knowledge, hand-off to appropriate second level support, tracking and
follow-up for all calls. This service includes all required communication
expenses and spans extended hours of operation. Management notification of
critical outages within 15 minutes. Reporting on problem trends based on data.
WIDE AREA NETWORK ENGINEERING AND OPERATIONS
Perform wide area network continuous monitoring with appropriate network tools,
take action as soon as a link is down or device unresponsive. Provide some
level of proactive network checking. ( The wide area network includes the frame
relay communications and local circuits up to and including the routers.)
Coordinate with all circuit providers when outages occur or to
5
<PAGE>
enhance service levels. As needed, due to increased outage trends or expansion
of business, provide engineering to sustain network availability. Provide
documentation of physical and logical network.
FINANCIAL SYSTEMS (INTEGRAL, FOCUS, AND CONNECTIVITY)
Consult with Financial departments within TMMC. Keep Financial systems current
for all government regulations. Provide system access to meet all required
filing dates. Complete the TMMC split project currently underway to separate
TMMC from FHP data. Provide required operating environment consistent with
current TMMC requirements.
ALL CATEGORIES INCLUDE:
- Management of personnel
- Physical office space, appropriate desktop equipment and clerical
support
- Network access
- System software currently required for production
- Computer hardware currently required for production
- Access to all currently used software unless otherwise negotiated
- Reasonable access to support personnel
- Meeting reasonable service levels
Services can be terminated with mutual consent or by either party, with or
without cause, upon provision of 120 day prior written notice. Every effort
will be made to separate as quickly as is prudent.
6
<PAGE>
EXHIBIT B
AGREEMENT OF CONFIDENTIALITY
1. "Confidential Information" as used herein shall mean all information
disclosed from one party (the "Disclosing Party") to the other party (the
"Receiving Party") and shall include, without limitation, trade secrets, know-
how, software programs, and software source documents.
2. The Receiving Party agrees that it will not make use of, disseminate,
or in any way disclose any Confidential Information of the Disclosing Party to
any person, firm or business, except to the extent necessary for the purposes of
the performance of such party under the Agreement to which this Exhibit B is
attached (the "Agreement").
3. The Receiving Party agrees that it shall disclose Confidential
Information of the Disclosing Party only to those of its employees, contractors
or other agents who need to know such information and who have previously
agreed, either as a condition to employment or in order to obtain the
Confidential Information, to be bound by terms and conditions substantially
similar to those of the Agreement.
4. The Receiving Party shall treat all Confidential Information of the
Disclosing Party with the same degree of care as it accords to its own
confidential information of a similar nature, and the Receiving Party will
exercise at least reasonable care to protect its own such confidential
information.
5. The Receiving Party's obligations under Sections 2, 3 and 4 with
respect to any portion of the Confidential Information shall terminate when the
Receiving Party can document that: (a) it was in the public domain at the time
it was communicated to the Receiving Party by the Disclosing Party; (b) it
entered the public domain subsequent to the time it was communicated to the
Receiving Party by the Disclosing Party through no fault of the Receiving Party;
(c) it was in the Receiving Party's possession free of any obligation of
confidence at the time it was communicated to the Receiving Party by the
Disclosing Party; (d) it was rightfully communicated to the Receiving Party free
of any obligation of confidence subsequent to the time it was communicated to
the Receiving Party by the Disclosing Party; or (e) it was developed by
employees or agents of the Receiving Party independently of and without
reference to any information communicated to the Receiving Party by the
Disclosing Party. In addition, the Receiving Party may disclose the Disclosing
Party's Confidential Information in response to a valaid order by a court or
other governmental body, as otherwise required by law.
7
<PAGE>
6. All Confidential Information and materials furnished by the Receiving
Party by the Disclosing Party shall remain the property of the Disclosing Party
and shall be returned to it promptly at its request, together with any copies
thereof.
7. The Receiving Party does not acquire any licenses under any
intellectual property rights of the Disclosing Party under the Agreement.
8
<PAGE>
EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT
This Employee Benefits and Compensation Allocation Agreement is
entered into as of February 14, 1997 between FHP International Corporation, a
Delaware corporation ("FHP"), and Talbert Medical Management Holdings
Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, FHP has agreed to merge (the "FHP Merger") with PacifiCare
Health Systems, Inc., pursuant to an Amended and Restated Agreement and Plan of
Reorganization dated as of November 11, 1996 (the "FHP Merger Agreement").
WHEREAS, in connection with the FHP Merger, FHP intends to sell its
shares of common stock of Talbert Medical Management Corporation, a Delaware
corporation ("TMMC"), and Talbert Health Services Corporation, a Delaware
corporation ("THSC"), to Holdings in exchange for subscription rights to
purchase shares of Holdings' common stock (the "Rights"), which Rights are to be
distributed to FHP's stockholders as a portion of the consideration in the FHP
Merger (the "Offering").
WHEREAS, if upon the expiration of the Rights (the "Expiration Date"),
FHP holds less than a majority of the shares of Holdings' common stock, Holdings
(including TMMC and THSC) will not be a subsidiary of FHP.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the parties hereby agree
as follows:
ARTICLE 1. PURPOSE AND DEFINITIONS
SECTION 1.1 PURPOSE. The purpose of this Agreement is to set forth
the agreement of the parties regarding (a) the provision of employee benefits
after the Expiration Date to the Talbert Individuals (as defined below), and (b)
the disposition after the Expiration Date of various employee benefit plans
which cover Talbert Individuals.
SECTION 1.2 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following terms will have the
following meanings (applicable to both the singular and plural forms of the
terms defined):
<PAGE>
"Agreement" means this Employee Benefits and Compensation Allocation
Agreement between FHP and Holdings, including any appendices attached hereto, as
amended or supplemented.
"FHP Individual" means any person who immediately after the Expiration
Date is a current or former officer or employee of FHP or any entity which is a
member of the same controlled group of corporations (within the meaning of
Section 1563(a) of the Internal Revenue Code of 1986, as amended (the "Code"))
as FHP (after giving effect to the Offering) or any current or former director
of FHP, who does not then become exclusively a Talbert Individual, and any duly
designated legal representative or beneficiary of any FHP Individual.
"Talbert Individual" means (i) for all references in this Agreement
excluding Articles 2 and 7, the active employees and former employees of
Holdings (including TMMC and THSC), their dependents, beneficiaries, and
alternate payees under qualified domestic relations orders, (ii) for all
references in Article 2 of this Agreement, the individuals described in clause
(i) as well as the employees and former employees of the professional medical
and dental corporations that are listed on Appendix A attached hereto, their
dependents, beneficiaries, and alternate payees under qualified domestic
relations orders, and (iii) for all references in Article 7, any person who
immediately after the Expiration Date is a current officer or employee of
Holdings (including TMMC and THSC) and, for purposes of clause (i), (ii) or
(iii), who is not immediately after the Expiration Date also an FHP Individual,
and any duly designated legal representative or beneficiary of any such Talbert
Individual.
ARTICLE 2. QUALIFIED PLANS
SECTION 2.1 MONEY PURCHASE PENSION PLAN. FHP sponsors the FHP
Money Purchase Pension Plan (the "Pension Plan"), which covers Talbert
Individuals, as well as employees of FHP and its subsidiaries. A portion of the
assets and liabilities of the Pension Plan are attributable to Talbert
Individuals. As soon as administratively feasible following the Expiration
Date, Holdings will establish a plan (and accompanying trust) to which the
account balances attributable to Talbert Individuals in the Pension Plan will be
directly transferred. Such plan will comply with all applicable provisions of
the Code, including, without limitation, Code Section 411(d). As soon as
administratively feasible following the Expiration Date, Holdings will submit
such plan and trust to the Internal Revenue Service for a determination of its
qualified status and tax-exempt status under Code Sections 401 and 501(a).
Holdings will amend such plan and trust as and if requested by the Internal
Revenue Service as a condition of granting a favorable determination of the tax-
qualified and tax-exempt status of such plan and trust. As soon as
administratively feasible following the Expiration Date, FHP will cause the
trustee of the Pension Plan to transfer to the trust established by Holdings the
assets and liabilities of the Pension Plan attributable to Talbert Individuals.
Such assets (other than the real estate assets) will be distributed in-kind
based on the investments of the accounts of the Talbert Individuals, and a
tenancy in common interest will be transferred with respect to
2
<PAGE>
the real estate assets. Holdings will be responsible for all required
governmental compliance testing, reporting, disclosure and funding with respect
to the plan established by Holdings pursuant to this Section 2.1 (including
without limitation, the obligation to file Forms 5500). Holdings will have the
same power and authority to amend or terminate coverage under said successor
plan as held by FHP under the Pension Plan.
Notwithstanding anything else contained herein to the contrary, the
parties to this Agreement anticipate that the Investment Committees of the
Pension Plan and the plan established by Holdings (the "Holdings Plan") will
enter into an agreement (the "Real Estate Disposition Agreement") to provide
for the prompt disposition and maintenance pending disposition of certain real
estate assets which will be held as a tenancy in common following the
Expiration Date by the trustee of the Pension Plan and the trustee of the
Holdings Plan. Consistent with the preceding sentence, Holdings will as soon as
practicable appoint the members of the Investment Committee for the Holdings
Plan. In addition, the parties to this Agreement anticipate that the
respective Committees will negotiate and execute the Real Estate Disposition
Agreement within 30 days or such later date as may be mutually agreed to by the
Investment Committees. In the event that the Investment Committees are unable
to reach agreement with respect to the Real Estate Disposition Agreement, the
Investment Committees will appoint a qualified real estate professional to
determine whether the terms of a proposed disposition are fair and reasonable.
SECTION 2.2 EMPLOYEE STOCK OWNERSHIP PLAN.
(a) FHP ESOP. FHP sponsors the FHP International Corporation
Employee Stock Ownership Plan (the "FHP ESOP"), which covers Talbert
Individuals, as well as employees of FHP and its subsidiaries. FHP will
amend, if necessary, the FHP ESOP or otherwise establish appropriate
administrative procedures to allow participants to direct the trustee of
the FHP ESOP with respect to the exercise of any Rights which are
attributable to shares of FHP allocated to their accounts pursuant to the
FHP Merger. Such amendment or procedures will also provide for the
exercise of Rights by the trustee (or pursuant to some other method
determined to be appropriate by the Committee which administers the FHP
ESOP) which are attributable to shares of FHP which are unallocated under
the FHP ESOP, if any.
(b) HOLDINGS ESOP. A portion of the assets and liabilities of
the FHP ESOP are attributable to Talbert Individuals. As soon as
administratively feasible following the Expiration Date, Holdings will
establish a plan (and accompanying trust) to which the account balances
attributable to Talbert Individuals in the FHP ESOP will be directly
transferred. Such plan will comply with all applicable provisions of the
Code, including, without limitation, Code Section 411(d). As soon as
administratively feasible following the Expiration Date, Holdings will
submit such plan and trust to the Internal Revenue Service for a
determination of its qualified status and tax-exempt status under Code
Sections 401 and 501(a). Holdings will amend such plan and trust as and if
requested by the Internal Revenue Service as a condition of granting a
favorable determination of the tax-qualified and tax-exempt status of such
plan and trust. As soon as administratively feasible following the
Expiration Date, FHP will cause the
3
<PAGE>
trustee of the FHP ESOP to transfer to the trust established by Holdings
the assets and liabilities of the FHP ESOP attributable to Talbert
Individuals. Such assets will be distributed in-kind based on the
investments of the accounts of the Talbert Individuals under the FHP ESOP.
Holdings will be responsible for all required governmental compliance
testing, reporting, disclosure and funding with respect to the plan
established by Holdings pursuant to this section (including without
limitation, the obligation to file Forms 5500). Holdings will have the
same power and authority to amend or terminate coverage under said
successor plan as held by FHP under the FHP ESOP.
ARTICLE 3. COMPENSATION; NON-QUALIFIED DEFERRED COMPENSATION PLANS
SECTION 3.1 ASSUMPTION OF FHP'S OBLIGATIONS. Holdings will, as of
the Expiration Date, assume the obligations of FHP and Holdings (including TMMC
and THSC) to Talbert Individuals under the FHP International Corporation
Deferred Compensation Plan. Holdings will adopt one or more non-qualified
deferred compensation plans under which the liabilities assumed by Holdings will
be provided to Talbert Individuals. FHP will amend the FHP International
Corporation Deferred Compensation Plan to provide that no distribution of
benefits will take place as a result of the Offering. In addition, as soon as
administratively feasible following the Expiration Date, Holdings will establish
a grantor trust to which the balance of the Holdings subtrust maintained under
the FHP International Corporation Master Trust Agreement will be directly
transferred in-kind.
SECTION 3.2 FICA TAX OBLIGATIONS. Holdings will, as of the
Expiration Date, assume any obligation of FHP, if any, to pay FICA, Medicare,
income tax withholding and similar taxes for any benefits earned by or owed to
the Talbert Individuals under the FHP International Corporation Deferred
Compensation Plan, whether before or after the Expiration Date.
SECTION 3.3 AMENDMENT OR TERMINATION BY HOLDINGS. Holdings will
have the same power and authority as held by FHP under the FHP International
Corporation Deferred Compensation Plan to amend or terminate benefits under the
Holdings successor plan contemplated by Section 3.1.
ARTICLE 4. MEDICAL AND DENTAL PLANS
SECTION 4.1 IMMEDIATE COVERAGE. Holdings will establish a medical
and dental plan or plans providing to Talbert Individuals medical and dental
benefits similar to those provided by FHP immediately prior to the Expiration
Date. Coverage under the medical and dental plan or plans of Holdings will
commence immediately after the Expiration Date with respect to the Talbert
Individuals. Effective as of the Expiration Date, the medical and
4
<PAGE>
dental plan or plans established by Holdings will not contain any exclusions or
limitations for preexisting conditions. Holdings will continue to maintain such
similar plans for a period of at least 12 months following the Expiration Date.
SECTION 4.2 CLAIMS PAYMENT AND REIMBURSEMENT. Holdings medical and
dental plan or plans will be responsible for all claims incurred by Talbert
Individuals on or after the Expiration Date. FHP's medical and dental plan and
any other group health plans, if any, will be responsible for all claims
incurred by Talbert Individuals before the Expiration Date.
SECTION 4.3 SUCCESSOR EMPLOYER. For purposes of the obligations
set forth in Section 601, ET SEQ., of the Employee Retirement Income Security
Act, (commonly known as "COBRA continuation coverage"), Holdings (including TMMC
and THSC) will be considered a successor employer to FHP. Holdings medical and
dental plan or plans will provide COBRA continuation coverage to Talbert
Individuals even if such individuals became entitled to COBRA continuation
coverage prior to the Expiration Date.
SECTION 4.4 REPORTING, COMPLIANCE AND FUNDING. Holdings will be
responsible for all required governmental compliance testing, reporting,
disclosure and funding with respect to the medical and dental plan or plans
established by Holdings after the Expiration Date (including without limitation,
the obligation to file Forms 5500). Subject to Section 4.1, Holdings will have
the same power and authority as held by FHP under FHP's medical plan or plans to
amend or terminate coverage under said successor plan(s).
ARTICLE 5. OTHER WELFARE BENEFITS
SECTION 5.1 INSURED PLANS. Coverage of Talbert Individuals under
any insured welfare benefit plans sponsored by FHP will continue until the
Expiration Date, pursuant to the terms of such plans, and will then terminate.
SECTION 5.2 FUTURE BENEFITS. Except as specifically provided in
this Benefits Agreement, Holdings will establish benefit plans and programs
following the Expiration Date according to the terms and conditions it selects.
SECTION 5.3 REPORTING, COMPLIANCE AND FUNDING. Holdings will be
responsible for all required governmental compliance testing, reporting,
disclosure and funding with respect to any welfare plan or plans established by
Holdings (including without limitation, the obligation to file Forms 5500) on or
after the Expiration Date.
ARTICLE 6. SEVERANCE BENEFITS
5
<PAGE>
SECTION 6.1 SEVERANCE BENEFITS. FHP will, if necessary, amend its
severance plans to provide that no severance benefits will be payable to Talbert
Individuals as a result of the Offering.
ARTICLE 7. STOCK OPTION PLAN
Section 7.1 STOCK OPTION PLAN. FHP maintains the FHP
International Corporation Executive Incentive Plan (the "EIP"). Some Talbert
Individuals currently hold outstanding options (the "FHP Options") granted under
the EIP. Pursuant to Section 4.8 of the FHP Merger Agreement, FHP Options
outstanding as of the date of the FHP Merger will either be (i) cashed out in
accordance with Section 4.8(a) of the FHP Merger Agreement or (ii) exchanged for
options (the "Exchange Options") to purchase Class B common stock of N-T
Holdings, Inc., the holding company for FHP and PacifiCare following the FHP
Merger, in accordance with Section 4.8(b) of the FHP Merger Agreement. The
effect of the separation of TMMC and THSC from N-T Holdings, Inc. on the
Exchange Options held by Talbert Individuals will be as set forth in Section
4.8(b) of the FHP Merger Agreement.
ARTICLE 8. GENERAL
SECTION 8.1 INDEMNIFICATION. Holdings will indemnify and hold
harmless FHP for any costs, liabilities and expenses, including attorneys'
fees and other costs of defense, for any claims or actions against FHP (or
any plan established or maintained by FHP, or any successor thereto), and for
any liabilities or obligations imposed upon FHP, (or any plan established or
maintained by FHP, or any successor thereto) with respect to (i) the
obligations or liabilities assumed by Holdings (or any plan established or
maintained by Holdings, or its subsidiaries, or any successor thereto) under
this Benefits Agreement, and (ii) actions or omissions of Holdings (or any
plan established or maintained by Holdings or its subsidiaries, or any
successor thereto) with respect to any employee pension, benefit, health,
welfare or other plans which are established by Holdings and which relate to
any period after the Expiration Date.
SECTION 8.2 NO THIRD PARTY BENEFICIARIES. Notwithstanding anything
to the contrary herein, this Benefits Agreement is solely for the benefit of FHP
and Holdings. There will be no third party beneficiaries under this Benefits
Agreement, including, without limitation, any Talbert Individual or FHP
Individual.
SECTION 8.3 OTHER ACTIONS. FHP and Holdings will take such other
and further actions as may be necessary or appropriate to carry out this
Benefits Agreement.
SECTION 8.4 GOVERNING LAW. This Benefits Agreement and the legal
relations between the parties hereto will be governed by and construed in
accordance with the internal laws of the State of California and without regard
to conflict of laws principles.
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SECTION 8.5 OBLIGATIONS BINDING UPON SUCCESSOR. Obligations of FHP
and Holdings under this Benefits Agreement will be binding upon their respective
successors or assigns.
SECTION 8.6 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
SECTION 8.7 AMENDMENT AND MODIFICATIONS. No amendment or other
modification of this Agreement will be binding upon any party unless executed in
writing by all parties thereto.
SECTION 8.8 WAIVER. No waiver by any party of any of the
provisions of this Agreement will be deemed, or will constitute, a waiver of any
other provision, whether similar, nor will any waiver constitute a continuing
waiver. No waiver will be binding unless executed in writing by the party
making the waiver.
SECTION 8.9 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 8.10 COUNTERPARTS. This agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 8.11 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
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IN WITNESS WHEREOF, the parties have caused this Benefits
Agreement to be executed by their duly authorized officers as of the day and
year first written above.
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price
--------------------------
Westcott W. Price
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: /s/ Jack D. Massimino
--------------------------
Jack D. Massimino
President and Chief Executive Officer
S-1
<PAGE>
APPENDIX A
PROFESSIONAL MEDICAL AND DENTAL CORPORATIONS
1. Robert Anderson, DDS, Inc. (CA), (dba Talbert Dental Group).
2. James Brodahl, DDS, Inc. (CA), (dba Talbert Dental Group).
3. Larry Kaban, DDS, Inc. (CA), (dba Talbert Dental Group).
4. John Whitley, DDS, Inc. (CA), (dba Talbert Dental Group).
5. Talbert Medical Group, Inc. (CA) (dba Talbert Medical Group).
6. Talbert Medical Group, Ltd. (NV).
7. Talbert Dental Group, P.C. (AZ).
8. Talbert Medical Group, P.C. (AZ).
9. Talbert Dental Group, Inc. (UT).
10. Talbert Medical Group, Inc. (UT).
A-1
<PAGE>
TAX ALLOCATION AGREEMENT
This Tax Allocation Agreement is entered into as of February 14,
1997, between FHP International Corporation, a Delaware corporation ("FHP"),
Talbert Medical Management Corporation ("TMMC"), Talbert Health Services
Corporation, a Delaware corporation ("THSC"), and Talbert Medical Management
Holdings Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc. ("PacifiCare"), Holdings intends to acquire
FHP's shares of the common stock of TMMC and THSC (the "Acquisition") in
exchange for subscription rights to purchase shares of Holdings' common stock
(the "Rights"), which Rights are to be distributed to FHP's stockholders as a
portion of the consideration in the FHP Merger (the "Offering").
WHEREAS, TMMC and THSC have previously been parties to the FHP
International Corporation and Subsidiaries Amended and Restated Tax Allocation
Agreement (the "Existing Tax Allocation Agreement").
WHEREAS, if upon expiration of the Rights (the "Expiration Date"), FHP
holds less than a majority of the shares of Holdings' common stock, Holdings
(including TMMC and THSC) will not be a subsidiary of FHP.
WHEREAS, in light of the Acquisition and the Offering, TMMC, THSC,
Holdings (collectively, "Talbert") and FHP have agreed that it is appropriate
and desirable to terminate the Existing Tax Allocation Agreement as to TMMC and
THSC and set forth herein the principles of their relationship and
responsibilities going forward regarding Taxes and other related Tax matters.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
of the parties contained herein, the parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following terms will have the
following meanings:
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"Agreement" means this Tax Allocation Agreement between FHP and
Talbert as amended or supplemented.
"Closing Date" means the date on which the closing of the Acquisition
occurs.
"FHP" means FHP International Corporation and all of its subsidiaries
after the Closing Date.
"Return" means any return, report, form or similar statement or
document (including, without limitation, any related or supporting information
or schedule attached thereto and any information return, claim for refund, amend
return and declaration of estimated tax) that has been or is required to be
filed with any Taxing Authority or that has been or is required to be furnished
to any Taxing Authority in connection with the determination, assessment or
collection of any Taxes or the administration of any laws, regulations or
administrative requirements to any Taxes.
"Tax" (and, with correlative meanings, "Taxes" and "Taxable") means,
without limitation, and as determined on a jurisdiction-by-jurisdiction basis,
each foreign or U.S. federal, state, local or municipal income, alternative or
add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property or any other tax, custom, tariff, impost, levy,
duty, governmental fee or other like assessment or charge or any kind
whatsoever, together with any interest or penalty, addition to tax or additional
amount related thereto, imposed by any Taxing Authority.
"Taxing Authority" means any Governmental Authority or any
subdivision, agency, commission or authority thereof, or any quasi-governmental
or private body having jurisdiction over the assessment, determination,
collection or other imposition of Taxes.
"Talbert" means TMMC, THSC, Holdings and all of their respective
subsidiaries after the Closing Date.
ARTICLE 2. TAX ALLOCATION FOLLOWING THE TMMC ACQUISITION
SECTION 2.1 SETTLEMENT OF ACCOUNTS. Prior to the Closing Date, the
parties will settle their accounts with respect to Tax matters under the
Existing Tax Allocation Agreement for all periods prior to the Closing Date, and
will agree as to their respective Tax Liabilities for any Taxable periods
beginning before, and ending after, the Closing Date.
SECTION 2.2 TERMINATION OF EXISTING TAX ALLOCATION AGREEMENT. Upon
the completion of the Acquisition, the Existing Tax Allocation Agreement will be
terminated with respect to TMMC and THSC, and any and all obligations and
responsibilities of
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TMMC, THSC and FHP under the Existing Tax Allocation Agreement for all
periods commencing prior to the Closing Date will be terminated. There will
be no further adjustments to Taxes with respect to such prior Taxable periods
following the Closing Date, PROVIDED, HOWEVER, that Talbert will indemnify
and hold harmless FHP against any adverse adjustment, or receive from FHP the
benefit of any favorable adjustment, of an FHP Return by a Governmental
Authority to the extent that the adjustment (a) relates to a Taxable period
commencing prior to the Acquisition, (b) arises out of Talbert's activities,
and (c) when combined with all other such adjustments that have occurred,
exceeds $2 million but does not exceed $4 million. To the extent any such
adjustment, when combined with all other such adjustments that have occurred,
exceed $4 million, Talbert and FHP will share equally the liability for, or
benefit of, such an adjustment to the extent that it exceeds $4 million.
SECTION 2.3 FHP RETURNS. FHP agrees to file all Returns with respect
to, and to pay all Taxes imposed upon or attributable to, FHP and its affiliates
(other than Talbert for periods described in Section 2.4) for all Taxable
periods, including all Taxes incurred in connection with the Acquisition.
SECTION 2.4 TALBERT RETURNS. Talbert agrees to file all Returns with
respect Talbert for all Taxable periods ending after the Closing Date and to pay
all Taxes imposed upon or attributable to Talbert for all Taxable periods ending
after the Closing Date.
ARTICLE 3. GENERAL
SECTION 3.1 COOPERATION. FHP and Talbert will, each at its own
expense, cooperate with each other in any matters relating to Taxes and, in
connection therewith, will (i) maintain appropriate books and records as
required by the Internal Revenue Code of 1986, for any and all Taxable periods
or any portion of a Taxable period; (ii) provide to each other such information
as may be necessary or useful in the filing of any such Return; (iii) execute
and deliver such consents, elections, powers of attorney and other documents
that may be required or appropriate for the proper filing of any such Return;
and (iv) make available for responding to inquiries of any other party or any
Taxing Authority, appropriate employees and officers of and advisors retained by
FHP or Talbert.
SECTION 3.2 GOVERNING LAW. To the extent not preempted by any
applicable foreign or U.S. federal, state, or local Tax law, this Agreement will
be governed by and construed and interpreted in accordance with the laws of the
State of California, disregarding conflict of law provisions.
SECTION 3.3 AFFILIATES. Each of the parties hereto will cause to be
performed, and hereby guarantees the performance of all actions, agreements and
obligations set forth herein to be performed by any affiliate of such party.
SECTION 3.4 NOTICES. Unless specifically provided otherwise in this
Agreement, all notices or other communications under this Agreement will be in
writing and will be deemed to be duly given when delivered in person, sent by
facsimile, deposited in the United States mail, postage prepaid and sent
certified mail, return
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receipt requested or deposited in private express mail, postage prepaid,
addressed as follows:
If to FHP to:
FHP INTERNATIONAL CORPORATION
3120 Lake Center Drive
Santa Ana, CA 92704
Attn: Secretary
Facsimile: (714) 825-5710
With copies to:
KONOWIECKI & RANK
First Interstate World Center
633 W. 5th Street
Los Angeles, CA 90071-2007
Attn: Joseph Konowiecki
Facsimile: (213) 229-0992
If to TMMC, THSC or Holdings:
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
3540 Howard Way
Costa Mesa, CA 92626-1417
Attn: President
Facsimile: (714) 436-4860
With copies to:
O'MELVENY & MYERS LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: C. James Levin, Esq.
Facsimile: (213) 669-6407
Any party may, by written notice to the other parties, change the address to
which such notices are to be given.
SECTION 3.5 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
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<PAGE>
SECTION 3.6 CONFLICTING OR INCONSISTENT PROVISIONS. In the event
that any provision or term of this Agreement conflicts or is inconsistent with
any provision or term of any other agreement between or among FHP or any other
member of the FHP group and/or Talbert or any other member of the Talbert group,
as the case may be, which is in effect on or prior to the date hereof, the
provision or term of this Agreement will control and apply and the provision or
term of any other agreement will, to the extent of such conflict or
inconsistency, be inoperative and inapplicable.
SECTION 3.7 SEVERABILITY. The parties agree that each provision to
this Agreement will be construed independent of any other provision of this
Agreement. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provisions hereof. This Agreement
will be construed in all respects as if such invalid or unenforceable provision
were omitted.
SECTION 3.8 DURATION. Notwithstanding anything in this Agreement to
the contrary, the provisions of this Agreement will survive for the full period
of all applicable statutes of limitations (giving effect to any waiver,
mitigation or extension thereof).
SECTION 3.9 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all of the parties hereto.
SECTION 3.10 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 3.11 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 3.12 COUNTERPARTS. This Agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 3.13 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
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5
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IN WITNESS WHEREOF, the parties hereto have caused this Tax Allocation
Agreement to be executed by their duly authorized representatives.
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
--------------------------------
Westcott W. Price III
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT
CORPORATION
By: /s/ Jack D. Massimino
--------------------------------
Jack D. Massimino
President and Chief Executive
Officer
TALBERT HEALTH SERVICES
CORPORATION
By: /s/ Jack D. Massimino
--------------------------------
Jack D. Massimino
President and Chief Executive
Officer
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
By: /s/ Jack D. Massimino
--------------------------------
Jack D. Massimino
President and Chief Executive
Officer
S-1
<PAGE>
ALLOCATION OF LIABILITIES AND INDEMNIFICATION AGREEMENT
This Allocation of Liabilities and Indemnification Agreement (the
"Agreement") is entered into as of February 14, 1997 between FHP International
Corporation, a Delaware corporation ("FHP"), Talbert Medical Management
Corporation, a Delaware corporation ("TMMC"), Talbert Health Services
Corporation, a Delaware corporation ("THSC"), and Talbert Medical Management
Holdings Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, TMMC and THSC were organized as wholly-owned subsidiaries of
FHP and succeeded to certain portions of FHP's former staff model operations as
of January 1, 1996, since which date TMMC and THSC have maintained their own
balance sheets, which have been consolidated with FHP's balance sheet for
purposes of reporting FHP's consolidated financial condition.
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc. ("PacifiCare"), Holdings intends to acquire
FHP's shares of the common stock of TMMC and THSC (the "Acquisition") in
exchange for subscription rights to purchase shares of Holdings' common stock
("Rights"), which Rights are to be distributed to FHP's stockholders as a
portion of the consideration in the FHP Merger (the "Offering").
WHEREAS, in light of the Acquisition and the Offering, TMMC, THSC and
Holdings (collectively, "Talbert") and FHP have agreed that it is appropriate
and desirable to set forth herein the principles of their relationship and
responsibilities after the Acquisition and the Offering regarding the allocation
of liabilities between them and their indemnification obligations with respect
to those liabilities.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
of the parties contained herein, the parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement, the following terms will have
the following meanings:
"Affiliate" will have the meaning provided under Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
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"Claim" means (a) a suit, proceeding or investigation by or before
any court or governmental or regulatory agency or body, or a written demand for
payment of a Liability or cause of action asserted against FHP, Talbert or both
by a person or entity other than Talbert or FHP (a "Claimant"); or (b) a written
demand or assertion by or on behalf of a Claimant that a cause of action giving
rise to a Liability exists against Talbert or FHP.
"Expiration Date" means the date on which the Rights expire.
"FHP" means FHP International Corporation, its parent and all of their
respective subsidiaries after the Acquisition.
"FHP Balance Sheet" means the consolidated balance sheet of the FHP
Group, including the consolidating balance sheets of each subsidiary of FHP
and all asset and liability work schedules underlying such balance sheets.
"FHP Business" means any business conducted by FHP after the
Expiration Date.
"FHP Group" means FHP International Corporation, and all of its
existing and former subsidiaries (including Talbert) and Affiliates, immediately
prior to the Acquisition.
"Indemnified Loss" means a cost or loss for which an Indemnitee
receives or is entitled to receive a payment from an Indemnifying Party.
"Indemnifying Party" means a party indemnifying another party pursuant
to Article 3, or a party against whom such indemnification is sought pursuant to
those provisions of this Agreement.
"Indemnitee" means a party or other person or entity entitled to be
indemnified pursuant to Article 3.
"Liability or Liabilities" means losses, debts, liabilities, damages,
obligations, claims, demands, judgments or settlements of any nature or kind,
including all costs and expenses (legal, accounting or otherwise) associated
therewith, but excluding "Taxes" as such term is defined in the Tax Allocation
Agreement of even date herewith between FHP and Talbert.
"Offering Balance Sheet Date" means [June 30, 1996].
"Rights Offering" means the offering of rights to purchase the Common
Stock of Holdings in connection with the FHP Merger.
"Rights Offering Costs" means all legal, accounting, printing and
filing fees incurred by Talbert and FHP in connection with the Rights Offering.
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"Talbert" means TMMC, THSC, Holdings, and all of their respective
subsidiaries after the Acquisition.
"Talbert Balance Sheet" means the consolidated balance sheet of TMMC,
THSC and Holdings, including the consolidating balance sheets of each subsidiary
of TMMC and THSC and all asset and liability work schedules underlying such
balance sheets.
"Talbert Business" means any business conducted by TMMC, THSC,
Holdings or their predecessors at any time.
"Talbert Medical Malpractice Liabilities" means any Liabilities for
medical malpractice, clinic professional liability, or errors and omissions that
result from a Claim arising out of the Talbert Business prior to February 15,
1996.
"Tax Allocation Agreement" means the Tax Allocation Agreement of even
date herewith between the parties.
"Talbert Pre-1996 Liabilities" means Liabilities other than Talbert
Medical Malpractice Liabilities that are not disclosed or for which no reserves
have been established on the FHP Balance Sheet as of June 30, 1996, and result
from a Claim arising out of the Talbert Business and based on events occurring
after January 1, 1994 and prior to the Expiration Date.
ARTICLE 2. ASSUMPTION AND ALLOCATION OF LIABILITIES
SECTION 2.1 FHP LIABILITIES. On and after the Expiration Date, FHP
will assume, the following Liabilities (the "FHP Liabilities"):
(a) Liabilities (including any Liabilities for which reserves
have been established) reflected on the FHP Balance Sheet as of the
Expiration Date (excluding any Talbert Liabilities), regardless of the
adequacy of the amount set forth thereon;
(b) Liabilities that result from a Claim arising out of the
business of the FHP Group based on events occurring prior to January 1,
1996 (excluding any Talbert Pre-1996 Liabilities);
(c) Liabilities that arise out of the FHP Business or any other
activity undertaken by, or any failure to act by, FHP after the Expiration
Date;
(d) Liabilities for Rights Offering Costs; and
(e) Talbert Medical Malpractice Liabilities.
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SECTION 2.2 TALBERT LIABILITIES. On and after the Expiration Date,
Talbert will assume, the following Liabilities (the "Talbert Liabilities"):
(a) Liabilities reflected on the Talbert Balance Sheet as of the
Expiration Date, regardless of the adequacy of the amount set forth
thereon;
(b) Liabilities that are disclosed, or for which reserves have
been established, on the FHP Balance Sheet as of June 30, 1996, and
result from a Claim arising out of the Talbert Business and based on events
occurring after January 1, 1996 and prior to the Expiration Date;
(c) the Talbert Pre-1996 Liabilities, except to the extent of
any reserves established by FHP between June 30, 1996 and the Offering
Balance Sheet Date with respect to Talbert Pre-1996 Liabilities; and
(d) Liabilities that arise out of the Talbert Business or any
other activity undertaken by, or any failure to act by, Talbert after the
Expiration Date.
ARTICLE 3. INDEMNIFICATION
SECTION 3.1 BY FHP. FHP will indemnify and hold harmless Talbert,
its subsidiaries and Affiliates, and each officer, director, employee and agent
thereof, from and against any and all FHP Liabilities.
SECTION 3.2 BY TALBERT. Talbert will indemnify and hold harmless
FHP, its subsidiaries and Affiliates, and each officer, director, employee and
agent thereof, from and against any and all Talbert Liabilities.
SECTION 3.3 PAYMENT TERMS. All requests for payments to be made
pursuant to this Article 3 will be made by the party seeking indemnification
pursuant to a "Claims Notice." A Claims Notice will set forth, in reasonable
detail (a) the nature of the Liability, (b) the name of the Claimant, (c) the
amount of damages or other demand being sought and (d) the basis for the
indemnification obligation. Within thirty (30) calendar days of receipt of a
Claims Notice, the party from whom indemnification is being sought shall either
(i) make the payment as requested in the Claims Notice or (ii) notify the party
seeking indemnification in writing that such party disputes all or part of the
amounts being sought (a "Dispute Notice"). The Dispute Notice shall set forth,
in detail, the basis for such dispute. The parties shall in good faith, attempt
to resolve in a diligent manner the matter set forth in the Dispute Notice.
SECTION 3.4 TAXES. Any Indemnified Loss will be calculated net of
any tax benefits (net of any tax detriments) realized or realizable by the
Indemnified Party based on the present value thereof in respect of the
Indemnified Loss.
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SECTION 3.5 INSURANCE. The indemnification provisions of this
Agreement are not to be construed to be insurance coverage and do not amend or
affect in any manner any insurance policies purchased by the FHP Group prior to
the Expiration Date. Each party will use commercially reasonable efforts to
collect on insurance as to which it is the insured party, without regard to
whether it is the Indemnitee or the Indemnifying Party hereunder. If either
party receives insurance proceeds from an unrelated insurance company after a
payment has been made between the parties for an Indemnified Loss, it will
promptly remit to the other a portion of such proceeds equal to the other
party's proportion of the Indemnified Loss (but net of the other party's pro
rata portion of any resulting premium increase). In the event that the
Indemnitee collects on or otherwise receives proceeds from insurance and such
insurance is used to satisfy the indemnification obligations of the Indemnifying
Party, the Indemnifying Party shall pay to the Indemnitee any deductible amount
and other fees, costs and expenses (including any expenses incurred in
connection with enforcing the Indemnitee's right to collect on insurance).
SECTION 3.6 EFFECT OF OTHER REDUCTIONS OF INDEMNIFIED LOSS. If the
amount of any Indemnified Loss will at any time subsequent to indemnification
pursuant to this Agreement be reduced by recovery, settlement or otherwise, the
Indemnifying Party's share of such reduction, less any expenses reasonably
incurred in connection therewith, will promptly be repaid by the Indemnitee to
the Indemnifying Party.
SECTION 3.7 WAIVER OF SUBROGATION. Each party hereby waives any
right of subrogation it may have with respect to any Indemnified Loss.
ARTICLE 4. CONTROL OF CLAIMS
SECTION 4.1 FHP LIABILITIES. Subject to the restrictions and
provisions in this Article 4, FHP will have full control over any action taken
with respect to all Claims subject to assumption and allocation under Section
2.1.
SECTION 4.2 TALBERT LIABILITIES. Subject to the restrictions and
provisions in this Article 4, Talbert will have full control over any action
taken with respect to all Claims subject to assumption and allocation under
Section 2.2.
SECTION 4.3 LEGAL ACTION. If either party is served with any
judicial or administrative process concerning any Claim the defense of which
such party believes should be conducted by the other party, such party will:
(a) take all steps necessary or appropriate to preserve both parties' legal
rights and remedies; (b) notify the other party of the pendency of the action;
and (c) request that the other party assume conduct of the defense and that the
other party use its reasonable best efforts to have itself substituted as a
party to the action. Acceptance of control will not act as an admission of
liability. Unless and until the parties agree to a transfer of control of a
particular action, the party originally notified or served will have full
control over, and responsibility for, the conduct of the proceedings, and will
be solely liable for any default. If both parties are served with judicial or
administrative process
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concerning any Claim covered by this Agreement, each party will use its
reasonable best efforts to reach agreement with the other as to which party
should control the conduct of the proceedings. Pending such agreement, each
party will have full control over, and responsibility for, preserving its legal
rights and remedies, and will be solely responsible for any default entered
against it.
SECTION 4.4 OTHER ACTIONS. If either party receives from a Claimant
any demand, not related to judicial or administrative action, for payment
against which such party believes it is entitled to be indemnified pursuant to
this Agreement, the Indemnitee will promptly forward such demand to the
Indemnifying Party with a request that the Indemnifying Party assume control of
the Claim and acknowledge its obligation to indemnify the Indemnitee with
respect to such Claim. The Indemnifying Party will respond to such a request
from the Indemnitee within 30 days. If the parties cannot agree as to which
party should control the Claim, the party upon whom the demand was made may
settle the Claim and resolve any dispute over indemnification under the
provisions of Section 3.3.
SECTION 4.5 CONSULTATION AND COOPERATION. FHP and Talbert agree to
cooperate with each other in good faith in connection with all Claims in order
to minimize the Liability resulting from Claims asserted against either party
and the adverse effects on the businesses of both parties.
ARTICLE 5. MISCELLANEOUS PROVISIONS
SECTION 5.1 GOVERNING LAW. This Agreement will be governed by, and
construed in accordance with, the laws of the State of California, disregarding
conflict of law provisions.
SECTION 5.2 NOTICES. Unless specifically provided otherwise in this
Agreement, all notices or other communications under this Agreement will be in
writing and will be deemed to be duly given when delivered in person, sent by
facsimile, deposited in the United States mail, postage prepaid and sent
certified mail, return receipt requested or deposited in private express mail,
postage prepaid, addressed as follows:
If to FHP to:
FHP INTERNATIONAL CORPORATION
3120 Lake Center Drive
Santa Ana, CA 92704
Attn: Secretary
Facsimile: (714) 825-5710
6
<PAGE>
With copies to:
KONOWIECKI & RANK
First Interstate World Center
633 W. 5th Street
Los Angeles, CA 90071-2007
Attn: Joseph Konowiecki
Facsimile: (213) 229-0992
If to TMMC, THSC or Holdings:
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
3540 Howard Way
Costa Mesa, CA 92626-1417
Attn: President
Facsimile: (714) 436-4860
With copies to:
O'MELVENY & MYERS LLP
400 South Hope Street
Los Angeles, CA 90071
Attn: C. James Levin, Esq.
Facsimile: (213) 669-6407
Any party may, by written notice to the other parties, change the address to
which such notices are to be given.
SECTION 5.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties regarding its subject matter. It supersedes all
prior written or contemporaneous oral agreements related thereto.
SECTION 5.4 SEVERABILITY. The parties agree that each provision to
this Agreement will be construed independent of any other provision of this
Agreement. The invalidity or unenforceability of any particular provision of
this Agreement will not affect the other provisions hereof. This Agreement will
be construed in all respects as if such invalid or unenforceable provision were
omitted.
SECTION 5.5 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all of the parties hereto.
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SECTION 5.6 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 5.7 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision hereof.
SECTION 5.8 CUMULATIVE REMEDIES. No right or remedy conferred upon
or reserved to any of the parties under the terms of this Agreement is intended
to be, nor will it be deemed, exclusive of any other right or remedy provided
herein or by law or equity, but each will be cumulative of every other right or
remedy.
SECTION 5.9 BINDING EFFECT OF AGREEMENT. This Agreement will be
binding upon, and will inure to the benefit of and be enforceable by, the
parties hereto, their respective Affiliates, successors and assigns.
SECTION 5.10 NO THIRD PARTY BENEFICIARY. Nothing in this Agreement,
express or implied, will confer on any person other than the parties any rights
or remedies under or by virtue of this Agreement.
SECTION 5.11 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties, by their duly authorized officers,
have executed and delivered this Agreement on the date first written above.
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
----------------------------
Westcott W. Price III
Westcott W. Price III
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT CORPORATION
By: /s/ Jack D. Massimino
----------------------------
Jack D. Massimino
President and Chief Executive Officer
TALBERT HEALTH SERVICES CORPORATION
By: /s/ Jack D. Massimino
----------------------------
Jack D. Massimino
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: /s/ Jack D. Massimino
----------------------------
Jack D. Massimino
President and Chief Executive Officer
S-1
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TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
ARTICLE I DEFINITIONS.............................................. 2
1.01 Accounts....................................................... 2
1.02 Affiliate...................................................... 2
1.03 Beneficiary.................................................... 2
1.04 Board.......................................................... 3
1.05 Code........................................................... 3
1.06 Committee...................................................... 3
1.07 Company........................................................ 3
1.08 Compensation................................................... 3
1.09 Distribution Date.............................................. 4
1.10 Effective Date................................................. 4
1.11 Eligible Employee.............................................. 4
1.12 Employer....................................................... 4
1.13 Employer Contribution.......................................... 4
1.14 ERISA.......................................................... 4
1.15 ESOP Fund...................................................... 5
1.16 ESOP Suspense Subfund.......................................... 5
1.17 Exempt Loan.................................................... 5
1.18 Financed Shares................................................ 5
1.19 Highly Compensated Employee.................................... 5
1.20 Hour of Service................................................ 5
1.21 Inactive Participant........................................... 6
1.22 Investment Fund................................................ 6
1.23 Limitation Year................................................ 6
1.24 Non-Highly Compensated Employee................................ 7
1.25 Normal Retirement Age.......................................... 7
1.26 Participant.................................................... 7
1.27 Period of Severance............................................ 7
1.28 Permanent and Total Disability................................. 8
1.29 Plan........................................................... 8
1.30 Plan Year...................................................... 8
1.31 Pretax Deferrals............................................... 8
1.32 Profit Sharing Contributions................................... 8
1.33 Rollover Contributions......................................... 8
1.34 Service........................................................ 9
1.35 Stock.......................................................... 10
1.36 Trust Fund..................................................... 10
1.37 Trustee........................................................ 10
1.38 Valuation Date................................................. 10
ARTICLE II ELIGIBILITY AND PARTICIPATION............................ 11
2.01 Participation in the Plan...................................... 11
2.02 Enrollment in the Plan......................................... 11
2.03 Reemployment................................................... 11
2.04 Employment After Normal Retirement Age......................... 12
2.05 Termination of Participation................................... 12
2.06 Inactive Participation and Transfers........................... 12
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ARTICLE III CONTRIBUTIONS............................................ 13
3.01 Contribution of Participant Deferrals.......................... 13
3.02 Limitation on Participant's Pretax Deferrals................... 14
3.03 Employer Matching Contributions................................ 16
3.04 Employer ESOP Contributions.................................... 16
3.05 Participant Contributions...................................... 16
3.06 Rollover Contributions......................................... 16
3.07 Limitation on Reversion of Contributions....................... 17
3.08 Limitation of Liability........................................ 17
3.09 Make-Up Contributions.......................................... 17
3.10 Employer Stock Bonus Contributions............................. 18
3.11 Employer Profit Sharing Contributions.......................... 18
ARTICLE IV PARTICIPANT'S ACCOUNT: ALLOCATIONS....................... 19
4.01 Participant Accounts........................................... 19
4.02 Allocation of Pretax Deferrals................................. 21
4.03 Allocation of Employer Matching Contributions.................. 21
4.04 Limitation on Allocation of Employer Matching Contributions.... 22
4.05 Allocation of Employer ESOP Contributions...................... 23
4.06 Allocation of Employer Stock Bonus Contributions............... 24
4.07 Allocation of Employer Profit Sharing Contributions............ 24
ARTICLE V ESOP SUSPENSE SUBFUND.................................... 26
5.01 Establishment of ESOP Suspense Subfund......................... 26
5.02 Release of Shares in ESOP Suspense Subfund..................... 26
5.03 Allocation of Shares Released From ESOP Suspense Subfund....... 27
ARTICLE VI ALLOCATION LIMITATIONS................................... 29
6.01 Basic Limitation on Annual Additions........................... 29
6.02 Participation in this Plan and a Defined Benefit Plan.......... 31
6.03 Reduction in Annual Additions and Elimination of Excess Amounts 31
ARTICLE VII INVESTMENTS: ALLOCATION OF GAINS AND LOSSES.............. 32
7.01 Investment of Accounts......................................... 32
7.02 Transfers of Existing Account Balances Between Investment Funds 33
7.03 Allocation of Investment Fund Gains and Losses................. 33
7.04 Purchase and Sale of Stock..................................... 34
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7.05 Rights, Warrants, or Options................................... 34
7.06 Participant Rights Concerning Stock............................ 35
7.07 Sale of Stock.................................................. 36
7.08 Tenders and Exchanges of Stock................................. 36
7.09 Valuation of Stock............................................. 39
7.10 Plan May Borrow to Buy Stock................................... 40
7.11 Use of Exempt Loan Proceeds.................................... 41
7.12 Allocation of Stock Dividends and Splits....................... 41
7.13 Reinvestment of Dividends...................................... 42
7.14 Allocation of Dividends other than Stock Dividends............. 42
7.15 Reserve Fund................................................... 43
7.16 Special Investment Election by Qualified Participants.......... 44
ARTICLE VIII WITHDRAWALS AND LOANS.................................... 46
8.01 Post Age 59-1/2 Withdrawals.................................... 46
8.02 Financial Hardship Withdrawals................................. 46
8.03 Withdrawals from Rollover Account.............................. 47
8.04 Amount and Payment of Withdrawals.............................. 48
8.05 Loans to Participants.......................................... 48
8.06 Debiting of Investment Funds................................... 50
ARTICLE IX RETIREMENT, DISABILITY AND DEATH BENEFITS................ 51
9.01 Retirement Benefits............................................ 51
9.02 Disability Benefits............................................ 51
9.03 Death Benefits................................................. 51
ARTICLE X TERMINATION BENEFITS AND VESTING REQUIREMENTS............ 52
10.01 Benefits Payable Upon Termination of Employment................ 52
10.02 Vesting Requirements........................................... 52
10.03 Effect of Termination of Employment; Period of Severance and
Reemployment................................................... 53
10.04 Forfeiture of Non-Vested Accounts.............................. 53
10.05 Disposition of Forfeitures..................................... 54
ARTICLE XI DISTRIBUTION OF BENEFITS................................. 55
11.01 Form of Benefits for Retirement and Other Termination.......... 55
11.02 Timing of Distributions........................................ 55
11.03 Rights, Options and Restrictions on Stock...................... 56
11.04 Special Distribution and Payment Requirements.................. 58
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ARTICLE XII COMMITTEE................................................ 60
12.01 Appointment of Committee....................................... 60
12.02 Manner of Action............................................... 60
12.03 Chairman, Secretary and Employment of Specialists.............. 60
12.04 Subcommittees.................................................. 60
12.05 Other Agents................................................... 60
12.06 Records........................................................ 61
12.07 Powers and Duties.............................................. 61
12.08 Interested Members............................................. 62
12.09 Indemnification................................................ 62
12.10 Conclusiveness of Action....................................... 62
12.11 Payment of Expenses............................................ 62
12.12 Claims Procedure............................................... 63
ARTICLE XIII AMENDMENT TO THE PLAN.................................... 65
13.01 Right to Amend................................................. 65
ARTICLE XIV TERMINATION OF THE PLAN.................................. 66
14.01 Right to Terminate............................................. 66
14.02 Corporate Reorganization....................................... 66
14.03 Plan Merger and Consolidation.................................. 66
ARTICLE XV TRUST AND THE TRUSTEE.................................... 67
15.01 Board to Select Trustee........................................ 67
ARTICLE XVI ADOPTION BY AFFILIATE.................................... 68
16.01 Affiliate Participation........................................ 68
16.02 Action Binding on Participating Affiliates..................... 68
16.03 Termination of Participation of Affiliate...................... 68
ARTICLE XVII TOP-HEAVY PROVISIONS..................................... 70
17.01 Definitions.................................................... 70
17.02 Determination of Top Heavy Status - Single Plan................ 72
17.03 Determination of Top Heavy Status - Multiple Plans............. 72
17.04 Effect of Top Heavy Status..................................... 73
ARTICLE XVIII MISCELLANEOUS............................................ 76
18.01 Voluntary Plan................................................. 76
18.02 Nonalienation of Benefits...................................... 76
18.03 Inability to Receive Benefits.................................. 76
18.04 Lost Participants.............................................. 77
18.05 Limitation of Rights........................................... 77
18.06 Absence of Guaranty............................................ 77
18.07 Invalid Provisions............................................. 77
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18.08 One Plan....................................................... 77
18.09 Governing Law.................................................. 78
ARTICLE XIX DIRECT ROLLOVERS......................................... 79
19.01 Direct Rollovers............................................... 79
19.02 Definitions.................................................... 79
ARTICLE XX EXECUTION................................................ 81
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INTRODUCTION
FHP International Corporation ("FHP") previously established the FHP
International Corporation Employee Stock Ownership Plan ("FHP Plan") for the
benefit of certain employees of FHP and certain of its Subsidiaries which
adopted the FHP Plan. Two of these subsidiaries were Talbert Medical Management
Corporation and Talbert Health Care Services Corporation (collectively and
together with Talbert Medical Management Holdings Corporation referred to herein
as "Talbert"). Effective on February 14, 1997, the FHP controlled group was
acquired by PacifiCare Health Systems, Inc. ("PacifiCare") and sponsorship of
the FHP Plan was assumed by PacifiCare in connection with that transaction.
Effective on or about April __, 1997, Talbert became a separate publicly traded
corporation. Talbert established this Plan for the benefit of certain of its
employees and the employees of corporations which are part of he same
"affiliated service group" (within the meaning of Code Section 414(m)) as
Talbert. Pursuant to the Employee Benefits and Compensation Allocation
Agreement between FHP and Talbert dated February 14, 1997, the assets and
liabilities of the FHP Plan attributable to employees of Talbert and various
affiliated entities were transferred to this Plan. This Plan shall be known as
the "Talbert Medical Management Holdings Corporation Employee Stock Ownership
Plan."
The Plan as amended and restated is intended to qualify under Code Section
401(a). It consists of four separate, but complimentary, parts which are
designed to satisfy the specific rules applicable to each part. The first part
is an employee stock ownership plan intended to qualify under Code Section
4975(e)(7), the second part is a cash or deferred arrangement intended to
qualify under Code Section 401(k), the third part is a profit sharing plan, and
the fourth part is a stock bonus feature which is separate from the part of the
Plan intended to qualify as an employee stock ownership plan.
The purpose of this Plan is to enable participating employees to share in the
growth and prosperity of the Company by providing them with a common stock
ownership interest in the Company, as well as to enable employees to accumulate
capital for retirement through a convenient method of regular savings in a
tax-efficient manner.
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ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan with their first letters
capitalized, they have the meaning specified below. Additional words and phrases
used in the Plan are not defined in this Article I, but, for convenience, are
defined as they are introduced in the text. Unless the context indicates
otherwise, the masculine pronoun refers to a man or a woman. Words in the
singular include the plural, and vice versa, unless the context indicates
otherwise.
1.01 ACCOUNTS
"Accounts" means a Participant's Employer Contribution Account, Pretax
Deferral Account, Profit Sharing Contribution Account, Employer Stock
Bonus Account, Matching Contribution Account, TakeCare Account, and
Rollover Account. These Accounts are described in Section 4.01 of the
Plan.
1.02 AFFILIATE
"Affiliate" means the Company and each other entity which is controlled by
or under common control with the Company or is a member of the same
affiliated service group, within the meaning of Code Sections 414 and
1563. Any other organization which is permitted to treat Stock as
"employer securities" under Code Section 409(1) is also an Affiliate if it
adopts the Plan pursuant to Article XVI of the Plan.
1.03 BENEFICIARY
"Beneficiary" means the person or persons (who may be named contingently
or successively) designated by a Participant to receive his Accounts in
the event of his death. Each Participant may designate a Beneficiary on a
form prescribed by the Committee. The designation will be effective when
filed with the Committee, and will revoke all prior designations by the
same Participant. A married Participant who designates a Beneficiary
other than his spouse must obtain and submit to the Committee the spouse's
written, notarized consent to the designation of each such Beneficiary on
a form that discloses to the spouse the potential effect of such consent
the designation will not be valid until the Committee receives such
notarized consent. If no Beneficiary is designated at the time of the
Participant's death, or if no person so designated survives the
Participant, the Beneficiary will be the Participant's spouse, or if the
deceased Participant has no surviving spouse, his estate.
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1.04 BOARD
"Board" means the board of directors of Talbert Medical Management
Holdings Corporation.
1.05 CODE
"Code" means the Internal Revenue Code of 1986 as it currently exists and
includes any subsequent amendments.
1.06 COMMITTEE
"Committee" means the Committee described in Article XII.
1.07 COMPANY
"Company" means Talbert Medical Management Holdings Corporation.
1.08 COMPENSATION
"Compensation" means the total salary and wages paid for a Plan Year or
other specified period to a Participant by the Employer for services
rendered. It includes salary, wages, commission, tips, bonuses and
overtime compensation reportable on federal form W-2 or its equivalent and
amounts of salary reduction elected by the Participant in connection with
pretax deferrals under the Talbert Medical Management Holdings Corporation
Employee Stock Ownership Plan and/or a benefit plan sponsored by an
Affiliate and qualified under Code Section 125. It excludes (1) any
amount (other than the pretax deferrals described above) contributed by
the Employer to any pension plan or plan of deferred compensation, (2) any
amount, regardless if it is or becomes reportable on federal form W-2,
which is (i) paid by the Employer (other than the salary reduction
described above) for other fringe benefits, such as health and welfare,
hospitalization, group life insurance benefits, stock options or
perquisites, or (ii) paid by the Employer in lieu of the benefits
described in (i) above, such as a cash out of credits generated under a
plan qualified under Code Section 125, (3) any reimbursement for expenses
or allowances, including automobile allowances and moving allowances and
(4) any amount realized when a stock option is exercised at a price below
fair market value on the date of the exercise.
A Participant's annual Compensation in excess of $150,000 is disregarded
for all purposes under the Plan. Such dollar limit will be adjusted
pursuant to Code Section 401(a)(17).
Compensation will be recognized as of an employee's effective date of
participation pursuant to Section 2.01 and 2.02. Compensation for any
Plan Year shall be determined by counting
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Compensation for the payroll periods ending with or within such Plan Year.
1.09 DISTRIBUTION DATE
"Distribution Date" means the date as of which the vested portion of a
Participant's Accounts is distributed, as described in Section 9.01 (in
the case of Normal Retirement Age), Section 9.02 (in the case of Permanent
and Total Disability), Section 9.03 (in the case of death) and Section
10.01 (in the case of any other termination of employment).
1.10 EFFECTIVE DATE
"Effective Date" means the original effective date of the Plan, which is
________ __, 1997.
1.11 ELIGIBLE EMPLOYEE
"Eligible Employee" means any person who is employed by an Employer
provided he is not one of the following:
(a) a per diem, on-call, or temporary employee, or
(b) an employee whose terms of employment are covered by a collective
bargaining agreement between the Employer and employee
representatives where there is evidence retirement benefits were the
subject of good faith bargaining unless the bargaining agreement
expressly provides for participation in the Plan.
1.12 EMPLOYER
"Employer" means the Company and any Affiliate which adopts the Plan in
accordance with Article XVI.
1.13 EMPLOYER CONTRIBUTION
"Employer Contribution" means contributions to the Plan made by an
Employer pursuant to Sections 3.03, 3.04, 3.10 and 3.11. It includes the
Employer Matching Contribution described in Section 3.03, the Employer
ESOP Contribution described in Section 3.04, the Employer Stock Bonus
Contribution described in Section 3.10 and the Employer Profit Sharing
Contribution described in Section 3.11.
1.14 ERISA
"ERISA" means the Employee Retirement Income Security Act of 1974, as it
currently exists and includes any subsequent amendments.
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1.15 ESOP FUND
"ESOP Fund" means the portion of the Trust Fund consisting of assets
allocated to all Participants' ESOP Accounts, unallocated assets
representing contributions under Section 3.03 and unallocated assets
representing the proceeds of any Exempt Loan (the ESOP Suspense Subfund).
1.16 ESOP SUSPENSE SUBFUND
"ESOP Suspense Subfund" means the portion of the Trust Fund consisting of
unallocated assets representing the proceeds of any Exempt Loan. The ESOP
Suspense Subfund is part of the ESOP Fund.
1.17 EXEMPT LOAN
"Exempt Loan" means any loan (or other extension of credit) to the Plan or
Trust not prohibited by Code Section 4975(c). It includes a loan which
meets the requirements of Code Section 4975(d)(3) and related regulations
and the proceeds of which are used to finance the acquisition of stock
and/or refinance an Exempt Loan.
1.18 FINANCED SHARES
"Financed Shares" means shares of Stock acquired under the Plan with the
proceeds of an Exempt Loan.
1.19 HIGHLY COMPENSATED EMPLOYEE
"Highly Compensated Employee" means an individual described in Code
Section 414(q).
1.20 HOUR OF SERVICE
"Hour of Service" means:
(a) Each hour for which a person is directly or indirectly paid by, or
entitled to payment from an Affiliate for the performance of duties.
These hours are credited to the person in the computation period in
which the duties are performed.
(b) Each hour for which a person is directly or indirectly paid by, or
entitled to payment from an Affiliate on account of a period of time
during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including disability), layoff, jury duty,
military duty or leave of absence. However, a person is not
entitled to credit for such hours if payment is made or due under a
plan maintained solely for
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the purpose of complying with applicable worker's compensation,
unemployment compensation or disability insurance laws, or if such
payment solely reimburses a person for his medical or medically
related expenses. No more than 501 hours are credited for any
single continuous period of time during which no duties are
performed.
In the case of a payment which is made or due on account of a period
during which a person performs no duties, and which results in
crediting of hours under this subsection (b), or in the case of an
award or agreement for back pay, to the extent that such award or
agreement is made with respect to a period described in this
subsection (b), the number of hours and the computation period in
which they are to be credited is determined according to Section
2530.200(b)-2(b) and (c) of Title 29 of the Code of Federal
Regulations.
(c) Each hour for which a person is entitled to back pay, regardless of
mitigation of damages, which has been either awarded or agreed to by
an Affiliate. These hours are credited to the person in the
computation period to which the award, agreement or payment
pertains. However, a person will not be credited with hours under
this subsection (c) if he received credit for the same hours under
subsections (a) or (b).
(d) Notwithstanding the above, an exempt employee will be credited with
90 Hours of Service for each bi-weekly pay period (or 95 Hours of
Service in the case of a semi-monthly pay period) during which he
would receive credit for at least one Hour of Service under
subsections (a) through (c) above. For purposes of this subsection
an exempt employee is defined under the Fair Labor Standards Act.
1.21 INACTIVE PARTICIPANT
"Inactive Participant" means a person who was a Participant but who is
transferred to and is in a position of employment in which he is no longer
an Eligible Employee.
1.22 INVESTMENT FUND
"Investment Fund" means the funds in which a Participant may invest his
Pretax Deferral, TakeCare, Profit Sharing Contribution and Rollover
Accounts according to Section 7.01.
1.23 LIMITATION YEAR
"Limitation Year" shall mean the twelve month period beginning on January
1 and ending on December 31; provided, however,
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that the initial Limitation Year shall be from _________ __, 1997 through
December 31, 1997.
1.24 NON-HIGHLY COMPENSATED EMPLOYEE
"Non-Highly Compensated Employee" means a person employed by an Affiliate
who is not a Highly Compensation Employee.
1.25 NORMAL RETIREMENT AGE
"Normal Retirement Age" means a Participant's 65th birthday.
1.26 PARTICIPANT
"Participant" means any Eligible Employee who is a Participant as provided
in Article II. Where appropriate to the context, it also includes an
Inactive Participant.
1.27 PERIOD OF SEVERANCE
"Period of Severance" means, for any person, an interruption in his
Service under the Plan. A Period of Severance begins on the date the
person no longer is credited with Service under the Plan and ends on the
date the person returns to active employment with an Affiliate. A person
whose employment with all Affiliates is terminated, or deemed terminated,
for any reason will incur:
(a) a one year Period of Severance if he fails to return to active
employment as an employee and render one or more Hours of Service
before the first annual anniversary of the date of such termination.
(b) a five year Period of Severance if he fails to return to active
employment as an employee and render one or more Hours of Service
before the fifth annual anniversary of the date of such termination.
For purposes of this Section, a person who is absent from employment for
maternity or paternity reasons will not be treated as having incurred a
one year Period of Severance until the second anniversary of such absence,
or a five year Period of Severance until the sixth anniversary of such
absence, or such earlier time permitted under applicable regulations.
Absence for maternity or paternity reasons means a person is absent
because:
(1) the person is pregnant,
(2) the person gave birth to a child;
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(3) an adopted child is placed with the person, or
(4) the person is caring for his natural or adopted child
immediately after the child is born or placed with the person.
The provisions of this paragraph will not apply unless the person provides
information to the Committee, within the time limits established by the
Committee, sufficient to establish that the absence is for maternity or
paternity reasons and the duration of the absence.
1.28 PERMANENT AND TOTAL DISABILITY
"Permanent and Total Disability" means a physical or mental condition
which renders a person unable to engage in any substantial gainful
activity for an Affiliate by reason of any medically determinable physical
or mental impairment which can bc expected to result in death or to be of
long-continued or indefinite duration. The Committee will determine,
based on whatever competent medical evidence it requires, whether a person
is Permanently and Totally Disabled.
1.29 PLAN
"Plan" means the Talbert Medical Management Holdings Corporation Employee
Stock Ownership Plan as described in this document and includes any
subsequent amendments.
1.30 PLAN YEAR
"Plan Year" means the twelve month period beginning January 1 and ending
the following December 31; provided, however, that the initial Plan Year
shall be a short Plan Year commencing on _______ __, 1997 and ending on
December 31, 1997.
1.31 PRETAX DEFERRALS
"Pretax Deferrals" means contributions to the Plan made by the Employer at
the election of a Participant in amounts equal to reductions in the
Participant's Compensation under Section 3.01.
1.32 PROFIT SHARING CONTRIBUTIONS
"Profit Sharing Contributions" means contributions to the Plan made by an
Employer pursuant to Section 3.11.
1.33 ROLLOVER CONTRIBUTIONS
"Rollover Contributions" means contributions to the Plan made by an
Eligible Employee pursuant to Section 3.06.
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1.34 SERVICE
"Service" means, with respect to any person, his period or periods of
employment with all Affiliates which are counted as Service according to
the following rules.
(a) Each person is credited with Service under the Plan for the period
or periods during which the person maintains an employment
relationship with any Affiliate. A person's employment relationship
is deemed to commence on the date the person first renders one Hour
of Service, and is deemed to continue during the following periods:
(i) Periods of leave of absence with or without pay granted to the
person by an Affiliate in a like and nondiscriminatory manner
for any purpose including, but not limited to, sickness,
accident or military leave. The person is not considered to
have terminated employment during such leave of absence
unless he fails to return to the employ of an Affiliate at or
prior to the expiration date of the leave. If he fails to so
return, he is deemed to have terminated as of the date the
leave began but he is given credit for Service through the
earlier of the first anniversary of the date his leave of
absence began or the date his employment terminates.
(ii) In case of a person who terminates employment and who is later
reemployed by an Affiliate before he incurs a one year Period
of Severance, the period between his date of termination and
date of reemployment.
(b) Except as provided in Subsection (c) all periods of a person's
Service, whether or not consecutive, are aggregated. Service is
measured in elapsed years and fractions of years whereby each twelve
complete calendar months constitutes one year, each complete
calendar month constitutes one-twelfth of a year and partial
calendar months which when aggregated equal thirty days constitute
one-twelfth of a year.
(c) In the case of a person who terminates employment before he becomes
a Participant and who is not reemployed before the date he incurs
the greater of:
(i) a five year Period of Severance, or
(ii) a Period of Severance greater than his service before the date
he terminated employment,
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his service before he terminated employment will be disregarded.
(d) Notwithstanding anything in this Plan to the contrary, Service that
was credited to a Participant under the terms of the FHP
International Corporation Employee Stock Ownership Plan shall be
counted as Service for all purposes under this Plan.
1.35 STOCK
"Stock" means the shares of stock issued by Talbert Medical Management
Holdings Corporation, which are readily tradable on an established
securities market. At the Company's discretion, stock may also include
other types of stock which qualify as "employer securities" under Code
Section 409(l).
1.36 TRUST FUND
"Trust Fund" means the Stock and other assets of the Plan held by the
Trustee and subject to the trust agreement described in Article XV. Trust
Fund includes, but is not limited to, the Investment Funds, the ESOP Fund,
and the ESOP Suspense Subfund.
1.37 TRUSTEE
"Trustee" means the person, persons, bank and/or other entity selected by
the Board to hold the Trust Fund according to Article XV.
1.38 VALUATION DATE
"Valuation Date" means March 31, June 30, September 30, and December 31,
of each Plan Year. Notwithstanding the preceding sentence, upon a
determination by the Committee, in its sole discretion, that more frequent
Valuation Dates are administratively feasible, Valuation Date also means
the last day of any other months selected by the Committee. Valuation
Date may also mean any date selected by the Committee in the event the
Committee, in its sole discretion, determines that events affecting the
market value of the Trust Fund require an interim Valuation Date.
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ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.01 PARTICIPATION IN THE PLAN
(a) Each Eligible Employee will become a Participant on the first day of
the month coinciding with or immediately following the later of (i)
the date he attains age 21; (ii) the date he completes 12 months of
Service; or (iii) the date he becomes an Eligible Employee.
(b) Notwithstanding the foregoing, each Eligible Employee who was a
Participant in the FHP International Corporation Employee Stock
Ownership Plan as of _________, 1997 and whose Accounts were
transferred to this Plan pursuant to the Employee Benefits and
Compensation Allocation Agreement between the Company and FHP
International Corporation shall be immediately eligible to
participate in this Plan.
2.02 ENROLLMENT IN THE PLAN
If a Participant wishes to make Pretax Deferrals or a Rollover
Contribution, he must complete and file a form on which he designates a
Beneficiary. In addition, he must authorize his Employer to reduce his
Compensation by the amount of the deferrals pursuant to Section 3.01, if
applicable, and he must designate the allocation of his Pretax Deferrals
and/or his Rollover Contributions among the Investment Funds. The form
must be delivered to the Committee no less than 15 days before
participation is to begin. If a Participant declines to make Pretax
Deferrals when first eligible, he may elect to make such deferrals
beginning as of the first day of the first payroll period of any month
thereafter, provided he delivers a completed election form to the
Committee no less than 15 days before such payroll period.
2.03 REEMPLOYMENT
A Participant whose employment with all Affiliates terminated and who is
subsequently reemployed and becomes an Eligible Employee again, becomes a
Participant on the date he becomes an Eligible Employee again. He may not
begin Pretax Deferrals until the first day of the first payroll period of
any month that coincides with or next follows the date he again becomes an
Eligible Employee.
An employee who was not a Participant when his employment with all
Affiliates terminated and who is later reemployed by an Affiliate becomes
a Participant in the Plan pursuant to the provisions of Section 2.01.
Hours of Service before he
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terminated employment will be considered in determining his eligibility to
become a Participant.
2.04 EMPLOYMENT AFTER NORMAL RETIREMENT AGE
A Participant who continues employment as an Eligible Employee after his
Normal Retirement Age continues to be a Participant for all purposes of
the Plan.
2.05 TERMINATION OF PARTICIPATION
A Participant will cease to be a Participant on the date on which he or
his Beneficiary receives distribution of the entire vested portion of his
Accounts under the Plan due to his termination of employment, retirement,
death or Permanent and Total Disability.
2.06 INACTIVE PARTICIPATION AND TRANSFERS
A Participant who transfers to an employment status with an Affiliate in
which he is no longer an Eligible Employee becomes an Inactive
Participant. An Inactive Participant is not eligible to make Pretax
Deferrals from his Compensation earned after the date of his transfer.
Employer Contributions will not be allocated to his Accounts after the
date of his transfer.
If a Participant becomes an Inactive Participant, his Accounts will
continue to be held under the Plan until he becomes entitled to a
distribution under the provisions of Articles IX and X. An Inactive
Participant will continue to have the right to direct the investment of
his Accounts under the provisions of Article VII and to make withdrawals
under the provisions of Article VIII.
An employee who transfers to an employment status with an Affiliate in
which he is an Eligible Employee may become a Participant pursuant to
Section 2.01. He will not be eligible to make Pretax Deferrals from his
Compensation earned while he was not a Participant. Employer
Contributions to his Accounts will not be based on his Compensation earned
before the date he transferred and became a Participant.
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ARTICLE III
CONTRIBUTIONS
3.01 CONTRIBUTION OF PARTICIPANT DEFERRALS
(a) PRETAX DEFERRALS.
Upon enrollment or reenrollment in the Plan, each Participant may
elect to make Pretax Deferrals from 1% to 10% in a fixed whole
percentage, from his Compensation. The Committee may modify the
above limit, or set initial or interim limits for Pretax Deferrals
for any Participant who is a Highly Compensated Employee, or any
class of Participants who are Highly Compensated Employees. Such
limits may include the suspension or reduction of Pretax Deferrals
above a specified dollar amount or percentage of Compensation. The
amount of Compensation otherwise payable to the Participant for each
payroll period while an election under this Section 3.01 is in
effect will be reduced by the amount of the Participant's Pretax
Deferrals. The Employer will make contributions to the Plan equal
to the amount deferred. Such contributions will be allocated to the
Participant's Pretax Deferral Account as of the last day of the
payroll period in which such amounts are deferred.
(b) CHANGE IN PERCENTAGE OR SUSPENSION OF DEFERRALS.
A Participant's Pretax Deferral percentage rate will remain in
effect, notwithstanding any change in his Compensation, until he
terminates employment or elects to change the percentage. A
Participant may elect to change his deferral percentage as of the
first day of any month provided the election is delivered to the
Committee on or before the last day of the month prior to the
effective date of the change.
A Participant may suspend his Pretax Deferrals at any time. The
suspension will be effective as soon as administratively possible
following receipt of an election form from the Participant. A
Participant may resume making Pretax Deferrals on the first day of
any month after the effective date of his election to suspend Pretax
Deferrals. To resume Pretax Deferrals the Participant must file an
new election form with the Committee on or before the last day of
the month prior to the effective date of the change.
(c) CALENDAR YEAR LIMITATION
Notwithstanding the provisions of subsections (a) and (b) above, if
a Participant's Pretax Deferral election in
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effect during any calendar year would cause his Pretax Deferrals for
such year to exceed $7,000, his Pretax Deferrals will automatically
be suspended once they reach $7,000. The preceding $7,000 limit
will be adjusted each calendar year as permitted under Code Section
402(g)(5).
The Participant's Pretax Deferrals will automatically resume on the
following January 1. Unless the Participant elects to change his
Pretax Deferral percentage according to subsection (b) above, his
Pretax Deferrals will resume at the percentage rate in effect on the
date of the suspension.
If, for any reason, a Participant's total elective deferrals (within
the meaning of Code Section 402(g)(3)) to all his employers' plans
for any calendar year exceeds the applicable dollar limitation under
this subsection (c) for the calendar year, the Participant may elect
distribution of the excess. Such distribution will be made no later
than April 15 of the following calendar year, in an amount equal to
the portion of such excess which was contributed to this Plan.
(d) STATUS OF DEFERRAL CONTRIBUTIONS
Pretax Deferrals constitute Employer contributions under the Plan
and are intended to qualify as elective contributions under Code
Section 401(k).
3.02 LIMITATION ON PARTICIPANT'S PRETAX DEFERRALS
(a) Notwithstanding Section 3.01, the Pretax Deferral percentage rate
elected by one or more Participants under Section 3.01 will be
modified as provided in Subsection (c) of this Section 3.02 if the
requirements of Subsection (b) of this Section 3.02 are not
satisfied.
(b) For each Plan Year an "Actual Deferral Percentage" will be
determined for each Participant. Such percentage will be determined
by dividing the Participant's Pretax Deferrals allocated to his
Pretax Deferral Account during the Plan Year, if any, by his
Earnings as defined in Section 6.01(c), including salary reductions,
if any, elected by the Participant for the Plan Year under this Plan
and salary reductions, if any, elected under a Plan sponsored by the
Employer and qualified under Code Section 125. Notwithstanding the
preceding sentence, at the Committee's election Earnings may be
determined under an alterative definition as permitted in Treasury
Regulation Section 1.414(s)-1 and any subsequent rulings affecting
such regulation Section.
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The average of the Actual Deferral Percentages for all Participants
who are Highly Compensated Employees for the Plan Year (the "High
Average"), when compared to the average of the Actual Deferral
Percentages for all Participants who are Non-Highly Compensated
Employees for the Plan Year (the "Low Average"), must meet one of
the following requirements:
(i) The High Average must be no greater than the Low Average times
one and twenty-five hundredths; or
(ii) The excess of the High Average over the Low Average must not
be greater than two percentage points and the High Average
must be no greater than the Low Average times two.
(c) If the Committee determines, in its discretion, that Participants'
Pretax Deferrals for a Plan Year will not meet one of the
requirements of Subsection (b), the Committee, in its discretion,
may suspend or reduce future Pretax Deferrals of certain
Participants who are Highly Compensated Employees to the extent
necessary to meet the requirements. The suspension or reduction of
Participants' future Pretax Deferrals will be accomplished by
reducing the Pretax Deferral percentage rate of Participants who are
Highly Compensated Employees in order of their Actual Deferral
Percentage Rates, beginning with the Participant with the highest
percentage rate and decreasing in descending order until one of the
requirements of Subsection (b) is met.
If Participants' Pretax Deferrals actually made for a Plan Year do
not meet one of the requirements of Subsection (b), the Committee
will determine, in its discretion, the amount of Pretax Deferrals of
certain Participants who are Highly Compensated Employees which must
be reduced in order to meet one of the requirements of Subsection
(b). The reduction in Participants' Pretax Deferrals will be
accomplished by reducing the Pretax Deferrals of the Highly
Compensated Employees with the highest actual Pretax Deferrals to
the extent required to enable the Plan to meet the limits in (b)
above or to cause the amount of such deferrals to equal the Pretax
Deferrals of the Highly Compensated Employee(s) with the next
highest actual Pretax Deferrals. The earnings attributable to
excess Pretax Deferrals will be determined in accordance with
Treasury Regulations.
The amount of the reduction attributable to each Participant (and
any income allocated to such reduction) will be distributed to the
Participant on or before the last day of the immediately following
Plan Year.
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(d) The Committee's determination under Subsection (c) will be made in a
reasonable, consistent, and nondiscriminatory manner. The Committee
will not be liable to any Participant (or his Beneficiary, if
applicable) for any losses caused by inaccurately estimating the
amount of any Participant's Pretax Deferrals or the earnings
attributable to such Pretax Deferrals.
(e) This Section 3.02 will be applied after taking into account any
reductions in, or repayments of, Pretax Deferrals required by
Sections 3.01, 5.01, and 17.05.
3.03 EMPLOYER MATCHING CONTRIBUTIONS
The amount of Employer Matching Contributions, if any, for each Plan Year
will be determined by the Board in its sole discretion. The Employer
Matching Contributions may be made in cash and/or shares, as determined by
the Board in its sole discretion.
3.04 EMPLOYER ESOP CONTRIBUTIONS
The amount of Employer ESOP Contributions, if any, for each Plan Year will
be determined by the Board in its sole discretion. The Employer ESOP
Contributions may be made in cash and/or shares, as determined by the
Board in its sole discretion.
3.05 PARTICIPANT CONTRIBUTIONS
No Participant is required or permitted to make contributions other than
Pretax Deferrals or Rollover Contributions.
3.06 ROLLOVER CONTRIBUTIONS
Subject to the Committee's approval, an Eligible Employee may make a
Rollover Contribution to the Plan which does not exceed the maximum amount
of rollover contribution he is then permitted under Code Section
402(c)(2). The contribution must be in cash and must meet all the
applicable rollover requirements under Code Section 402(c). The Committee
will establish uniform and nondiscriminatory procedures for the treatment
of Rollover Contributions.
An Eligible Employee's Rollover Contribution is credited to his Rollover
Account. He is at all times one hundred percent vested in the value of
his Rollover Account. He may direct the investment of his Rollover
Contribution, and redirect the investment of his Rollover Account
according to Article VII. If an Eligible Employee is not a Participant
according to Section 2.01, his Rollover Account is his sole interest in
the
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Plan. Rollover Contributions must satisfy all applicable rollover
requirements of Code Section 402(c)(4).
3.07 LIMITATION ON REVERSION OF CONTRIBUTIONS
Except as provided in subsections (a), (b) and (c) below, contributions
made under the Plan are held for the exclusive benefit of Participants and
their Beneficiaries and may not revert to the Employer.
(a) A contribution which is made by a mistake of fact, may be returned
to the Employer within one year after it is contributed to the Plan.
(b) All employer contributions to the Plan are conditioned on their
deductibility under Code Section 404. To the extent the deduction
is disallowed, the amount disallowed may be returned to the Employer
within one year after the disallowance.
(c) All contributions to the Plan are conditioned on the Plan's
qualification under Code Sections 401(a), 409 and 4975(e)(7). If
the Plan does not so qualify, any contributions may be returned to
the Employer within one year after the qualification is denied.
3.08 LIMITATION OF LIABILITY
Each payment to the Trust Fund pursuant to Section 3.01(a) equal to the
amount of a Participant's Pretax Deferral is in complete discharge of the
financial obligations of the Employer under the Plan with respect to the
Participant's corresponding reduction in Compensation.
3.09 MAKE-UP CONTRIBUTIONS
In addition to other Employer Contributions described in Section 3.03,
3.04, 3.10 and 3.11 an Employer may make special make-up contributions to
the Plan, if necessary. A make-up contribution will be necessary if there
are insufficient forfeitures under the Plan to restore a Participant's
Employer Contribution Account, Employer Stock Bonus Account, or Profit
Sharing Contribution Account pursuant to Section 10.04, if a Participant
or Beneficiary's Accounts must be reinstated pursuant to Section 18.04, or
if a mistake or omission in the allocation of contributions is discovered
and cannot be corrected by revising prior allocations.
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3.10 EMPLOYER STOCK BONUS CONTRIBUTIONS
The amount of Employer Stock Bonus Contributions, if any, for each Plan
Year will be determined by the Board in its sole discretion. The Employer
Stock Bonus Contributions may be made in cash and/or shares of Stock, as
determined by the Board in its sole discretion.
3.11 EMPLOYER PROFIT SHARING CONTRIBUTIONS
The amount of Employer Profit Sharing Contributions, if any, for each Plan
Year will be determined by the Board in its sole discretion. The Profit
Sharing Contributions may be made in cash and/or shares of Stock, as
determined by the Board in its sole discretion.
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ARTICLE IV
PARTICIPANT'S ACCOUNT: ALLOCATIONS
4.01 PARTICIPANT ACCOUNTS
The Committee will maintain the following Accounts for each Participant:
(a) An EMPLOYER CONTRIBUTION ACCOUNT which is:
(i) credited with the Participant's share of Employer ESOP
Contributions made under this Plan;
(ii) credited with the Participant's Employer Contribution Account
transferred to this Plan from the FHP International
Corporation Employee Stock Ownership Plan;
(iii) adjusted for investment results and expenses; and
(iv) charged with distributions.
(b) A PRETAX DEFERRAL ACCOUNT which is:
(i) credited with the Participant's Pretax Deferrals made under
this Plan;
(ii) credited with the Participant's Pretax Deferral Account
transferred to this Plan from the FHP International
Corporation Employee Stock Ownership Plan;
(iii) adjusted for investment results and expenses; and
(iv) charged with withdrawals and distributions.
(c) An EMPLOYER STOCK BONUS ACCOUNT which is:
(i) credited with the Participant's share of Employer Stock Bonus
Contributions;
(ii) credited with the Participant's Employer Stock Bonus Account
transferred to this Plan from the FHP International
Corporation Employee Stock Ownership Plan;
(iii) adjusted for investment results and expenses; and
(iv) charged with distributions.
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(d) A MATCHING CONTRIBUTION ACCOUNT which is:
(i) credited with the Participant's share of Employer Matching
Contributions made under this Plan;
(ii) credited with the Participant's New Matching Contribution
Account transferred to this Plan from the FHP International
Corporation Employee Stock Ownership Plan;
(iii) adjusted for investment results and expenses; and
(iv) charged with distributions.
(e) A PROFIT SHARING CONTRIBUTION ACCOUNT which is:
(i) credited with the Participant's share of Profit Sharing
Contributions made under this Plan;
(ii) credited with the Participant's Profit Sharing Account
transferred to this Plan from the FHP International
Corporation Employee Stock Ownership Plan;
(iii) adjusted for investment results and expenses; and
(iv) charged with withdrawals and distributions.
(f) A TAKECARE ACCOUNT which is:
(i) credited with the Participant's TakeCare Account transferred
to this Plan from the FHP International Corporation Employee
Stock Ownership Plan;
(ii) adjusted for investment results and expenses; and
(iii) charged with distributions.
(g) A ROLLOVER ACCOUNT which is:
(i) credited with the Participant's Rollover Contributions made to
this Plan;
(ii) credited with the Participant's Rollover Account transferred
to this Plan from the FHP International Corporation Employee
Stock Ownership Plan;
(iii) adjusted for investment results and expenses; and
(iv) charged with withdrawals and distributions.
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4.02 ALLOCATION OF PRETAX DEFERRALS
Employer contributions which result from a Participant's Pretax Deferrals
pursuant to Section 3.01 will be allocated to the Participant's Pretax
Deferral Account. An allocation will occur as of the last day of each
payroll period during which the Participant has Pretax Deferrals withheld
from his Compensation. The amount of the allocation will equal the amount
of the Participant's Pretax Deferrals withheld during such payroll period.
4.03 ALLOCATION OF EMPLOYER MATCHING CONTRIBUTIONS
(a) Employer Matching Contributions are allocated as of the last day of
the Plan Year to the Matching Contribution Account of each person
who was a Participant during the Plan Year, provided the
Participant:
(i) is employed as an Eligible Employee on the last day of the
Plan Year; or
(ii) terminated employment during the Plan Year on or after
attaining Normal Retirement Age; or
(iii) died during the Plan Year; or
(iv) became Permanently and Totally Disabled during the Plan Year.
(b) Each Participant who meets the requirements of Subsection (a) above
is allocated a portion of the Employer Matching Contributions for a
Plan Year as follows:
(i) if the Participant has completed less than five years of
Service as of the last day of such Plan Year, the
Participant's portion of the Employer Matching Contributions
for such Plan Year shall equal 50% of the amount of his Pretax
Deferrals for the Plan Year which do not exceed six percent of
his Compensation for the Plan Year; or
(ii) if the Participant has completed at least five Years of
Service as of the last day of such Plan Year, the
Participant's portion of the Employer Matching Contributions
for such Plan Year shall equal 100% of the amount of his
Pretax Deferrals for the Plan Year which do not exceed six
percent of his Compensation for the Plan Year.
(c) If the Employer Matching Contribution available for a Plan Year is
not sufficient to allocate the amounts described in Subsection (b),
each Participant will be allocated a pro rata share of the available
Employer
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Matching Contribution. The pro rata share will be determined by
multiplying his contribution determined under Subsection (b)
(without considering the limitation in Subsection (c)) by a fraction
where the numerator is the available Employer Matching Contribution
and the denominator is the Employer Matching Contribution necessary
in order to allocate all the amounts described in Subsection (b)
(without considering the limitation in Subsection (c)).
(d) If any portion of the Employer Matching Contribution is contributed
in shares, the allocation of such portion to Participants' Matching
Contribution Accounts will be made in shares and fractions of shares
to the nearest thousandth of a share.
4.04 LIMITATION ON ALLOCATION OF EMPLOYER MATCHING CONTRIBUTIONS
(a) Notwithstanding Section 3.03, the Employer Matching Contribution
allocated to one or more Participants under Section 4.03(b)(i) will
be modified as provided in Subsection (c) of this Section 4.04 if
the requirements of Subsection (b) of this Section 4.04 are not
satisfied.
(b) For each Plan Year an "Actual Contribution Percentage" will be
determined for each Participant. Such percentage will be determined
by dividing the Employer Matching Contributions allocated to the
Participant's Matching Contribution Account during the Plan Year, if
any, by his Earnings as defined in Section 6.01(c), including salary
reductions, if any, elected by the Participant for the Plan Year
under this Plan and salary reduction, if any, elected under a plan
sponsored by the Employer and qualified under Code Section 125.
The average of the Actual Contribution Percentages for all
Participants who are Highly Compensated Employees for the Plan Year
(the "High Average"), when compared to the average of the Actual
Contribution Percentages for all Participants who are Non-Highly
Compensated Employees for the Plan Year (the "Low Average"), must
meet one of the following requirements:
(i) The High Average must be no greater than the Low Average times
one and twenty-five hundredths; or
(ii) The excess of the High Average over the Low Average must not
bc greater than two percentage points and the High Average
must be no greater than the Low Average times two.
(c) If the Committee determines, in its discretion, that allocations of
Employer Matching Contributions to
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Participants' Matching Contribution Accounts for a Plan Year do not
meet one of the requirements of Subsection (b), the Committee will
determine, in its discretion, the amount of Employer Matching
Contributions of certain Participants who are Highly Compensated
Employees which must be reduced in order to meet one of the
requirements of Subsection (b). The reduction will be accomplished
by reducing the allocations to Participants who are Highly
Compensated Employees beginning with the Highly Compensation
Employee(s) with the highest amount of Employer Matching
Contributions to the extent required to enable the Plan to meet the
limits in (b) above or to cause the amount of such Matching
Contributions to equal the Matching Contributions of the Highly
Compensated Employee(s) with the next highest amount of Matching
Contributions. [The reduced amounts will be added to the Employer
Stock Bonus Contribution for the Plan Year and allocated among all
Participants as provided in Section 4.06.]
(d) The Committee's determination under Subsection (c) will be made in a
reasonable, consistent, and nondiscriminatory manner. The Committee
will not bc liable to any Participant (or his Beneficiary, if
applicable) for any losses caused by inaccurately estimating the
amount of any Employer Matching Contributions.
4.05 ALLOCATION OF EMPLOYER ESOP CONTRIBUTIONS
(a) The Employer ESOP Contributions for each Plan Year are allocated as
of the last day of the Plan Year to the Employer Contribution
Account of each Participant, provided the Participant is not a
physician-employee of the Employer and:
(i) is employed as an Eligible Employee by the Company or one of
its subsidiaries which is part of the same controlled group of
corporations (within the meaning of Code Section 414(b)) on
the last day of the Plan Year; or
(ii) terminated employment with the Company or one of its
subsidiaries which is part of the same controlled group of
corporations (within the meaning of Code Section 414(b))
during the Plan Year on or after attaining age 65 or by reason
of death; or
(iii) become Permanently and Totally Disabled during the Plan Year
while employed by the Company or one of its subsidiaries which
is part of the same controlled group of corporations (within
the
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meaning of Code Section 414(b)) on the last day of the Plan
Year.
(b) Each Participant who meets the requirements of Subsection (a) above
is allocated a portion of the Employer ESOP Contributions equal to
the total Employer ESOP Contributions for the Plan Year times the
ratio of his Compensation for the Plan Year to the total of all such
Participants' Compensation for the Plan Year.
(c) If any portion of the Employer ESOP Contribution is contributed in
shares, the allocation of such portion to Participants' Employer
Contribution Accounts will be made in shares and fractions of shares
to the nearest thousandth of a share.
4.06 ALLOCATION OF EMPLOYER STOCK BONUS CONTRIBUTIONS
(a) The Employer Stock Bonus Contributions for each Plan Year are
allocated as of the last day of the Plan Year to the Employer Stock
Bonus Account of each Participant, provided the Participant is not a
physician-employee of the Employer and:
(i) is employed as an Eligible Employee on the last day of the
Plan Year; or
(ii) terminated employment during the Plan Year on or after
attaining age 65; or
(iii) died while employed during the Plan Year; or
(iv) became Permanently and Totally Disabled during the Plan Year.
(b) Each Participant who meets the requirements of Subsection (a) above
is allocated a portion of the Employer Stock Bonus Contributions
equal to the total Employer Stock Bonus Contributions for the Plan
Year times the ratio of his Compensation for the Plan Year to the
total of all such Participants' Compensation for the Plan Year.
(c) If any portion of the Employer Stock Bonus Contributions is
contributed in shares, the allocation of such portion to
Participants' Employer Stock Bonus Accounts will be made in shares
and fractions of shares to the nearest thousandth of a share.
4.07 ALLOCATION OF EMPLOYER PROFIT SHARING CONTRIBUTIONS
(a) The Employer Profit Sharing Contributions for each Plan Year are
allocated as of the last day of the Plan Year to the Profit Sharing
Account of [each Participant,]
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provided the Participant [is not a physician-employee of the
Employer] and:
(i) is employed as an Eligible Employee on the last day of the
Plan Year; or
(ii) terminated employment during the Plan Year on or after
attaining age 65; or
(iii) died while employed during the Plan Year; or
(iv) became Permanently and Totally Disabled during the Plan Year.
(b) Each Participant who meets the requirements of Subsection (a) above
is allocated a portion of the Profit Sharing Contributions equal to
the total Profit Sharing Contributions for the Plan Year times the
ratio of his Compensation for the Plan Year to the total of all such
Participants' Compensation for the Plan Year.
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ARTICLE V
ESOP SUSPENSE SUBFUND
5.01 ESTABLISHMENT OF ESOP SUSPENSE SUBFUND
Financed Shares acquired by the ESOP Fund with the proceeds of an Exempt
Loan are held in an ESOP Suspense Subfund. Some or all of the Employer
ESOP Contributions may be applied to repay any outstanding Exempt Loan.
5.02 RELEASE OF SHARES IN ESOP SUSPENSE SUBFUND
Financed Shares are released from the ESOP Suspense Subfund periodically
as the Exempt Loan is repaid. The number of Financed Shares released is
determined as follows:
(a) GENERAL RULE - For each Plan Year until the Exempt Loan is repaid,
the number of Financed Shares released from the ESOP Suspense
Subfund equals the number of unreleased Financed Shares immediately
before the release for the current Plan Year multiplied by a
fraction. The numerator of the fraction is the amount of principal
and interest paid on the Exempt Loan for the Plan Year. The
denominator of the fraction is the sum of the numerator plus the
total payments of principal and interest on that Exempt Loan
projected to be paid for all future Plan Years during the duration
of the Exempt Loan. However, if the Exempt Loan is repaid with the
proceeds of a subsequent Exempt Loan (a "Substitute Loan"), the
repayment shall not release all the Financed Shares in the ESOP
Suspense Subfund. Instead, the Financed Shares will be released on
the basis of payments of principal and interest on the Substitute
Loan.
(b) SPECIAL RULE - The Committee may elect at the time an Exempt Loan
is incurred, or the provisions of the Exempt Loan may provide, that
the number of Financed Shares released from the ESOP Suspense
Subfund is to be determined solely with reference to principal
payments on the Exempt Loan. This method may be used only if:
(i) the Exempt Loan provides for annual payments of principal and
interest at a cumulative rate that is not less rapid at any
time than level annual payments for ten years;
(ii) no more than an amount that would be determined to be interest
under standard loan amortization tables is disregarded, and
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(iii) the entire duration of the Exempt Loan repayment period does
not exceed ten years, even if the Exempt Loan is renewed,
extended or refinanced.
(c) The provisions under this Section 5.02 for the release of Financed
Shares are to be applied and construed in a manner consistent with
Section 54.4975-7(b)(8) of Title 26 of the Code of Federal
Regulations.
5.03 ALLOCATION OF SHARES RELEASED FROM ESOP SUSPENSE SUBFUND
Shares of Stock released from the ESOP Suspense Subfund for a Plan Year
are held in the ESOP Fund on an unallocated basis until allocated by the
Committee. Shares of Stock released in connection with a payment on an
Exempt Loan from Employer ESOP Contributions are allocated as described in
Subsection (a). Shares of Stock released in connection with a payment on
an Exempt Loan from cash dividends on Stock are allocated as described in
Subsection (b).
(a) A Participant who received an allocation of Employer ESOP
Contributions for the Plan Year will receive an allocation of Stock
as of the last day of the Plan Year equal to:
(i) the total shares released in connection with all payments on
an Exempt Loan during the Plan Year from Employer ESOP
Contributions, times
(ii) the ratio of his allocation of Employer ESOP Contributions for
the Plan Year to the total Employer Contributions for the Plan
Year. Stock will be allocated in shares and fractions of
shares to the nearest thousandth of a share.
At the time of such allocation of shares of Stock, the Participant's
Employer Contribution Account will be debited with its share of the
Trust's cash payments on the Exempt Loan.
(b) A Participant who received an allocation of Cash Dividends in his
Employer Contribution Account on a Valuation Date will receive an
allocation of Stock on the Valuation Date equal to:
(i) the total shares released in connection with all payments on
an Exempt Loan during the period since the immediately
preceding Valuation Date to the current Valuation Date from
Cash Dividends received on Stock held in the ESOP Fund, times
(ii) the ratio of shares in the Participant's Employer Contribution
Account on the immediately preceding
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Valuation Date to the total shares of all Participants'
Employer Contribution Accounts on the immediately preceding
Valuation Date (disregarding shares distributed to
Participants as of such Valuation Date.)
At the time of such allocation of shares of Stock, the Participant's
Employer Contribution Account will be debited with its share of the
Trust's cash payment on the Exempt Loan.
(c) All Stock in the ESOP Fund as of the last day of the Plan Year,
other than Stock held in the ESOP Suspense Subfund, must be
allocated to Employer Contribution Accounts as of such day. All
shares allocated under this Section 5.03 will be allocated to the
nearest thousandth of a share.
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ARTICLE VI
ALLOCATION LIMITATIONS
6.01 BASIC LIMITATION ON ANNUAL ADDITIONS
(a) Notwithstanding any other provisions of the Plan and subject to the
provisions of Subsections (b), (c) and (d) below, the amount of
Annual Additions, as defined below, allocated to a Participant for
any Limitation Year will not exceed the lesser of:
(i) $30,000; or
(ii) twenty-five percent of the Participant's Earnings (as defined
below) for the Limitation Year.
The dollar limitation referred to in Subsection (a)(i) above is
adjusted as of January 1 of each Plan Year pursuant to Code Section
415. The adjusted amount applies for the Limitation Year which ends
within that Plan Year.
(b) For purposes of this Article VI a Participant's Annual Additions
means the amount of:
(i) Employer and Affiliate contributions,
(ii) Participant contributions,
(iii) forfeitures, and
(iv) contributions for post retirement medical benefits, to the
extent required by Code Section 415(e) or 419A(d)(2),
allocated to his Accounts under this Plan and his accounts under all
other defined contribution plans (as defined in Code Section 414(i))
adopted by an Affiliate.
Notwithstanding the above paragraph, if no more than one-third of
the total Employer Contributions for the Plan Year which are
deductible under Code Section 404(a)(9) are allocated to the
Accounts of Participants who are Highly Compensated Employees during
the Plan Year, then any Employer Contributions which are used by the
Trust to pay interest on an Exempt Loan, and any Financed Shares
which are allocated as forfeitures, are not included as Annual
Additions. The Employer Contributions must be used to pay such
interest not later than the due date including extensions, for
filing the Employer's Federal income tax return for the Plan Year.
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(c) For purposes of this Article VI, a Participant's Earnings means his
earned income, wages, salaries, commissions and bonuses received
from all Affiliates. It excludes the following:
(i) Contributions by an Affiliate to a plan of deferred
compensation which are not included in the Participant's gross
income for the taxable year in which contributed, or any
distribution from a plan of deferred compensation;
(ii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
Participant either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(iii) Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option; and
(iv) Other amounts which received special tax benefits, including
Pretax Deferrals under this Plan and salary reduction under
any other tax qualified program.
Earnings for any Limitation Year are the amount actually paid or
includable in gross income during such year. A Participant's annual
Earnings in excess of $150,000 are disregarded for all purposes
under the Plan. Such dollar limit will be adjusted each year
pursuant to Code Section 415(d).
(d) Under certain circumstances, the dollar limitation described in
Subsection (a)(i) above for a Limitation Year may be increased. The
increase occurs only if not more than one-third of the total
Employer Contributions for the Plan Year are allocated to the
Accounts of Participants who are Highly Compensated Employees during
the Plan Year. The amount of the increase will be the lesser of:
(i) the dollar amount otherwise applicable for the Plan Year; or
(ii) the amount of Employer Contributions allocated to
Participants' Employer Contribution Accounts as of each
Valuation Date during the Plan Year that ends in the
Limitation Year representing Stock which is:
(A) contributed to the Trust for that Plan Year;
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(B) purchased not later than sixty days after the due date
(including extensions) for filing the Employer's Federal
income tax return for that Plan Year from Employer
Contributions which were made in cash; or
(C) released from the ESOP Suspense Subfund as a result of
payments on an Exempt Loan for that Plan Year.
6.02 PARTICIPATION IN THIS PLAN AND A DEFINED BENEFIT PLAN
If a Participant is or has been a participant in a qualified defined
benefit plan (as defined in Code Section 414(j) maintained by an
Affiliate, the sum of the Participant's defined benefit plan fraction and
defined contribution plan fraction (as defined in Code Section 415(e)) for
any year will not exceed one. In calculating the defined contribution
plan fraction, the Committee may, at its discretion, make the election
described in Code Section 415(e)(6).
6.03 REDUCTION IN ANNUAL ADDITIONS AND ELIMINATION OF EXCESS AMOUNTS
If the limitations described in Section 6.01 and 6.02 would otherwise be
exceeded for a Participant for a Limitation Year, the excess will be
eliminated as follows:
(a) First, amounts attributable to the Participant's Pretax Deferrals
will be reduced. The amount of the reduction will be returned to
the Participant as cash compensation and will be subject to all
federal, state, municipal, and/or county taxes, and other deductions
which apply to cash compensation;
(b) Second, the provisions of any other plans established by an
Affiliate which have caused the limits to be exceeded for the
Participant will be applied. The provisions of a defined benefit
plan will be applied before the provisions of a defined contribution
plan.
(c) Third, the excess allocations of Employer Matching Contributions and
if necessary Employer ESOP Contributions, Employer Stock Bonus
Contributions and Employer Profit Sharing Contributions will be
removed from the Participant's Matching Contribution Account,
Employer Contribution Account, Employer Stock Bonus Contribution
Account and Profit Sharing Contribution Account, respectively, and
will be reallocated to other Participants' Matching Contribution
Account, Employer Contribution Account, Employer Stock Bonus
Contribution Account and Profit Sharing Contribution Account, as
applicable.
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ARTICLE VII
INVESTMENTS: ALLOCATION OF GAINS AND LOSSES
7.01 INVESTMENT OF ACCOUNTS
Each Participant's Accounts are invested in the Trust Fund. The
Participant's Employer Contribution Account and Employer Stock Bonus
Account are invested primarily in Stock. Except as provided in Section
7.16, the Participant has no right to direct the investments of such
Accounts. Each Participant has the right to direct the investment of his
existing and future Pretax Deferrals Account, Matching Contribution
Account, Profit Sharing Contribution Account, TakeCare Account, and his
Rollover Account in any of the Plan's Investment Funds. Any investment
direction by the Participant with respect to his existing and future
Pretax Deferrals Account shall be applied in the same manner to the
investment of his Matching Contribution Account and his TakeCare Account.
The Committee will select the Investment Funds available under the Plan.
Participants who are physician-employees of an Employer shall not be
permitted to direct the investment of their Accounts into the Company
Stock Fund.
Upon enrollment, reenrollment, and as of the first day of any month, the
Participant may designate the Investment Fund(s) in which his existing and
future Pretax Deferrals and Employer Matching Contributions and Employer
Profit Sharing Contributions, if any, are invested. A Rollover
Contribution must be accompanied by a written notice to the Committee
designating the Investment Funds in which the contribution will be
invested. The Committee will establish uniform nondiscriminatory rules
regarding the designation of Investment Funds.
This Plan is intended to constitute a plan described in Section 404(c) of
ERISA, and the regulations thereunder. As a result, with respect to
elections described in this Plan and any other exercise of control by a
Participant or his or her Beneficiary over assets in the Participant's
Accounts, such Participant or Beneficiary shall be solely responsible for
such actions and neither the Trustee, the Committee, the Company, nor any
other person or entity which is otherwise a fiduciary shall be liable for
any loss or liability which results from such Participant's or
Beneficiary's exercise of control.
The Committee shall provide to each Participant or his or her Beneficiary
the information described in Section 2550.404c-1(b)(2)(i)(B)(1) of the
Department of Labor Regulations. Upon request by a Participant or his or
her Beneficiary, the Committee shall provide the information described in
Section
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2550.404c-1(b)(2)(i)(B)(2) of the Department of Labor Regulations.
With respect to Stock held in a Participant's Pretax Deferrals Account,
Matching Contribution Account, TakeCare Account, Profit Sharing
Contribution Account and Rollover Account, the Committee shall take such
actions and establish such procedures as it deems necessary to ensure the
confidentiality of information relating to the purchase, sale, and holding
of such Stock, and the exercise of voting, tender and similar rights with
respect to Stock by a Participant or his or her Beneficiary.
The Committee may take such other actions or implement such other
procedures as it deems necessary or desirable in order that the Plan
comply with Section 404(c) of ERISA.
7.02 TRANSFERS OF EXISTING ACCOUNT BALANCES BETWEEN INVESTMENT FUNDS
Each Participant has the right as of the first day of any month to have
all or part of his Pretax Deferrals Account, Matching Contribution
Account, Profit Sharing Contribution Account, TakeCare Account and
Rollover Account transferred between the Investment Funds. Such transfers
may be made on a total basis or may be applied separately to each Account.
The Committee will establish uniform and nondiscriminatory rules regarding
the transfer of assets between Investment Funds.
7.03 ALLOCATION OF INVESTMENT FUND GAINS AND LOSSES
As of each Valuation Date, the Committee will determine the net investment
gain or loss, after adjustment for applicable expenses, if any, of each
Investment Fund since the immediately preceding Valuation Date.
The net investment gain or loss of each such Investment Fund will be
apportioned to each Participant's Accounts. The apportionment will be in
the same proportions as the following for the Participant bears to the
total of the following for all Participants:
(a) The balance of the Participant's Account which was held in such
Investment Fund as of the immediately preceding Valuation Date;
(b) One-half of the Participant's Pretax Deferrals, if any, allocated to
the Account since the immediately preceding Valuation Date which
were directed by the Participant to be invested in such Investment
Fund;
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(c) One-half of the Participant's loan repayments, if any, made to the
Account since the immediately preceding Valuation Date which were
directed by the Participant to be invested in such Investment Funds;
(d) One-half of the Participant's Rollover Contribution, if any, made to
the Account since the immediately preceding Valuation Date which was
directed by the Participant to be invested in such Investment Funds;
(e) An adjustment to reflect any transfers, to or from the portion of
the Account invested in such Investment Fund, which were made
effective after the allocation of gains or losses as of the
immediately preceding Valuation Date; and
(f) A reduction for any withdrawals, distributions or loan proceeds paid
from the portion of the Account invested in such Investment Fund and
paid after the allocation of gains or losses as of the immediately
preceding Valuation Date.
All withdrawals, distributions and loan proceeds which are paid as of a
Valuation Date shall be paid after the allocation of net investment gain
or loss applicable to such Valuation Date has been apportioned pursuant to
this Section. The amounts paid out will not share in the allocation of
net investment gain or loss in the subsequent Valuation Date.
7.04 PURCHASE AND SALE OF STOCK
The Trustee may acquire Stock in the open market or from the Company or
any other person, including a party in interest, provided that no
commission shall be paid in connection with the Trustee's acquisition from
a party in interest. Neither the Employer, nor the Committee, nor any
Trustee shall have any responsibility or duty to time any transaction
involving Stock in order to anticipate market conditions or changes in
Stock value, nor shall any such person have any responsibility or duty to
sell Stock held in the Trust Fund in order to maximize return or minimize
loss.
7.05 RIGHTS, WARRANTS, OR OPTIONS
Subject to the provisions applicable to nonvoting rights pursuant to
Section 7.08 hereof, stock rights (including warrants and options) issued
with respect to Stock shall, unless otherwise directed by the Committee,
be exercised by the Trustee on behalf of Participants to the extent that
cash is available. Rights which cannot be exercised because of the lack
of cash shall, unless otherwise directed by the Committee, be sold and the
proceeds shall be invested in Stock.
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7.06 PARTICIPANT RIGHTS CONCERNING STOCK
(a) PARTICIPANTS' RIGHT TO INSTRUCT VOTING. All voting rights on
Stock held in the Plan shall be exercised by the Trustee as and to
the extent directed by the Participants acting in their capacity as
"Named Fiduciaries" (as defined in ERISA section 402) with respect
to allocated and unallocated shares in accordance with the following
provisions:
(1) Timely Receipt of Instructions Required. As soon as
practicable before each annual or special shareholders'
meeting of Talbert Medical Management Holdings Corporation,
the Trustee shall furnish to each Participant a copy of the
proxy solicitation materials sent generally to shareholders,
together with a form requesting confidential directions on how
Stock allocated to such Participant's Accounts and a
proportionate share of any unallocated shares (including
fractional shares to 1/1000th of a share) are to be voted.
The Company and the Committee will cooperate with the Trustee
to ensure that Participants receive the requisite information
in a timely manner. Upon timely receipt of such voting
directions, the Trustee (after combining votes of fractional
shares to give effect to the greatest extent to Participants'
directions) shall vote the shares as directed. The voting
directions received by the Trustee from Participants or
Beneficiaries shall be held by the Trustee in strict
confidence and shall not be divulged or released to any
person, except as may be necessary to facilitate the
tabulation of such voting directions.
(2) VOTING OF ALLOCATED SHARES. Each Participant shall be
entitled to direct the voting of Stock (including fractional
shares to 1/1000th of a share) allocated to his Accounts.
With respect to all corporate matters submitted to
shareholders, Stock allocated to the Accounts of Participants
shall be voted in accordance with the directions of such
Participants, as Named Fiduciaries, as given to the Trustee.
With respect to Stock allocated to the Accounts of a deceased
Participant, such Participant's Beneficiary, as Named
Fiduciary, shall be entitled to direct the voting with respect
to such allocated shares as if such Beneficiary were the
Participant. Any allocated shares of Stock with respect to
which no directions are received shall be voted by the Trustee
in the same manner as provided in subsection (3) below for
unallocated shares.
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(3) VOTING OF UNALLOCATED SHARES. Each Participant shall, as a
Named Fiduciary, also be entitled to direct the Trustee to
vote a portion of the unallocated shares of Stock with respect
to all corporate matters submitted to shareholders. Such
direction shall apply to a number of votes equal to the total
number of votes attributable to unallocated Stock multiplied
by a fraction, the numerator of which is the number of votes
attributable to Stock allocated to the Participant's Accounts,
and the denominator of which is the total number of votes
attributable to Stock allocated to the Accounts of
Participants who have provided directions to the Trustee under
this Section. Fractional shares shall be rounded to the
nearest 1/1000th of a share.
7.07 SALE OF STOCK
Subject to the rights of Participants in a tender offer as described in
Section 7.08, the Committee may direct the Trustee to sell shares of Stock
to any person, including Talbert Medical Management Holdings Corporation
or the Company, provided that any sale to Talbert Medical Management
Holdings Corporation or any other "disqualified person" within the meaning
of Code section 4975 or "party in interest" within the meaning of ERISA
section 3(14) is made at a price which is not less than adequate
consideration as defined in ERISA section 3(18) and that no commission is
charged with respect to the sale. If the Trustee is unable to make
payments of principal or interest on an Exempt Loan when due, the
Committee may direct the Trustee, unless prohibited by the Code or ERISA,
to sell any shares of Stock not yet released from the ESOP Suspense
Subfund and to apply the proceeds to such Exempt Loan payment, or to
obtain another Exempt Loan in an amount sufficient to make such payment.
7.08 TENDERS AND EXCHANGES OF STOCK
(a) PARTICIPANTS' RIGHT TO INSTRUCT TENDER. All tender or exchange
decisions with respect to Stock held in the Plan shall be made by
the Participants acting in their capacity as Named Fiduciaries with
respect to both allocated and unallocated shares in accordance with
the following provisions:
(1) TIMELY RECEIPT OF INSTRUCTIONS REQUIRED. In the event an
offer is received by the Trustee (including a tender offer for
Stock subject to Section 14(d)(1) of the Securities Exchange
Act of 1934 ("Exchange Act") or subject to Rule 13e-4
promulgated under the Exchange Act, as those provisions may
from time to time be amended) to
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sell or exchange any Stock held by the Trust, the Trustee
shall advise each Participant who has Stock allocated to his
Accounts in writing of the terms of the offer as soon as
practicable and shall furnish each Participant with a form by
which he may direct the Trustee confidentially whether to
tender or exchange shares of Stock allocated to his Accounts
and a proportionate share of any unallocated shares (including
fractional shares to 1/1000th of a share). The materials
furnished to each Participant shall include such related
documents as are prepared by any person and provided to the
shareholders of Talbert Medical Management Holdings
Corporation pursuant to the Exchange Act. The Committee and
the Trustee may also provide Participants with such other
materials concerning the offer as the Trustee or the Committee
in its discretion determines to be appropriate; provided,
however, that prior to any distribution of materials by the
Committee, the Trustee shall be furnished with sufficient
numbers of complete copies of all such materials. The Company
and the Committee will cooperate with the Trustee to ensure
that Participants receive the requisite information in a
timely manner. Upon timely receipt of such tender directions,
the Trustee (after combining fractional shares to give effect
to the greatest extent to Participants' directions) shall
tender the shares as directed.
(2) ALLOCATED SHARES. The Trustee shall tender or not tender
shares of Stock allocated to the Accounts of any Participant
(including fractional shares to 1/1000th of a share) as and to
the extent instructed by the Participant as a Named Fiduciary.
With respect to Stock allocated to the Accounts of a deceased
Participant, such Participant's Beneficiary, as a Named
Fiduciary, shall be entitled to direct the Trustee whether to
tender such shares as if such Beneficiary were the
Participant. The instructions received by the Trustee from
Participants or Beneficiaries shall be held by the Trustee in
strict confidence and shall not be divulged or released to any
person, including directors, officers of employees of Talbert
Medical Management Holdings Corporation or the Company, except
as otherwise required by law. Any allocated shares of Stock
with respect to which no directions are received shall be
treated in the same manner as provided in subsection (3) below
for unallocated shares.
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(3) UNALLOCATED SHARES. Each Participant shall, as a Named
Fiduciary, also be entitled to direct the Trustee with respect
to the tender of a portion of the unallocated shares of Stock.
Such direction shall apply to such number of unallocated
shares multiplied by a fraction, the numerator of which is the
number of shares of Stock allocated to the Participant's
Accounts, and the denominator of which is the total number of
shares of Stock allocated to the Accounts of Participants who
have provided directions to the Trustee under this Section.
Fractional shares shall be rounded to the nearest 1/1000th of
a share.
(4) WITHDRAWAL OF TENDER. In the event, under the terms of a
tender offer or otherwise, any Stock tendered for sale or
exchange may be withdrawn from such offer, the Trustee shall
follow any instructions respecting the withdrawal of such
Stock from such offer in the same manner and the same
proportion as shall be timely received by the Trustee from
the Participants, as Named Fiduciaries, entitled under this
Section 7.08 to give instructions regarding the sale or
exchange of such shares.
(5) RIGHT TO TENDER ON PRO RATA BASIS. In the event the Trustee
receives an offer to tender for sale or exchange less than all
of the Stock held by the Trust (allocated and unallocated),
each Participant who has been allocated Stock subject to such
offer shall be entitled to direct the Trustee as provided in
Sections 7.08(a)(1), (2) and (3). Shares will be tendered
first from the Accounts of Participants who timely instruct
the Trustee to tender and then, to the extent additional
shares are directed to be tendered, from unallocated shares of
Stock and then from allocated shares of Stock for which no
direction is received.
(6) SIMULTANEOUS TENDER OFFERS. In the event an offer is
received by the Trustee and instructions are solicited from
Participants pursuant to Section 7.08(a) regarding such offer,
and prior to the termination of such offer a second offer is
received by the Trustee for the Stock subject to the first
offer, the Trustee shall use its best efforts under the
circumstances to solicit instructions from the Participants
(i) with respect to shares tendered for sale or exchange
pursuant to the first offer, whether to withdraw such shares,
if possible, and, if withdrawn, whether to tender such shares
for sale or exchange pursuant to the
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second offer and (ii) with respect to shares not tendered for
sale or exchange pursuant to the first offer, whether to
tender such shares for sale or exchange pursuant to the second
offer. The Trustee shall follow all such instructions
received in a timely manner from Participants in the same
manner and in the same proportion as provided in this Section
7.08(a). With respect to any such subsequent offer for Stock
subject to an earlier offer (including successive offers from
one or more existing offerors), the Trustee shall act in the
manner as described in the above provisions of this Section
7.08.
(b) TENDER IS NOT A WITHDRAWAL. A Participant's instruction to the
Trustee to tender for sale or exchange shares of Stock will not be
deemed a withdrawal or suspension from the Plan or a forfeiture of
any portion of the Participant's interest in the Plan. Funds
received in exchange for tendered shares will be credited to the
Accounts of Participants whose shares were tendered and will be used
by the Trustee to reinvest in Stock, if available, and if not, in
such other investments as permitted under the trust agreement
established under Article XV.
(c) TRUSTEE TO TAKE ALL NECESSARY ACTION. The Trustee shall take all
steps necessary, including appointment of a corporate trustee and/or
an outside independent administrator, to the extent such action,
after consultation with the Committee, is deemed necessary to
maintain confidentiality of the Participants' responses or to
discharge adequately its fiduciary obligations.
(d) TRUSTEE MAY OPT FOR NO PARTICIPATION IN SELF TENDER. Subject to
the provisions of the trust agreement, in the event Talbert Medical
Management Holdings Corporation initiates an offer described in
Section 7.08(a)(1), Talbert Medical Management Holdings Corporation
or the Committee may direct the Trustee not to tender for sale or
exchange any Stock in such offer. In such event, the foregoing
provisions of this Section 7.08 shall have no effect, and the
Trustee shall not tender for sale or exchange any Stock (allocated
or unallocated) in such offer.
7.09 VALUATION OF STOCK
When it becomes necessary to value Stock held by the Plan, the value shall
be the current fair market value of the Stock, determined in accordance
with applicable legal requirements. If the Stock is publicly traded, its
fair market value shall, except as otherwise required by the standards
applicable to
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prudent fiduciaries, be based on the most recent closing price in such
public trading, as reported in THE WALL STREET JOURNAL or such other
publication of general circulation as may be designated by the Committee.
If the Stock cannot be so valued on the basis of its closing price in
recent public trading, its fair market value shall be determined by the
Trustee in good faith based on all relevant factors for determining the
fair market value of securities, including an independent appraisal by a
person who customarily makes such appraisals and who meets requirements
similar to the requirements of Treasury Regulations promulgated under Code
Section 170(a)(1), if such an appraisal of the fair market value of the
Stock as of the relevant date has been obtained. In the case of a
transaction between the Plan and an Employer or another party in interest,
the fair market value of the Stock must be determined as of the date of
the transaction rather than as of some other Valuation Date occurring
before or after the transaction. In other cases, the fair market value of
the Stock shall be determined as of the most recent Valuation Date.
7.10 PLAN MAY BORROW TO BUY STOCK
The Company may direct the Trustee to incur debt obligations in order to
finance or refinance the acquisition of Stock for the Trust Fund. Any
such direction must specify all of the terms and conditions of an Exempt
Loan and any other documents which are to be executed in connection with
the Exempt Loan. The Trustee will have no responsibility to determine
whether the debt obligation is an Exempt Loan. The Trustee will have no
authority to modify the terms, conditions, or documents of an Exempt Loan
and will only be responsible for executing the documents on behalf of the
Plan.
Any Exempt Loan will be incurred only if it is primarily for the benefit
of the Participants and their Beneficiaries. The Exempt Loan must not
require the use of Plan assets other than those described in this Section
7.10. The Exempt Loan must be at least as favorable to the Plan as the
terms of a comparable loan resulting from an arm's length negotiation
between independent parties.
The Trustee will not be responsible or liable for inquiring into the
purpose of an Exempt Loan nor will it be responsible for determining the
various limitations described in this document are met.
All Exempt Loans must bear a reasonable rate of interest and must be for a
specific term. Such loans may not be payable at the demand of any person,
except in the case of default. Loan repayment will be made by the Trustee
at the direction of the Company. The payments must not exceed the amount
of Employer
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Contributions in the current or prior Plan Years and the earnings on such
contributions.
Any Exempt Loan must be without recourse to the Plan. In the event of
default on an Exempt Loan, the value of Trust assets which may be
transferred in satisfaction of the loan will not exceed the amount of the
default. The Trust assets which may be pledged as collateral for an
Exempt Loan are limited to the Stock acquired with the proceeds of the
loan or a prior loan which is repaid with the proceeds of the Exempt Loan.
In addition, the only Trust assets a lender may have any rights to are:
(a) the collateral given for the loan; (b) cash contributions made to the
Plan for the ultimate purpose of making loan payments; and (c) earnings
attributable to the collateral or to cash contributions. With respect to
Stock purchased with the proceeds of an Exempt Loan, the protections
stated in Sections 7.11 and 11.03 are non-terminable, notwithstanding the
fact that the Exempt Loan is repaid or the Plan ceases to be an employee
stock ownership plan.
7.11 USE OF EXEMPT LOAN PROCEEDS
The proceeds of an Exempt Loan must be used within a reasonable time after
receipt by the Plan only for any or all of the following purposes:
(a) to acquire Stock;
(b) to repay an Exempt Loan;
(c) to repay a prior Exempt Loan in a transaction creating a Substitute
Loan, as described in Section 5.02(a).
Except as provided in Section 11.04 or as otherwise required by applicable
law, no Stock acquired with the proceeds of an Exempt Loan may be subject
to a put, call, or other option or buy-sell or similar arrangement while
held by and when distributed from the Plan. This provision continues to
be apply to Stock even if the Plan ceases to be an employee stock
ownership plan under Section 4975(e)(7) of the Code.
7.12 ALLOCATION OF STOCK DIVIDENDS AND SPLITS
(a) Stock received by the Trust as a result of a Stock split or Stock
dividend on Stock held in Participant's Employer Contribution
Account, Matching Contribution Account, Employer Stock Bonus Account
and Profit Sharing Contribution Account, as applicable, will be
allocated as of the Valuation Date coincident with or following the
date of such split or dividend, to each Participant who has an
Employer Contribution Account, Matching Contribution Account,
Employer Stock Bonus Account and/or Profit Sharing Contribution
Account, as applicable on
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such date. The amount allocated will bear substantially the same
proportion to the total number of shares received as the number of
shares in such Account of the Participant immediately before the
allocation bears to the total number of shares allocated to such
Accounts of all Participants immediately before the allocation. The
shares will be allocated to the nearest one thousandth of a share.
(b) Stock received by the Trust as a result of a Stock split or Stock
dividend on Stock held in Participant's Pretax Deferral Account,
TakeCare Account and Rollover Account will be allocated as of the
Valuation Date coincident with or following the date of such split
or dividend, to each Participant who has a Pretax Deferral, TakeCare
Account and/or Rollover Account, as applicable. The amount
allocated will bear substantially the same proportion to the total
number of shares received as the number of shares in such Account
bears to the total number of shares allocated to such Accounts of
all Participants immediately before the allocation. The shares will
be allocated to the nearest one thousandth of a share.
(c) Stock received by the Trust as a result of a Stock dividend on Stock
held in the ESOP Suspense Subfund shall be governed by Section 7.13.
7.13 REINVESTMENT OF DIVIDENDS
Upon direction of the Committee, (a) cash dividends may be reinvested as
soon as practicable by the Trustee in shares of Stock for Participant's
Accounts, (b) stock dividends may be allocated to Participant's Accounts,
or (c), if cash or stock dividends are paid on shares held in the ESOP
Suspense Subfund they may be applied to retire an Exempt Loan. Cash
dividends may be reinvested in Stock purchased as provided in Section 7.04
or purchased from the Accounts of Participants who receive cash
distributions. Notwithstanding the foregoing, upon the direction of the
Committee, the trustee may use cash or stock dividends on stock held in
the ESOP Fund to add to the Reserve Fund. At the direction of the
Committee, stock dividends may be sold and the proceeds used for the
purposes set forth above.
7.14 ALLOCATION OF DIVIDENDS OTHER THAN STOCK DIVIDENDS
At the direction of the Committee, dividends in cash or in property other
than Stock which are actually received by the Trust during a Plan Year may
be applied by the Trustee to the purchase of Stock, as provided in Section
7.13. Dividends in property other than Stock which are received by the
Trustee in respect of Stock held by the Trust shall, to the extent
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practicable, be sold or exchanged for the ultimate purpose of acquiring
additional Stock.
Stock released from the ESOP Suspense subfund due to the use of dividends
to make payments on an Exempt Loan will be allocated pursuant to Section
5.03(b).
Stock purchased by the Trustee for the Trust out of dividends and out of
the proceeds of rights or warrants sold (or exercised, to the extent of
the bargain element if such exercise is made with Employer Contributions)
will be allocated, as of the Valuation Date coincident with or following
the date such shares were purchased, to the Account of each Participant
who has an Account on such Valuation Date.
(a) Stock purchased with dividends on Stock held in Participants'
Employer Contribution Accounts, Matching Contribution Accounts,
Employer Stock Bonus Accounts and Profit Sharing Contribution
Accounts will be allocated to each Participant's Employer
Contribution Account, New Matching Contribution Account, Employer
Stock Bonus Account and Profit Sharing Contribution Account.
(b) Stock purchased with dividends on Stock held in Participants' Pretax
Deferral Accounts, TakeCare Accounts and Rollover Accounts will be
allocated to each Participant's Pretax Deferral Account, TakeCare
Account and Rollover Account.
Shares allocated to an Account under subsections (a) or (b) above
will be allocated in an amount which bears substantially the same
proportion to the total number of shares purchased as the ratio that
the number of shares in such Account on the Valuation Date
immediately preceding such purchase bears to the total number of
shares that were allocated to such Accounts of all Participants on
such preceding Valuation Date (disregarding the shares that were
distributed to Participants as of such preceding Valuation Date).
Shares allocated under this Section will be allocated to the nearest
one thousandth of a share.
7.15 RESERVE FUND
The portion of the ESOP Fund not invested in Stock is referred to as the
Reserve Fund. The Reserve Fund will normally be held in cash and
short-term, liquid assets except to the extent that special circumstances,
such as the lack of a market for assets received in kind, prevent the
conversion of assets to such form. The Reserve Fund will also be limited
to the amount needed to meet current requirements of the Plan to make cash
distributions provided under Article XI, to pay
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expenses to the extent permissible under Section 12.11, and to exercise
rights under Section 7.05. In the case of cash distributions, the Reserve
Fund may be used to make purchases of Stock from the Accounts of the
Participants receiving such distributions. As the Company and the Trustee
shall agree, the amount to be maintained in such cash Reserve Fund shall
be determined by the Company and communicated to the Trustee in writing.
As of each Valuation Date, the Committee will determine the net gain or
loss, after adjustment for applicable expenses, if any, in the Reserve
Fund since the immediately preceding Valuation Date. The net gain or loss
of the Reserve Fund will be apportioned to each Participant's Employer
Contribution Account. The apportionment will be in the same proportion as
the following for the Participant bears to the total of the following for
all Participants:
(a) The balance of the Participant's Employer Contribution Account as of
the immediately preceding Valuation Date, determined after
allocation as of such Valuation Date of Employer Contributions and
the net gain or loss of the Reserve Fund;
(b) A reduction to reflect any transfers from the Participant's Employer
Contribution Account, pursuant to Section 7.16, which were made
effective after the allocation of net gain or loss of the Reserve
Fund as of the immediately preceding Valuation Date; and
(c) A reduction for any distributions paid from the Employer
Contribution Account after the allocation of net gain or loss of the
Reserve Fund as of the immediately preceding Valuation Date.
The result of this allocation of net gain or loss of the Reserve
Fund may be expressed in dollars and cents, or shares and fractional
shares of Stock having the same value as such dollars and cents on
the date as of which the allocation is made. However, conversion to
full and fractional shares of Stock will be made only to the extent
necessary to reflect anticipated purchases from the Reserve Fund of
Stock allocated to the Accounts of Participants who are to receive
cash distributions as of the Valuation Date in question.
7.16 SPECIAL INVESTMENT ELECTION BY QUALIFIED PARTICIPANTS
(a) Each Participant who has attained age fifty-five and has been a
Participant for at least ten years may direct the investment of a
portion of the value of his Employer Contribution Account into the
Investment Funds described in Section 7.01.
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(b) Investment direction is available during the ninety day period
following the last day of each of the five Plan Years immediately
following the Plan Year in which the Participant first meets both of
the eligibility requirements of Subsection (a) above.
(c) The portion of the Participant's Employer Contribution Account
subject to his direction is twenty-five percent of the value of such
Account as of the last day of the Plan Year to which the direction
applies. The twenty-five percent limit is reduced to reflect any
investment directions pursuant to this Section 7.16 in a previous
Plan Year. In the last period during which a Participant may direct
investments pursuant to this Section 7.16, the limit on the amount
of such Account which are subject to his direction will be increased
to fifty percent.
(d) A Participant's investment direction under this Section 7.16 must be
provided to the Committee in writing within the applicable ninety
day period. The investment direction must specify the portion of
the Participant's Employer Contribution Account, which will be
invested in the Investment Funds, in a fixed whole percent, and the
Investment Funds in which such portion will be invested. The
investment direction will be effective no later than one hundred
eighty days after the last day of the Plan Year to which the
direction applies.
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ARTICLE VIII
WITHDRAWALS AND LOANS
8.01 POST AGE 59-1/2 WITHDRAWALS
A Participant who has attained age 59-1/2 may withdraw up to one hundred
percent of the value of his Pretax Deferral Account and TakeCare Account,
determined as of the most recent Valuation Date (a) which precedes the
date the withdrawal request is received by the Committee on a written form
prescribed by the Committee, and (b) for which the allocation process
described in Section 7.03 has been completed. A Participant may not
withdraw from his Employer Contribution Account, Matching Contribution
Account, Profit Sharing Contribution Account or Employer Stock Bonus
Account except as provided in Articles IX, X, and XI.
8.02 FINANCIAL HARDSHIP WITHDRAWALS
A Participant who has a financial hardship may withdraw up to one hundred
percent of the value of his Pretax Deferral Account and TakeCare Account,
determined as of the most recent Valuation Date (a) which precedes the
date the withdrawal request is received by the Committee on a written form
prescribed by the Committee, and (b) for which the allocation process
described in Section 7.03 has been completed.
(a) A withdrawal must be on account of a hardship. A withdrawal will be
deemed to be on account of a hardship if:
(i) The distribution is for the purpose of:
(A) paying medical expenses described in Code Section 213(d)
incurred by the Participant, his spouse or his
dependents;
(B) purchasing the Participant's principal residence
(excluding mortgage payments);
(C) paying tuition for the next semester or quarter of
post-secondary education for the Participant, his spouse
or his dependents;
(D) preventing the Participant's eviction from his principal
residence or foreclosure on the mortgage on the
Participant's principal residence; or
(E) any other purpose specified by the Internal Revenue
Service as a deemed immediate and heavy financial need;
and
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(ii) All of the following are satisfied:
(A) the distribution is not in excess of the amount of the
financial need;
(B) the Participant has obtained all distributions, other
than hardship withdrawals, and all nontaxable loans
under the Plan or any other plan maintained by an
Affiliate;
(C) the Participant does not make Pretax Deferrals to this
Plan or any other plan maintained by an Affiliate for at
least twelve months after he receives the hardship
distribution; and
(D) the Participant's Pretax Deferrals made in the calendar
year immediately following the calendar year in which
the withdrawal occurs do not exceed the limitation of
Code Section 402(g) (as adjusted) for such calendar
year, less the Participant's Pretax Deferrals made in
the calendar year in which the withdrawal was received.
The Committee will determine whether the Participant has met
the requirements of Subsections (i) and (ii) above.
(iii) The amount to be withdrawn may not exceed the smaller of (A)
the total value, determined under this Section 8.02, of the
sum of the Participant's Pretax Deferral Account and TakeCare
Account or (B) the amount necessary to meet the Participant's
financial hardship.
A Participant may not withdraw any earnings credited to his
Pretax Deferral Account and TakeCare Account on and after
January 1, 1989.
8.03 WITHDRAWALS FROM ROLLOVER ACCOUNT
At any time a Participant may withdraw up to one hundred percent of the
value of his Rollover Account, determined as of the most recent Valuation
Date (a) which precedes the date the withdrawal request is received by the
Committee on a written form prescribed by the Committee, and (b) for which
the allocation process described in Section 7.03 has been completed.
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8.04 AMOUNT AND PAYMENT OF WITHDRAWALS
Application for a withdrawal shall be made on such forms as the Committee
prescribes. Payment will be made to the Participant as soon as
administratively possible following the date the Committee receives and
approves the withdrawal request from the Participant. The amount of such
withdrawal shall be taken from the Participant's Account(s) at such time
and paid to the Participant in a single sum. A Participant may not make
more than two withdrawals under the Plan in any Plan Year. No withdrawal
under this Article VIII shall cause forfeiture of any interests of the
Participant in the Plan.
8.05 LOANS TO PARTICIPANTS
A Participant who is actively employed by an Affiliate may borrow from his
Pretax Deferral Account, TakeCare Account and Rollover Account in
accordance with the terms and conditions for loans established by the
Committee. Such terms and conditions include, but are not limited to, the
following:
(a) A Participant may have no more than one loan from this Plan
outstanding at any time.
(b) The Participant must apply for the loan, sign a note payable to the
Trustee in the proper amount on a form prescribed by the Committee,
and authorize payroll deductions for payment of interest and
principal, all in accordance with procedures adopted by the
Committee.
Any loan processing fees (charged by a person other than the
Employer) shall be deducted from the principal amount available to
the Participant.
(c) The period of repayment for any loan shall be arrived at by mutual
agreement between the Committee and the Participant. However, the
period of repayment, including any extensions resulting from the
consolidation of a loan into a subsequent loan, shall not extend
beyond the earlier of five years or the date such Participant
terminates employment with the Employer. The five year limit shall
not apply to any portion of the loan used to acquire the
Participant's principal place of residence.
(d) The amount of the loan must be at least $1,000, but may not exceed
the lesser of.
(i) $50,000 reduced by (A) the Participant's current outstanding
loan balance under all plans qualified under Code Section
401(a) and maintained by an Affiliate, and (B) the excess of
the Participant's highest outstanding loan balance under such
plans during the twelve months preceding the date of the
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loan over the Participant's current outstanding loan balance
under such plans; or
(ii) 50% of the vested portion of the Participant's Pretax Deferral
Account, TakeCare Account and Rollover Account under this Plan
valued on the Applicable Valuation Date immediately before the
date the request for a loan is received. "Applicable
Valuation Date" means the most recent Valuation Date (A) which
precedes the date the loan request is received by the
Committee on a written form prescribed by the Committee, and
(B) for which the allocation process described in Section 7.03
has been completed.
(e) All loans shall bear an interest rate equal to two percentage points
above the published prime lending rate of Bank of America N.T.& S.A
on the last business day of the month preceding the month in which
the request for a loan is received, provided, however, that no loan
shall bear a rate of interest which exceeds the maximum rate
permitted by law. The interest rate so determined shall be fixed
for the term of the loan.
(f) The Committee shall establish a loan account for the Participant,
and shall credit the loan account with an amount equal to the
principal amount of the loan granted. The principal amount shall be
withdrawn from Investment Funds according to rules established by
the Committee. Each repayment of principal on the loan received by
the Trustee from the Participant shall reduce the balance credited
to the loan account and each payment of principal and interest shall
increase pro-rata the amount invested in each Investment Fund
according to rules established by the Committee.
(g) Repayment shall be accomplished through regular payroll deductions.
The Committee may restrict loan amounts if withholdings of principal
and interest would exceed twenty percent of Compensation in each
payroll period. A Participant shall be entitled to prepay, without
penalty, the total accrued interest and outstanding principal amount
of the loan. Such prepayment may be made by increasing the amount
of his payroll deductions or by any other means.
(h) If a Participant terminates employment with all Affiliates, incurs a
Permanent and Total Disability or undergoes bankruptcy prior to his
repayment of the total principal and interest on a note held by his
loan account, the note in the Participant's Account shall be
cancelled and the unpaid principal balance deemed distributed to him
by the Trust Fund.
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(i) The foregoing provisions of this Section 8.05 notwithstanding, the
Committee reserves the right to stop granting loans to Participants
at any time.
(j) This subsection (j) applies only to Participants who (i) were
employed by FHP Fountain Valley Hospital ("FHP Hospital") on or
before January 13, 1996, (ii) had an outstanding loan under the Plan
as of January 13, 1996 and (iii) became employed by Orange Coast
Memorial Hospital on January 14, 1996. A participant who satisfies
the requirements of the preceding sentence is referred to herein as
a "Qualified Participant." Notwithstanding anything else contained
herein to the contrary, Qualified Participants may repay loans under
this Plan by payroll deduction in accordance with paragraph (g) of
this Section 8.05 except that Orange Coast Memorial Hospital shall
remit such payroll deductions to the Trustee. The repayment period
with respect to a loan subject to this Section 8.05(j) shall be the
same as the original repayment period of such loan, provided that
such period of repayment, including any extensions resulting from
the consolidation of a loan into a subsequent loan, shall not extend
beyond five years from the original date of the loan. This five
year limit shall not apply to any portion of the loan used to
acquire the Participant's principal residence.
8.06 DEBITING OF INVESTMENT FUNDS
If a Participant elects to withdraw less than the total value of any
Account, or elects to borrow less than the total value of any Account, and
the Account is invested in more than one Investment Fund, the withdrawal
or loan will be made from each of the Investment Funds according to rules
established by the Committee.
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ARTICLE IX
RETIREMENT, DISABILITY AND DEATH BENEFITS
9.01 RETIREMENT BENEFITS
The retirement benefit payable under the Plan in the case of a Participant
whose employment with all Affiliates terminates on or after he attains
Normal Retirement Age is one hundred percent of the value of his Accounts
on his Distribution Date. The Participant's Distribution Date is the
Valuation Date coincident with or immediately following the date the
terminated Participant's request for a distribution on a written form
prescribed by the Committee is received by the Committee.
9.02 DISABILITY BENEFITS
The disability benefit payable under the Plan in the case of a Participant
whose employment with all Affiliates terminates because he is Permanently
and Totally Disabled is one hundred percent of the value of his Accounts
on his Distribution Date. The Participant's Distribution Date is the
Valuation Date coinciding with or immediately following the date the
Permanently and Totally Disabled Participant's request for a distribution
on a written form prescribed by the Committee is received by the
Committee.
9.03 DEATH BENEFITS
The death benefit payable to a Beneficiary under the Plan in the case of a
Participant whose employment with an Affiliate terminates due to his death
(or who dies after termination of employment under Sections 9.01 and 9.02,
but before his Distribution Date under such Sections) is one hundred
percent of the value of his Accounts on the Distribution Date. The
Distribution Date with respect to such Participant is the Valuation Date
coincident with or immediately following the date the request for a
distribution by the deceased Participant's Beneficiary (or if no
Beneficiary has been designated, the representative of his estate) is
received by the Committee on a written form prescribed by the Committee.
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ARTICLE X
TERMINATION BENEFITS AND VESTING REQUIREMENTS
10.01 BENEFITS PAYABLE UPON TERMINATION OF EMPLOYMENT
The benefit payable under the Plan in the case of a Participant whose
employment with all Affiliates terminates for any reason other than
because he became Permanently and Totally Disabled, died, or retired on or
after his Normal Retirement Age is the vested portion (determined pursuant
to Section 10.02) of the value of his Accounts on his Distribution Date.
The Participant's Distribution Date is the Valuation Date coincident with
or immediately following the date the terminated Participant's request for
a distribution on a written form prescribed by the Committee is received
by the Committee.
10.02 VESTING REQUIREMENTS
(a) The vested portion of a Participant's Pretax Deferral Account,
TakeCare Account, and Rollover Account is always one hundred
percent.
(b) The vested portion of a Participant's Employer Contribution Account,
Matching Contribution Account, Employer Stock Bonus Account and
Profit Sharing Contribution Account is based on his Service as of
the date his employment terminates, as follows:
(i) With respect to a Participant who was hired before July 1,
1990:
YEARS OF SERVICE VESTED PORTION
----------------- --------------
Less than 1 year 0%
1 but less than 2 10%
2 but less than 3 20%
3 but less than 4 30%
4 but less than 5 40%
5 or more years 100%
(ii) With respect to a Participant who was first hired on or after
July 1, 1990:
YEARS OF SERVICE VESTED PORTION
----------------- --------------
Less than 5 year 0%
5 or more years 100%
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(iii) Year of Vesting Service shall mean a Plan Year during which an
Employee is credited with at least 1,000 Hours of Service with
the Company or an Affiliate.
(c) Notwithstanding the provisions of Subsection (b) above, when a
Participant reaches his Normal Retirement Age while employer by the
Company or an Affiliate, his vested portion in his Accounts shall be
one hundred percent.
10.03 EFFECT OF TERMINATION OF EMPLOYMENT; PERIOD OF SEVERANCE AND REEMPLOYMENT
If a Participant incurs a one year Period of Severance before he has a
vested interest in his Employer Contribution Account, Matching
Contribution Account, Profit Sharing Contribution Account and Employer
Stock Account, under this Article 10, in determining his Years of Vesting
Service under this Section 10.03, all Years of Vesting Service earned
before the one year Period of Severance shall be forfeited if the
consecutive number of one year Periods of Severance equal or exceeds the
greater of five or the Years of Vesting Service earned before the one year
Period of Severance.
10.04 FORFEITURE OF NON-VESTED ACCOUNTS
When a Participant ceases to participate and receives distribution of his
Employer Contribution Account, Matching Contribution Account, Profit
Sharing Contribution Account and Employer Stock Bonus Account, such
portion of his Employer Contribution Account, Matching Contribution
Account, Profit Sharing Contribution Account and Employer Stock Bonus
Account as of the coinciding or next following Valuation Date that is not
vested shall be forfeited and allocated in the manner provided in Section
10.05 as of such Valuation Date. For purposes of the preceding sentence,
a Participant who ceases to participate in the Plan and whose
nonforfeitable percentage in his Employer Contribution Account, Matching
Contribution Account, Profit Sharing Contribution Account and Employer
Stock Bonus Account is zero, shall be deemed to have received a complete
distribution of the nonforfeitable portion of such Accounts. If a former
Participant who has suffered a forfeiture on account of his termination of
participation in accordance with this subsection is reemployed as an
employee by the Company or an Affiliate before incurring five consecutive
one year Periods of Severance, and repays to the Plan all money
distributed from his Employer Contribution Account, Matching Contribution
Account, Profit Sharing Contribution Account and Employer Stock Bonus
Account prior to 60 months after such reemployment, any amounts so
forfeited (unadjusted for any increase or decrease in the value of the
Trust Fund subsequent to the Valuation Date on which the forfeiture
occurred) shall be reinstated to the Participant's
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Employer Contribution Account, Matching Contribution Account, Profit
Sharing Contribution Account and Employer Stock Bonus Account within a
reasonable time after such payment. Such reinstatement occurs to the
extent such forfeitures are attributable to contributions by the same
Company or an Affiliate and earnings on such contributions; provided,
however, if such forfeitures are not sufficient to provide such
reinstatement, the reinstatement shall be made for the current year's
contribution by that Company or Affiliate to the Plan.
10.05 DISPOSITION OF FORFEITURES
All amounts forfeited under any provisions of this Plan are first applied
to reinstate forfeited amounts of other Participants pursuant to Section
10.03. Any remaining forfeitures are used to reduce the Employer
Contributions required pursuant to Sections 3.03, 3.04, 3.10 and 3.11 for
the Plan Year in which they are forfeited. Forfeitures are first charged
against the portion of a Participant's Employer Contribution Account,
Matching Contribution Account, Employer Stock Bonus Account and Profit
Sharing Contribution Account not invested in Stock, with any balance
charged against the remainder of his Employer Contribution Account,
Matching Contribution Account, Employer Stock Bonus Account and Profit
Sharing Contribution Account at the fair market value of Stock. Financed
Shares are forfeited only after all other amounts in a Participant's
Accounts have been forfeited.
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ARTICLE XI
DISTRIBUTION OF BENEFITS
11.01 FORM OF BENEFITS FOR RETIREMENT AND OTHER TERMINATION
Amounts distributable pursuant to Articles IX and X are distributed, at
the Participant's or, if applicable, Beneficiary's election, in one of the
following forms:
(a) A single sum payment in cash of the value of his benefit as of his
Distribution Date; or
(b) A single sum distribution consisting of the whole shares of Stock
held in his Accounts as of his Distribution Date and a single sum
payment in each of the value of the remaining portion of his benefit
as of his Distribution Date.
A Participant's or Beneficiary's election may not be changed or revoked
following his Distribution Date.
Notwithstanding the preceding, to avoid the elimination of an optional
form of benefit in connection with the merger of the TakeCare Savings and
Retirement Plan into the FHP International Corporation Employee Stock
Ownership Plan, amounts credited to a Participant's TakeCare Account which
are distributable pursuant to Articles IX and X may, at the Participant's
or, if applicable, Beneficiary's election, be distributed in (i) a single
cash lump sum, (ii) installments in cash over a period of years determined
by the Participant, or (iii) a combination of a partial lump sum in cash
and installments in cash over a period of years determined by the
Participant.
11.02 TIMING OF DISTRIBUTIONS
(a) Notwithstanding the provisions of Articles IX and X, if a
Participant's employment terminates for any reason and the value of
the vested portion of his Accounts on the Valuation Date coinciding
with or immediately following the date he terminates employment does
not exceed $3,500, his Distribution Date is the Valuation Date
coinciding with or immediately following the date he terminates
employment. Except as provided in Section 11.04, if a Participant
who is otherwise entitled to elect a Distribution Date does not make
an election in the manner established by the Committee, his
Distribution Date is the Valuation Date coinciding with or
immediately following the date he reaches age sixty-five.
(b) Distributions under the Plan pursuant to Articles IX, X and XI are
made as soon as practicable following the
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applicable Distribution Date but in no event later than sixty days
after the end of the Plan Year in which the Participant reaches age
sixty-five, reaches the tenth anniversary of the date he began
participation in the Plan, or terminates employment, whichever is
latest.
Notwithstanding anything to the contrary contained herein, the
distribution options under the Plan shall comply with Section
401(a)(9) of the Code and regulations promulgated thereunder, which
are hereby incorporated by this reference as a part of the Plan.
Accordingly, unless otherwise permitted by law, the entire interest
of each Participant shall be distributed by April 1 of the calendar
year following the calendar year in which the Participant reaches
age 70-1/2. However, effective January 1, 1997 and only with
respect to a Participant who is not a five percent (5%) owner of the
Company or an Affiliate at any time during Plan Year ending in the
calendar year in which he or she attains age 70-1/2, and except as
otherwise provided by law, such a Participant is not required to
receive a distribution of his or her interest until the April 1 of
the calendar year following the calendar year in which he or she
retires. Except as provided by law, a Participant who reached age
70-1/2 before January 1, 1988 and who was not a five percent owner
of the Company at any time during the Plan Year ending with or
within the calendar year in which the Participant attains age 66-1/2
or thereafter, is not required to receive distribution of his
interest until he separates from service.
(c) If a Participant terminates employment before his Normal Retirement
Age and elects pursuant to Section 10.01(c) to have his Distribution
Date be the Valuation Date coinciding with or immediately following
the date he reaches age 65, he shall continue to be allowed to
direct the investment of his Pretax Deferral Account, TakeCare
Account, Matching Contribution Account, Profit Sharing Contribution
Account and Rollover Account according to the terms of this Plan
until such Accounts are distributed or forfeited.
11.03 RIGHTS, OPTIONS AND RESTRICTIONS ON STOCK
(a) If Stock is distributed from the Plan at a time when it is not
readily tradable on an established public market, then the
provisions of this Section apply.
(b) Any shares of Stock distributed by the Trust are subject to a "right
of first refusal". The right of first refusal must provide that,
before any subsequent transfer, the shares must first be offered for
purchase in writing to the Company, and then to the Trust, at the
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then fair market value. A bona fide written offer from an
independent prospective buyer is deemed to be the fair market value
of the Stock for this purpose. The Company and the Committee (on
behalf of the Trust) have a total of fourteen days to exercise the
right of first refusal on the same terms offered by a prospective
buyer. The Company may require that a Participant entitled to a
distribution of Stock execute an appropriate stock transfer
agreement (evidencing the right of first refusal) before receiving a
certificate for Stock.
(c) The Company will issue a "put option" to any Participant who
receives a distribution of Stock. The put option must permit the
Participant to sell the distributed Stock to the Company at any time
during two option periods, at the fair market value of the shares.
The first put option period is for at least sixty days beginning on
the date of distribution. The second put option period is for at
least sixty days beginning after the new determination of the fair
market value of Stock by the Committee (and notice to the
Participant) in the following Plan Year. The put option must
provide that if the Participant exercises the put option, the
Company, or the Plan if the Plan so elects, will repurchase the
Stock as follows:
(i) If the distribution is a total distribution, payment of the
fair market value of a Participant's Employer Contribution
Account and Employer Stock Bonus Account will be made in five
substantially equal annual payments. The first installment
will be paid not later than thirty days after the Participant
exercises the put option. The Plan will pay a reasonable rate
of interest and provide adequate security on amounts not paid
after thirty days.
(ii) If the distribution is not a total distribution, the Plan will
pay the Participant an amount equal to the fair market value
of the Stock repurchased no later than thirty days after the
Participant exercises the put option.
(d) The rights and protections with regard to Stock acquired with the
proceeds of an exempt loan, including the provisions of this Section
11.03, are not terminable should the exempt loan be paid or the Plan
cease to qualify as an Employee Stock Ownership Plan under Code
Section 4975.
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11.04 SPECIAL DISTRIBUTION AND PAYMENT REQUIREMENTS
(a) Notwithstanding any other provision of the Plan, other than the
provision requiring the Participant's consent to a distribution in
excess of $3,500, a Participant may elect to have his Employer
Contribution Account and Employer Stock Bonus Account distributed as
follows:
(i) If the Participant terminates employment after attaining his
Normal Retirement Age, or on account of his death, or
Permanent and Total Disability, the distribution of such
portion of the Participant's Employer Contribution Account and
Employer Stock Bonus Account will begin not later than one
year after the close of the Plan Year in which such event
occurs unless the Participant elects otherwise under other
provisions of this Plan.
(ii) If the Participant separates from service for any reason other
than those described in clause (i) above, and is not
reemployed by the Employer at the end of the fifth Plan Year
following the Plan Year in which he terminates employment,
distribution of such portion of the Participant's Employer
Contribution Account and Employer Stock Bonus Account will
begin not later than one year after the close of the fifth
Plan Year following the Plan Year in which the Participant
terminates employment unless the Participant elects otherwise
under other provisions of this Plan.
(iii) If the Participant terminates employment for any reason other
than those described in clause (i) above, and is reemployed by
the Employer as of the last day of the fifth Plan Year
following the Plan Year in which he terminates employment,
distribution to the Participant, prior to any subsequent
separation from service, shall be in accordance with terms of
the Plan other than this Section 11.04.
For purposes of this Section 11.04, Stock shall not include
any Stock acquired with the proceeds of an Exempt Loan until
the close of the Plan Year in which such loan is repaid in
full.
(b) Distributions required under this Section 11.04 shall be made in
substantially equal annual payments over a period of five years
unless the Participant otherwise elects under provisions of this
Plan other than this Section 11.04. In no event shall such
distribution period exceed the period permitted under Code Section
401(a)(9).
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(c) The portion of a Participant's Employer Contribution Account
attributable to Stock which was acquired by the Plan after December
31, 1986, shall be determined by multiplying the number of shares of
such Stock held in the Employer Contribution Account by a fraction,
the numerator of which is the number of shares acquired by the Plan
after December 31, 1986 and allocated to Participants' Employer
Contribution Accounts (not to exceed the number of shares held by
the Plan on that date of distribution) and the denominator of which
is the total number of such shares held by the Plan at the date of
the distribution.
(d) Notwithstanding anything else contained herein, if a distribution is
one to which Sections 401(a)(11) and 417 of the Code do not apply,
such distribution may commence less than 30 days after the notice
required under Treasury Regulation Section 1.411(a)-11(c) is given,
provided that:
(i) the Committee clearly informs the Participant that the
Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or
not to elect a distribution (and, if applicable, a particular
distribution option), and
(ii) the Participant, after receiving the notice, affirmatively
elects a distribution.
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ARTICLE XII
COMMITTEE
12.01 APPOINTMENT OF COMMITTEE
A Committee consisting of at least three members will be appointed by the
Board to administer the Plan on behalf of the Company. A vacancy on the
Committee which results from death, resignation or otherwise, will be
filled from time to time by appointment of a new Committee member by the
Board, and a member of the Committee may be removed at any time at the
discretion of the Board.
12.02 MANNER OF ACTION
A majority of the members of the Committee at the time in office will
constitute a quorum for the transaction of business. All resolutions
adopted, and other actions taken by the Committee at any meeting will be
by the vote of a majority of those present at the meeting. Upon the
unanimous written consent of the members at the time in office, action of
the Committee may bc taken without a meeting.
12.03 CHAIRMAN, SECRETARY AND EMPLOYMENT OF SPECIALISTS
The Company may appoint a Chairman of the Committee. The Committee will
elect a Secretary who may, but need not, be a member of the Committee.
They may authorize one or more of their number or any agent to execute or
deliver any instrument or instruments on their behalf, and may employ such
counsel, auditors, and other specialists and such clerical, medical,
actuarial and other services as they may require in carrying out the
provisions of the Plan.
12.04 SUBCOMMITTEES
The Committee may appoint one or more subcommittees and delegate such of
its power and duties as it deems desirable to any such subcommittee, in
which case every reference in the Plan made to the Committee is deemed to
mean or include the subcommittees as to matters within their jurisdiction.
The members of any subcommittee will consist of such officers or other
employees of the Company and such other persons as the Committee may
appoint.
12.05 OTHER AGENTS
The Committee may also appoint one or more persons or agents to aid it in
carrying out its duties as Plan Administrator and Named Fiduciary, as
defined in ERISA, and delegate such of its power and duties as it deems
desirable to such persons or agents.
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12.06 RECORDS
All resolutions, proceedings, acts and determinations of the Committee
shall be recorded by the Secretary thereof or under his supervision, and
all such records, together with such documents and instruments as may be
necessary for the administration of the Plan, shall be preserved in the
custody of the Secretary.
12.07 POWERS AND DUTIES
(a) The Committee has full power to administer the Plan and to construe
and apply all of its provisions on behalf of the Company. The
Company is the Plan Administrator. The Company is the Named
Fiduciary within the meaning of ERISA Section 402(a). The Company
and Committee may delegate to any other person or organizations any
of its powers and duties with respect to the operation of this Plan.
The Committee's powers and duties, unless properly delegated,
include, but are not limited to:
(i) Deciding questions relating to eligibility, continuity of
Service and amount of benefits;
(ii) Deciding disputes which may arise with regard to the rights of
employees, Participants and their legal representatives or
Beneficiaries under the terms of the Plan. Such decisions by
the Committee shall be deemed final in each case;
(iii) Obtaining such information from the Employer with respect to
employees as shall be necessary to determine the rights and
benefits of such employees under the Plan. The Committee may
rely conclusively upon such information furnished by the
Employer;
(iv) Compiling and maintaining all records necessary for the Plan;
(v) Furnishing the Employer, upon request, such reports with
respect to the administration of the Plan as are reasonable
and appropriate;
(vi) Authorizing the Trustee to make payment of all benefits as
they become payable under the Plan;
(vii) Engaging such legal, administrative, actuarial, investment,
accounting, consulting and other professional services as the
Committee deems proper;
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(viii) Adopting rules and regulations for the administration of the
Plan not inconsistent with the Plan;
(ix) Doing and performing such other actions as may be provided for
in other parts of this Plan; and
(x) Allocating Stock to such appropriate Accounts as the Committee
determines.
12.08 INTERESTED MEMBERS
No Committee member shall participate in any action of the Committee on a
matter in which such member has a specialized individual interest as a
Participant in the Plan. Such matters shall be determined by a majority
of the remainder of the members of the Committee.
12.09 INDEMNIFICATION
The Company shall and does by the following items indemnity and hold the
members of the Committee and each of them, harmless from the effects and
consequences of their acts, omissions and conduct in their official
capacities, except to the extent that the effects and consequences thereof
shall result from their own willful misconduct, breach of good faith or
gross negligence in the performance of their duties. The Company shall
have the right, but not the obligation, to conduct the defense of such
members in any proceeding to which this Section applies. The foregoing
right of indemnification shall not be exclusive of other rights to which
each such member may be entitled as a matter of law or by other indemnity
coverage provided by the Company.
The Company's obligations under this Section may be satisfied through
purchase of a policy or policies of insurance providing equivalent
protection.
12.10 CONCLUSIVENESS OF ACTION
Any action on matters within the discretion of the Committee shall be
conclusive, final and binding upon all Participants of the Plan and upon
all persons claiming any rights hereunder including Beneficiaries.
12.11 PAYMENT OF EXPENSES
The members of the Committee shall serve without compensation for services
as such. However, the Company may reimburse such members for all
necessary and proper expenses incurred in carrying out their duties under
the Plan. The compensation or fees of accountants, counsel, employee
benefit consultants, and other specialists and any other costs of
administering the
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Plan or Trust, unless paid directly by the Company are paid from the Trust
Fund and will be charged against Participants' Accounts.
Investment costs and taxes that are paid from the Trust Fund are paid as
follows. Brokerage commissions, transfer taxes, and other charges and
expenses in connection with the purchase and sale of securities are added
to the cost of such securities, as the case may be. There will be no
commission on transactions with the Company or any other party in interest
involving Stock. Taxes, if any, applicable to the Trust Fund which are
payable by the Trustee will be charged against Participants' Accounts,
other than any excise tax payable directly by the Trustee pursuant to
Section 4975 of the Code.
12.12 CLAIMS PROCEDURE
Benefits are provided from this Plan through procedures initiated by the
Committee, and the Participant need not file a claim. However, if a
Participant or Beneficiary believes he is entitled to a benefit, or a
benefit different from the one he receives, then the Participant or
Beneficiary may file a claim for the benefit by writing a letter to the
Committee.
If any claim for benefits under the Plan is wholly or partially denied,
the claimant will be given a written notice of the denial within ninety
days after the claim is received. However, if special circumstances
require an extension of time, and written notice of the extension is
furnished to the claimant, he will be given a written notice of the denial
within one hundred and eighty days after the claim is received. Notice of
the denial will state the following information:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent Plan provisions on which denial is
based;
(c) A description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why the
material or information is necessary;
(d) An explanation that a full and fair review by the Committee of the
decision denying the claim may be requested by the claimant or his
authorized representative by filing with the Company, within sixty
days after the claimant receives the denial, a written request for
review; and
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(e) If a request for review is filed, the claimant or his authorized
representative may review pertinent documents and submit issues and
comments in writing within the same sixty day period specified in
paragraph (d) above.
The decision of the Committee upon review will be made by the Committee's
delegate, will be made promptly, and not later than sixty days after the
Committee's receipt of the request for review. However, if special
circumstances require an extension of time for processing, the claimant
will be so notified and a decision will be rendered as soon as possible,
but not later than one hundred and twenty days after receipt of the
request for review. If the claim is denied, wholly or in part, the
claimant will be given a copy of the decision promptly. The decision will
be in writing and will include specific reasons for the denial, specific
references to the pertinent Plan provisions on which the denial is based
and will be written in a manner calculated to be understood by the
claimant.
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ARTICLE XIII
AMENDMENT TO THE PLAN
13.01 RIGHT TO AMEND
The Board, or the Committee if authorized by the Board, has the right to
amend the Plan at any time and, from time to time, to any extent that it
deems advisable. No amendment will increase the duties or
responsibilities of the Trustee without the Trustees written consent. No
amendment may be made to this Plan which attempts to transfer any part of
the corpus or income of the Trust Fund for purposes other than the
exclusive benefit of Participants and their Beneficiaries. No amendment
may deprive any Participant or Beneficiary of any benefits to which he is
entitled under the Plan with respect to contributions previously made to
the Plan. No amendment may eliminate or reduce an early retirement
benefit or eliminate an optional form of distribution.
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ARTICLE XIV
TERMINATION OF THE PLAN
14.01 RIGHT TO TERMINATE
The Board has the right to terminate the Plan in whole or in part at any
time. In the event of a termination, partial termination or complete
discontinuation of contributions, each affected Participant will become
one hundred percent vested in the value of all his Accounts.
14.02 CORPORATE REORGANIZATION
In the event the Company is dissolved or liquidated or shall by
appropriate legal proceedings be adjudged bankrupt, or in the event
judicial proceedings of any kind result in the involuntary dissolution of
the Company, the Plan shall be terminated. The merger, consolidation or
reorganization of the Company, or the sale of the Company or of all or
substantially all of its assets or stock, shall not terminate the Plan if
there is delivery to the Company, by its successor or by the purchaser of
all or substantially all of its stock or assets, a written instrument
requesting that it bc substituted for the Company and agreeing to perform
all the provisions hereof which the Company is required to perform
hereunder. Upon the receipt of said instrument, with the approval of the
Company, the successor or the purchaser shall be substituted for the
Company herein, and the Company shall be relieved and released from all
obligations of any kind, character or description herein or in any trust
agreement.
14.03 PLAN MERGER AND CONSOLIDATION
In the event that the Plan and Trust Fund merges or consolidates with, or
transfers its assets or liabilities to, any other qualified plan of
deferred compensation, no Participant herein shall, solely on account of
such merger, consolidation or transfer, have an account balance on the day
following such event which is less than his account balance on the day
preceding such event. For the purpose of this Section, a Participant's
account balance shall be calculated based upon the assumption that a plan
termination and distribution of assets occurred on each of the
above-mentioned days. In no event will this provision be construed to
require full vesting upon a merger, consolidation, or transfer of assets
unless the Plan is subsequently partially or wholly terminated or
contributions are completely discontinued.
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ARTICLE XV
TRUST AND THE TRUSTEE
15.01 BOARD TO SELECT TRUSTEE
The Board will select a Trustee to hold and invest the Trust Fund in
accordance with the terms of a trust agreement and/or other contract. The
Trustee must be an individual or individuals, a bank or trust company
incorporated under the laws of the United States or of any state and
qualified to operate as a trustee, a legal reserve life insurance company,
or a combination of such entities. The Board may, from time to time,
change the Trustee then serving under the trust agreement and/or other
contract to another Trustee or elect to terminate the trust and/or other
contract and hold the Plan assets in any other method acceptable under
ERISA.
Any trust agreement and/or other contract are designated as and constitute
a part of the Plan. Any rights which a person has under this Plan are
subject to all of the terms and provisions of the trust agreement and/or
other contract.
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ARTICLE XVI
ADOPTION BY AFFILIATE
16.01 AFFILIATE PARTICIPATION
An Affiliate may become a party to the Plan and Trust Agreement by
adopting the Plan for the benefit of any specified group of its Employees,
effective as of the date specified in such adoption:
(a) By filing with the Company a certified copy of a resolution of its
board of directors to that effect, and/or such other instruments as
the Company may require; and
(b) By the Company's filing with the then Trustee a copy of such
resolution, together with a certified copy of resolutions of the
Board approving such adoption.
The Company may require an adopting Affiliate to execute an instrument of
adoption in such form as is acceptable to the Company. Except as provided
below, an Employee of an Affiliate shall earn Service only with respect to
periods for which his employer is an Affiliate. Notwithstanding the
above, to the extent explicitly provided by the Company in a stock or
asset acquisition, merger or other similar transaction, an Employee of a
Affiliate shall earn Service with respect to periods of employment with
such Affiliate prior to the time it became an Affiliate.
16.02 ACTION BINDING ON PARTICIPATING AFFILIATES
As long as the Company is party to the Plan and the Trust Agreement it
shall be empowered to act thereunder for any Employer in all matters
respecting the Committee and the Trustee and the designation of
Affiliates, and any action taken by the Company with respect thereto shall
automatically include and be binding upon any Employer which is a party to
the Plan.
16.03 TERMINATION OF PARTICIPATION OF AFFILIATE
The Company reserves the right, in its sole discretion and at any time, to
terminate the participation in this Plan of any or all Affiliates. Such
termination shall be effective immediately upon notice of such termination
from the Company to the Trustee and the Affiliate being terminated. In
event of such termination, this Plan shall not terminate, but the portion
of the Plan attributable to the Affiliate shall become a separate Plan,
and the Company shall inform the Trustee of the portion of the Trust Fund
that is then attributable to the participation of such terminated
Affiliate. Such portion
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shall as soon thereafter as is administratively feasible be set apart by
the Trustee as a separate Trust which shall be part of the separate Plan
of such terminated Affiliate. Thereafter the administration, control, and
operation of the Plan with respect to such terminated Affiliate shall be
on a separate basis (with the Affiliate assuming the functions assigned to
the Company hereunder) in accordance with the terms hereof, or as such
terms may be amended by appropriate action of such terminated Affiliate in
accordance with the provisions of Article XIII.
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ARTICLE XVII
TOP-HEAVY PROVISIONS
17.01 DEFINITIONS
Wherever used in this Article XVII, the following words and phrases have
the meaning specified below:
(a) "Accumulated Account" means the total value of an employee's
Accounts as of the Valuation Date which coincides with or
immediately precedes the Determination Date. Accumulated Accounts
includes:
(i) amounts attributable to employee contributions (other than
deductible employee contributions),
(ii) amounts rolled over or transferred directly from a plan
sponsored by an unrelated employer (within the meaning of Code
Section 414(b), (c) or (m)), but only if received by the Plan
before January 1, 1984.
(iii) amounts rolled over or transferred directly from a plan
sponsored by a related employer (within the meaning of Code
Section 414(b), (c) or (m)), without regard to when received
by the Plan, and
(iv) distributions to the employee during the Plan Year which
includes the Determination Date and the four immediately
preceding Plan Years, unless already reflected in the
employee's Accounts. The preceding sentence shall also apply
to distributions under a terminated plan which, if it had not
been terminated would have been required to be included in the
Aggregation Group.
Accumulated Accounts will not include any distribution rolled over
or transferred directly to a related employer (within the meaning of
Code Section 414(b), (c) or (m)). With respect to a Nonkey Employee
who was Key Employee with respect to a plan in a prior year,
Accumulated Accounts will not include any of the employee's
Accounts.
Accumulated Accounts will not include the Accounts of an employee
who has not performed any service for the Employer during the five
year period ending on the Determination Date. However, if the
employee again performs services his Accounts will be included.
(b) "Determination Date" means in any Plan Year the last day of the
immediately preceding Plan Year.
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(c) "Key Employee" means at any given time an employee, a deceased
employee, or the beneficiary of a deceased employee who during the
current Plan Year or any of the four immediately preceding Plan
Years is:
(i) an officer of an Employer with annual earnings from the
Employer greater than 50% of the maximum dollar limit under
Code Section 415(b)(1)(A) in effect for the calendar year in
which the Plan Year ends. In any Plan Year, officer will not
include more than the lesser of:
(A) fifty employees, or
(B) the greater of three employees or ten percent of the
greatest number of employees the Employer had during the
current Plan Year or any of the four immediately
preceding Plan Years.
Such limited number of officers will be selected from
the group of all persons otherwise considered officers
under this paragraph (i) in the current Plan Year or
four immediately preceding Plan Years, selecting only
those who had the highest annual earnings in such five
year period;
(ii) an employee who is one of the ten employees of the Employer
having annual compensation from such Employer of more than the
limitation in effect under Section 415(c)(1)(A) of the Code
and owning (or considered as owning within the meaning of
Section 318 of the Code) both more than a 1/2% interest and
the largest interests in such Employer. An employee's
ownership interest during a Plan Year is his greatest
ownership interest at anytime during the Plan Year. If two
employees have the same ownership interest, the employee with
the greater earnings in the Plan Year of such ownership will
be deemed to have the greater ownership interest.
(iii) an employee who owns at least five percent of an Employer; or
(iv) an employee who owns at least one percent of an Employer and
has annual earnings from the Employer of more than $150,000.
For purposes of determining the number of officers of the Employer,
all employees of organizations required to be aggregated under Code
Section 414(b), (c) and (m) will be
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considered employees of the Employer. For purposes of determining
earnings from the Employer, all earnings, as stated on Form W-2 for
the calendar year ending within the Plan Year, from all
organizations required to be aggregated under Code Section 414(b),
(c) and (m) will be treated as earned from the Employer. For
purposes of determining ownership interest, each entity that would
otherwise be aggregated under Code Section 414(b), (c) and (m) will
be treated as a separate Employer. Ownership includes any interest
constructively owned under the applicable provisions of the Code.
Employee will not include any employee or beneficiary of an employee
who did not have earnings from an Employer during the five year
period ending on the Determination Date.
(d) "Nonkey Employee" means at any given time an employee who is not a
Key Employee.
17.02 DETERMINATION OF TOP HEAVY STATUS - SINGLE PLAN
If this Plan is the only retirement plan qualified under Code Section
401(a) maintained by an Affiliate, the rules of this Section 17.02 will
apply to determine if this Plan is Top Heavy. The Plan will be Top Heavy
during a Plan Year if as of the Determination Date in such Plan Year the
value of the Accumulated Accounts under the Plan of all Key Employees
exceeds sixty percent of the value of Accumulated Accounts under the Plan
of all employees.
17.03 DETERMINATION OF TOP HEAVY STATUS - MULTIPLE PLANS
(a) If an Affiliate maintains more than one retirement plan qualified
under Code Section 401(a), the rules of this Section 17.03 will
apply to determine if this Plan is Top Heavy.
This Plan will be Top Heavy during a Plan Year if the Plan is
required to be in the Aggregation Group on the Plan's Determination
Date for such Plan Year and the Aggregation Group is Top Heavy.
The Aggregation Group is Top Heavy if the value of the Accumulated
Accounts for all Key Employees of all the plans in the group exceeds
sixty percent of the value of the Accumulated Accounts for all
employees of all the plans in the group. The Accumulated Accounts
of each plan will be determined separately as of each plan's
Determination Date and then aggregated by calendar year. If a plan
in the Aggregation Group is a defined benefit plan (as defined in
Code Section 414(j), for purposes of this subsection (a) value of
the Accumulated Accounts
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means the present value of benefits as defined under the top heavy
provisions of such plan.
(b) The Aggregation Group consists of all the Affiliate's retirement
plans qualified under Code Section 401(a) which are either required
or permitted to be in the Aggregation Group.
A plan is required to be in the Aggregation Group if during the Plan
Year containing the Determination Date or any of the four preceding
Plan Years:
(1) the Plan has at least one Key Employee, or
(2) the Plan is required to be aggregated with a plan with at
least one Key Employee so that the later plan meets the
requirements of Code Sections 401(a)(4) or 410.
A plan, which has been formally terminated, has ceased crediting
service for benefit accruals and vesting, and has been or is
distributing all plan assets to participants or their beneficiaries
as soon as administratively feasible, is required to be in the
Aggregation Group if it was maintained during the Plan Year
containing the Determination Date or any of the four preceding Plan
Years and it would, but for the fact that it terminated, bc required
to be in the Aggregation Group pursuant to the preceding sentence.
A plan is permitted to be in the Aggregation Group if it is not
required to be in the Aggregation Group, provided including it does
not prevent the Aggregation Group as a whole from meeting the
requirements of Code Sections 402(a)(4) and 410.
17.04 EFFECT OF TOP HEAVY STATUS
If the Plan is Top Heavy for any Plan Year, the requirements of this
Section 17.04 apply during such Plan Year, superseding all other Plan
provisions inconsistent with its terms.
(a) MINIMUM VESTING
The vested portion of a Participant who has completed one Hour of
Service in any Plan Year in which the Plan is Top Heavy is
determined under the schedule designated below in this Section
17.04(a) or the applicable schedules in Section 10.02, whichever is
more favorable to the Participant:
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SERVICE VESTED PORTION
less than 2 years 0%
2 but less than 3 years 20%
3 but less than 4 years 40%
4 but less than 5 years 60%
5 but less than 6 years 80%
6 or more years 100%
In each Plan Year in which the Plan is not Top Heavy, which occurs
immediately after a Plan Year in which the Plan is Top Heavy, an
employee who is participating in the Plan during the Election Period
has the right to elect to continue to be subject to the vesting
schedule in this subparagraph (a). The Election Period begins on
the date the Plan is determined not to be Top Heavy and ends on the
later of sixty days after the Plan is determined not to be Top Heavy
or sixty days after the employee is given written notice that the
Plan is no longer Top Heavy.
(b) MINIMUM CONTRIBUTION
On the last day of any Plan Year in which the Plan is Top Heavy an
Employer Contribution will be allocated to the appropriate Account
of each employee who is eligible to participate in the Plan pursuant
to Section 2.01 on such date. The amount of such contribution, when
aggregated with all other contributions allocated to the
Participant's Pretax Deferral Account and Employer Contribution
Account and his employer contribution account under the Talbert
Medical Management Holdings Money Purchase Pension Plan during the
Plan Year must equal the lesser of-
(i) Three percent of the Participant's earnings, as stated on Form
W-2 for the calendar year ending within such Plan Year, or
(ii) A percent of the Participant's earnings, as defined in
subsection (1) above, equal to the percentage at which
contributions (including Pretax Deferrals) are allocated
pursuant to Sections 4.02, 4.03, and 4.05 (or required to be
allocated) for the Plan Year for the Key Employee for whom
such percentage is the highest for the year.
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The Employer will make an additional contribution to the Plan
sufficient to make the allocation described above.
This Subsection (b) applies without regard to contributions or
benefits under Social Security or any other Federal or State law.
(c) ADJUSTMENT TO LIMITATION ON ANNUAL ADDITIONS
(i) If an Affiliate also maintains a qualified defined benefit
plan (as defined in Code Section 414(j) the denominator of
both the defined benefit plan fraction and defined
contribution plan fraction, as described in Code Section
415(e), for the Limitation Year ending in such Plan Year will
be adjusted by substituting one for one and twenty-five one
hundredths in each place the figure occurs.
(ii) The adjustments referred to in paragraph (i) are not required
if:
(A) the Plan would not be Top Heavy if ninety percent were
substituted for sixty percent in Sections 17.02 and
17.03, and
(B) Subsection (b)(i) above is adjusted by substituting four
percent for three percent where the figure occurs.
(iii) The adjustments referred to in paragraph (i) above do not
apply to any Participant as long as no Employer Contributions,
forfeitures, salary deferrals or nondeductible voluntary
contributions are allocated to such Participant's Accounts and
the Participant does not accrue any benefits under the defined
benefit plan.
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ARTICLE XVIII
MISCELLANEOUS
18.01 VOLUNTARY PLAN
The Plan is purely voluntary on the part of the Company and Employer and
neither the establishment of the Plan nor any amendment thereof, nor the
creation of any fund or account, nor the payment of any benefits shall be
construed as giving any person a legal or equitable right as against the
Company, an Employer, the Trustee or the Committee unless the same shall
be specifically provided for in this Plan or conferred by affirmative
action of the Committee or the Company in accordance with the terms and
provisions of this Plan. Nor shall such actions be construed as giving
any Employee or Participant the right to be retained in the service of the
Employer. All Employees and/or Participants shall remain subject to
discharge to the same extent as though this Plan had not been established.
18.02 NONALIENATION OF BENEFITS
Participants and their Beneficiaries shall be entitled to all the benefits
specifically set out under the terms of the Plan, but neither said
benefits nor any of the property rights therein shall be assignable or
distributable to any creditor or other claimant of such Participant. A
Participant shall not have the right to anticipate, assign, pledge,
accelerate or in any way dispose of or encumber any of the monies or
benefits or other property which may be payable or become payable to such
Participant or his Beneficiary. The preceding sentence shall also apply
to the creation, assignment, or recognition of a right to any benefit
payable with respect to Participant pursuant to a domestic relations
order, unless such order is determined to be a qualified domestic
relations order, as defined in Code Section 414(p). Consistent with the
preceding sentence, payments to an alternate payee pursuant to a qualified
domestic relations order may be made prior to the time the Participant
attains "earliest retirement age" (as defined in Section 414(p)(4)(B) of
the Internal Revenue Code).
18.03 INABILITY TO RECEIVE BENEFITS
If the Committee receives evidence that (a) a person entitled to receive
any payment under the Plan is physically or mentally incompetent to
receive payment and to give a valid release therefor, and (b) another
person or an institution is then maintaining or has custody of such
person, and no guardian, committee or other representative of the estate
of such person has been duly appointed by a court of competent
jurisdiction, such payment may be made to such other person or institution
referred to in (b) above. The release to such
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other person or institution shall be a valid and complete discharge for
the payment.
18.04 LOST PARTICIPANTS
If the Committee is unable within two years after a distribution becomes
due, and after reasonable and diligent effort, to locate a Participant or
Beneficiary who is entitled to payment under the Plan, the payment due
such person shall become a forfeiture; provided, however, that if the
Participant or Beneficiary later files a claim for his benefit it shall be
reinstated. Notification by certified or registered mail to the last
known address of the Participant or Beneficiary shall be deemed a
reasonable and diligent effort to locate such person.
18.05 LIMITATION OF RIGHTS
Nothing in the Plan expressed or implied is intended or shall be construed
to confer upon or give to any person, firm or association other than the
Company, an Employer, the Participant and their successors in interest any
right, remedy or claim under or by reason of this Plan.
18.06 ABSENCE OF GUARANTY
Each Participant (and his Beneficiary) assumes all risk connected with any
decreased in the market value of any assets held under the Plan. Neither
the Company nor the Employer in any way guarantees the Trust Fund from
loss or depreciation, or the payment of any amount that may be or become
due to any person from the Trust Fund. The Trust Fund shall be the sole
source of distributions to be made under this Plan.
18.07 INVALID PROVISIONS
In case any provision of this Plan shall be held illegal or invalid for
any reason, said illegality or invalidity shall not affect the remaining
parts of this Plan, but this Plan shall be construed and enforced as if
said illegal and invalid provisions had never been inserted herein.
18.08 ONE PLAN
This Plan may be executed in any number of counterparts, each of which
shall be deemed an original and said counterparts shall constitute but one
and the same instrument and may be sufficiently evidenced by any one
counterpart.
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18.09 GOVERNING LAW
The Plan shall be governed by and construed in accordance with the Federal
laws governing employee benefit plans qualified under the Code and in
accordance with the laws of the State of California where such laws are
not preempted by the aforementioned federal laws.
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ARTICLE XIX
DIRECT ROLLOVERS
19.01 DIRECT ROLLOVERS
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a Distributee's election under this Article, if a
Distributee will receive an Eligible Rollover Distribution of at least
$200, the Distributee may elect, at the time and in the manner prescribed
by the Committee, to have any portion of an Eligible Rollover Distribution
paid directly to an Eligible Retirement Plan specified by the Distributee
in a Direct Rollover; provided, however, that a Distributee may not elect
to have an Eligible Rollover Distribution of less than $500 paid directly
to an Eligible Retirement Plan unless the Distributee elects to have his
or her entire Eligible Rollover Distribution paid directly to the Eligible
Retirement Plan.
19.02 DEFINITIONS
(a) Eligible rollover distribution: An eligible rollover distribution
is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover
distribution does not include: any distribution that is one of a
series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the
extent such distribution is required under Section 401(a)(9) of the
Code; and the portion of any distribution that is not includable in
gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(b) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in Section 408(a) of the
Code, an individual retirement annuity described in Section 408(b)
of the Code, an annuity plan described in Section 403(a) of the
Code, or a qualified plan described in Section 401(a) of the Code,
that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
(c) Distributee: A distributee includes an employee or former employee.
In addition, the employee's or former
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employee's surviving spouse and the employee's or former employee's
spouse or former spouse who is the alternate payee under a qualified
domestic relations order, as defined in Section 414(p) of the Code,
are distributees with regard to the interest of the spouse or former
spouse.
(d) Direct rollover: A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
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ARTICLE XX
EXECUTION
IN WITNESS WHEREOF, the Company has caused its duly authorized
officer to execute this Plan on this _____ day of ___________, 1997.
TALBERT MEDICAL MANAGEMENT HOLDINGS
CORPORATION
By:
------------------------------
Its:
------------------------------
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TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
MONEY PURCHASE PENSION PLAN
<PAGE>
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
MONEY PURCHASE PENSION PLAN
TABLE OF CONTENTS
ARTICLE I DEFINITIONS............................................... 2
1.01 Accounts.................................................. 2
1.02 Affiliate................................................. 2
1.03 Beneficiary............................................... 2
1.04 Board..................................................... 2
1.05 Code...................................................... 3
1.06 Committee................................................. 3
1.07 Company................................................... 3
1.08 Compensation.............................................. 3
1.09 Distribution Date......................................... 4
1.10 Effective Date............................................ 4
1.11 Eligible Employee......................................... 4
1.12 Employer.................................................. 4
1.13 ERISA..................................................... 4
1.14 Highly Compensated Employee............................... 4
1.15 Hour of Service........................................... 5
1.16 Inactive Participant...................................... 6
1.17 Limitation Year........................................... 6
1.18 Non-Highly Compensated Employee........................... 6
1.19 Normal Retirement Age..................................... 6
1.20 Participant............................................... 6
1.21 Period of Severance....................................... 6
1.22 Permanent and Total Disability............................ 7
1.23 Plan...................................................... 7
1.24 Plan Year................................................. 7
1.25 Service................................................... 8
1.26 Trust Fund................................................ 9
1.27 Trustee................................................... 9
1.28 Valuation Date............................................ 9
ARTICLE II ELIGIBILITY AND PARTICIPATION............................. 10
2.01 Participation in the Plan................................. 10
2.02 Reemployment.............................................. 10
2.03 Employment After Normal Retirement Age.................... 10
2.04 Termination of Participation.............................. 10
2.05 Inactive Participation and Transfers...................... 10
ARTICLE III CONTRIBUTIONS............................................. 12
3.01 Employer Contributions.................................... 12
3.02 Limitation on Reversion of Contributions.................. 12
3.03 Make-Up Contributions..................................... 12
ARTICLE IV PARTICIPANT'S ACCOUNT: ALLOCATIONS........................ 13
4.01 Participant Accounts...................................... 13
ARTICLE V ALLOCATION LIMITATIONS.................................... 14
5.01 Basic Limitation on Annual Additions...................... 14
5.02 Participation in this Plan and a Defined Benefit Plan..... 15
5.03 Reduction in Annual Additions and Elimination of Excess
Amounts................................................... 15
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TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
MONEY PURCHASE PENSION PLAN
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
ARTICLE VI INVESTMENTS: ALLOCATION OF GAINS AND LOSSES............... 17
6.01 Investment of Accounts.................................... 17
6.02 Allocation of Investment Fund Gains and Losses............ 17
ARTICLE VII WITHDRAWALS AND LOANS..................................... 19
7.01 Withdrawals from Employee After-Tax Contribution Transfer
Account................................................... 19
7.02 Amount and Payment of Withdrawals......................... 19
7.03 Loans to Participants..................................... 19
ARTICLE VIII RETIREMENT, DISABILITY AND DEATH BENEFITS................. 23
8.01 Retirement Benefits....................................... 23
8.02 Disability Benefits....................................... 23
8.03 Death Benefits............................................ 23
8.04 Annuity Requirements...................................... 23
ARTICLE IX TERMINATION BENEFITS AND VESTING REQUIREMENTS............. 24
9.01 Benefits Upon Termination of Employment................... 24
9.02 Vesting Requirements...................................... 24
9.03 Annuity Requirement....................................... 24
ARTICLE X DISTRIBUTION OF BENEFITS.................................. 25
10.01 Form of Benefits for Retirement and Other Termination..... 25
10.02 Joint and Survivor Annuity Requirements................... 25
10.03 Qualified Pre-Retirement Survivor Annuity Requirements.... 27
10.04 Timing of Distributions................................... 28
ARTICLE XI COMMITTEE................................................. 30
11.01 Appointment of Committee.................................. 30
11.02 Manner of Action.......................................... 30
11.03 Chairman, Secretary and Employment of Specialists......... 30
11.04 Subcommittees............................................. 30
11.05 Other Agents.............................................. 30
11.06 Records................................................... 31
11.07 Powers and Duties......................................... 31
11.08 Interested Members........................................ 32
11.09 Indemnification........................................... 32
11.10 Conclusiveness of Action.................................. 32
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TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
MONEY PURCHASE PENSION PLAN
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
11.11 Payment of Expenses....................................... 33
11.12 Claims Procedure.......................................... 33
ARTICLE XII AMENDMENT TO THE PLAN..................................... 35
12.01 Right to Amend............................................ 35
ARTICLE XIII TERMINATION OF THE PLAN................................... 36
13.01 Right to Terminate........................................ 36
13.02 Corporate Reorganization.................................. 36
13.03 Plan Merger and Consolidation............................. 36
ARTICLE XIV TRUST AND THE TRUSTEE..................................... 37
14.01 Board to Select Trustee................................... 37
ARTICLE XV ADOPTION BY AFFILIATE..................................... 38
15.01 Affiliate................................................. 38
15.02 Action Binding on Participating Affiliates................ 38
15.03 Termination of Participation of Affiliate................. 38
ARTICLE XVI TOP-HEAVY PROVISIONS...................................... 40
16.01 Definitions............................................... 40
16.02 Determination of Top Heavy Status - Single Plan........... 42
16.03 Determination of Top Heavy Status - Multiple Plans........ 42
16.04 Effect of Top Heavy Status................................ 43
ARTICLE XVII MISCELLANEOUS............................................. 46
17.01 Voluntary Plan............................................ 46
17.02 Nonalienation of Benefits................................. 46
17.03 Inability to Receive Benefits............................. 46
17.04 Lost Participants......................................... 47
17.05 Limitation of Rights...................................... 47
17.06 Absence of Guaranty....................................... 47
17.07 Invalid Provisions........................................ 47
17.08 One Plan.................................................. 47
17.09 Governing Law............................................. 47
ARTICLE XVIII DIRECT ROLLOVERS.......................................... 49
18.01 Direct Rollovers.......................................... 49
18.02 Definitions............................................... 49
ARTICLE XIX EXECUTION................................................. 51
iii
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INTRODUCTION
FHP International Corporation ("FHP") previously established the FHP Money
Purchase Pension Plan ("FHP Plan") for the benefit of certain employees of FHP
and certain of its Subsidiaries which adopted the FHP Plan. Two of these
subsidiaries were Talbert Medical Management Corporation and Talbert Health Care
Services Corporation (collectively and together with Talbert Medical Management
Holdings Corporation referred herein to as "Talbert"). Effective on February
14, 1997, the FHP controlled group was acquired by PacifiCare Health Systems,
Inc. ("PacifiCare") and sponsorship of the FHP Plan was assumed by PacifiCare in
connection with that transaction.
Effective on or about April __, 1997, Talbert became a separate publicly traded
corporation. Talbert established this Plan for the benefit of certain of its
employees and the employees of corporations which are part of he same
"affiliated service group" (within the meaning of Code Section 414(m)) as
Talbert. Pursuant to the Employee Benefits and Compensation Allocation
Agreement between FHP and Talbert dated February 14, 1997, the assets and
liabilities of the FHP Plan attributable to employees of Talbert and various
affiliated entities were transferred to this Plan. This Plan should be known as
the "Talbert Medical Management Holdings Corporation Money Purchase Pension
Plan." This Plan is frozen both as to participation and additional
contributions.
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ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan with their first letters
capitalized, they have the meaning specified below. Additional words and
phrases used in the Plan are not defined in this Article I, but, for
convenience, are defined as they are introduced in the text. Unless the context
indicates otherwise, the masculine pronoun refers to a man or a woman. Words in
the singular include the plural, and vice versa, unless the context indicates
otherwise.
1.01 ACCOUNTS
"Accounts" means a Participant's Employer Contribution Transfer Account
and his Employee After-Tax Contribution Transfer Account. These Accounts
are described in Section 4.01 of the Plan.
1.02 AFFILIATE
"Affiliate" means the Company and each other entity which is controlled by
or under common control with the Company or is a member of the same
affiliated service group, within the meaning of Code Sections 414 and
1563.
1.03 BENEFICIARY
"Beneficiary" means the person or persons (who may be named contingently
or successively) designated by a Participant to receive his Accounts in
the event of his death. Each Participant may designate a Beneficiary on a
form prescribed by the Committee. The designation will be effective when
filed with the Committee, and will revoke all prior designations by the
same Participant. A married Participant who designates a Beneficiary
other than his spouse must obtain and submit to the Committee the spouse's
written, notarized consent to the designation of each such Beneficiary on
a form that discloses to the spouse the potential effect of such consent.
The designation will not be valid until the Committee receives such
notarized consent. If no Beneficiary is designated at the time of the
Participant's death, or if no person so designated survives the
Participant, the Beneficiary will be the Participant's spouse, or if the
deceased Participant has no surviving spouse, his estate.
1.04 BOARD
"Board" means the board of directors of Talbert Medical Management
Holdings Corporation.
2
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1.05 CODE
"Code" means the Internal Revenue Code of 1986 as it currently exists and
includes any subsequent amendments.
1.06 COMMITTEE
"Committee" means the Committee described in Article XI.
1.07 COMPANY
"Company" means Talbert Medical Management Holdings Corporation.
1.08 COMPENSATION
"Compensation" means the total salary and wages paid for a Plan Year or
other specified period to a Participant by the Employer for services
rendered. It includes salary, wages, commission, tips, bonuses and
overtime compensation reportable on federal form W-2 or its equivalent and
amounts of salary reduction elected by the Participant in connection with
pre-tax deferrals under the Talbert Medical Management Holdings
Corporation Employee Stock Ownership Plan and/or a benefit plan sponsored
by an Affiliate and qualified under Code Section 125. It excludes (1) any
amount (other than the pre-tax deferrals described above) contributed by
the Employer to any pension plan or plan of deferred compensation, (2) any
amount, regardless if it is or becomes reportable on federal form W-2
which is (i) paid by the Employer (other than the salary reduction
described above) for other fringe benefits, such as health and welfare,
hospitalization, group life insurance benefits, stock options or
perquisites or (ii) paid by the Employer in lieu of the benefits described
in (i) above, such as a cash out of credits generated under a plan
qualified under Code Section 125, (3) any reimbursement for expenses or
allowances, including automobile allowances and moving allowances and (4)
any amount realized when a stock option is exercised at a price below fair
market value on the date of the exercise.
A Participant's annual Compensation in excess of $150,000 is disregarded
for all purposes under the Plan. Such dollar limit will be adjusted
pursuant to Code Section 401(a)(17).
Compensation will be recognized as of an employee's effective date of
participation pursuant to Sections 2.01 and 2.02. Compensation for any
Plan Year shall be determined by counting Compensation for the payroll
periods ending with or within such Plan Year.
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1.09 DISTRIBUTION DATE
"Distribution Date" means the date as of which the vested portion of a
Participant's Accounts is distributed, as described in Section 8.01 (in
the case of Normal Retirement Age), Section 8.02 (in the case of Permanent
and Total Disability), Section 8.03 (in the case of death) and Section
9.01 (in the case of any other termination of employment).
1.10 EFFECTIVE DATE
"Effective Date" means the original effective date of the Plan, which is
April __, 1997.
1.11 ELIGIBLE EMPLOYEE
"Eligible Employee" means any person who is employed by an Employer
provided he is not one of the following:
(a) a per diem, on-call, or temporary employee,
(b) an employee whose terms of employment are covered by a collective
bargaining agreement between the Employer and employee
representatives where there is evidence retirement benefits were the
subject of good faith bargaining unless the bargaining agreement
expressly provides for participation in the Plan, or
(c) any leased employee described in Section 414(n) of the Code.
1.12 EMPLOYER
"Employer" means the Company and any Affiliate which adopts the Plan in
accordance with Article XV.
1.13 ERISA
"ERISA" mean the Employee Retirement Income Security Act of 1974, as it
currently exists and includes any subsequent amendments.
1.14 HIGHLY COMPENSATED EMPLOYEE
"Highly Compensated Employee" means an individual described in Code
Section 414(q), as amended.
4
<PAGE>
1.15 HOUR OF SERVICE
"Hour of Service" means:
(a) Each hour for which a person is directly or indirectly paid by, or
entitled to payment from an Affiliate for the performance of duties.
These hours are credited to the person in the computation period in
which the duties are performed.
(b) Each hour for which a person is directly or indirectly paid by, or
entitled to payment from an Affiliate on account of a period of time
during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including disability), layoff, jury duty,
military duty or leave of absence. However, a person is not
entitled to credit for such hours if payment is made or due under a
plan maintained solely for the purpose of complying with applicable
worker's compensation, unemployment compensation or disability
insurance laws, or if such payment solely reimburses a person for
his medical or medically related expenses. No more than 501 hours
are credited for any single continuous period of time during which
no duties are performed.
In the case of a payment which is made or due on account of a period
during which a person performs no duties, and which results in
crediting of hours under this subsection (b), or in the case of an
award or agreement for back pay, to the extent that such award or
agreement is made with respect to a period described in this
subsection (b), the number of hours and the computation period in
which they are to be credited is determined according to Section
2530.200(b)-2(b) and (c) of Title 29 of the Code of Federal
Regulations.
(c) Each hour for which a person is entitled to back pay, regardless of
mitigation of damages, which has been either awarded or agreed to by
an Affiliate. These hours are credited to the person in the
computation period to which the award, agreement or payment
pertains. However, a person will not be credited with hours under
this subsection (c) if he received credit for the same hours under
subsections (a) or (b).
(d) Notwithstanding the above, an exempt employee will be credited with
90 Hours of Service for each bi-weekly pay period (or 95 Hours of
Service in the case of a semi-monthly pay period) during which he
would receive credit for at least one Hour of Service under
subsections (a) through (c) above. For purposes of
5
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this subsection an exempt employee is defined under the Fair Labor
Standards Act.
1.16 INACTIVE PARTICIPANT
"Inactive Participant" means a person who was a Participant but who is
transferred to and is in a position of employment in which he is no longer
an Eligible Employee.
1.17 LIMITATION YEAR
"Limitation Year" means the twelve month period beginning January 1 and
ending the following December 31, as that term is used in Section 5.01;
provided, however, that the initial limitation year shall be from _______
__, 1997 through December 31, 1997.
1.18 NON-HIGHLY COMPENSATED EMPLOYEE
"Non-Highly Compensated Employee" means a person employed by an Affiliate
who is not a Highly Compensated Employee.
1.19 NORMAL RETIREMENT AGE
"Normal Retirement Age" means a Participant's sixty-fifth birthday.
1.20 PARTICIPANT
"Participant" means any Eligible Employee who is a Participant as provided
in Article II. Where appropriate to the context, it also includes an
Inactive Participant.
1.21 PERIOD OF SEVERANCE
"Period of Severance" means, for any person, an interruption in his
Service under the Plan. A Period of Severance begins on the date the
person no longer is credited with Service under the Plan and ends on the
date the person returns to active employment with an Affiliate. A person
whose employment with all Affiliates is terminated, or deemed terminated,
for any reason will incur:
(a) a one year Period of Severance if he fails to return to active
employment as an employee and render one or more Hours of Service
before the first annual anniversary of the date of such termination.
(b) a five year Period of Severance if he fails to return to active
employment as an employee and render one or more Hours of Service
before the fifth annual anniversary of the date of such termination.
6
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For purposes of this Section, a person who is absent from employment for
maternity or paternity reasons will not be treated as having incurred a
one year Period of Severance until the second anniversary of such absence,
or a five year Period of Severance until the sixth anniversary of such
absence, or such earlier time permitted under applicable regulations.
Absence for maternity or paternity reasons means a person is absent
because:
(1) the person is pregnant,
(2) the person gave birth to a child;
(3) an adopted child is placed with the person, or
(4) the person is caring for his natural or adopted child
immediately after the child is born or placed with the person.
The provisions of this paragraph will not apply unless the person provides
information to the Committee, within the time limits established by the
Committee, sufficient to establish that the absence is for maternity or
paternity reasons and the duration of the absence.
1.22 PERMANENT AND TOTAL DISABILITY
"Permanent and Total Disability" means any medically determinable physical
or mental impairment resulting from sickness, accident or other injury
which may be expected to be permanent and continuous and which renders the
Participant incapable of performing the duties of his employment or any
similar employment with his Employer. The determination of the Committee
as to whether a Participant is "Permanently and Totally Disabled," based
upon the certification of one or more physicians or surgeons selected by
it, shall be final and binding on all persons.
1.23 PLAN
"Plan" means the Talbert Medical Management Holdings Corporation Money
Purchase Pension Plan described in this document and includes any
subsequent amendments.
1.24 PLAN YEAR
"Plan Year" means the twelve month period beginning January 1 and ending
the following December 31; provided, however, that the initial Plan Year
is a short Plan Year from _______ __, 1997 through December 31, 1997.
7
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1.25 SERVICE
"Service" means, with respect to any person, his period or periods of
employment with all Affiliates which are counted as Service according to
the following rules.
(a) Each person is credited with Service under the Plan for the period
or periods during which the person maintains an employment
relationship with any Affiliate. A person's employment relationship
is deemed to commence on the date the person first renders one Hour
of Service, and is deemed to continue during the following periods:
(i) Periods of leave of absence with or without pay granted to the
person by an Affiliate in a like and nondiscriminatory manner
for any purpose including, but not limited to, sickness,
accident or military leave. A person is not considered to
have terminated employment during such leave of absence unless
he fails to return to the employ of an Affiliate at or prior
to the expiration date of the leave. If he fails to so
return, he is deemed to have terminated as of the date the
leave began but he is given credit for Service through the
earlier of the first anniversary of the date his leave of
absence began or the date his employment terminates.
(ii) In the case of a person who terminates employment and who is
later reemployed by an Affiliate before he incurs a one year
Period of Severance, the period between his date of
termination and date of reemployment.
(b) Except as provided in Subsection (c) all periods of a person's
Service, whether or not consecutive, are aggregated. Service is
measured in elapsed years and fractions of years whereby each twelve
complete calendar months constitutes one year, each complete
calendar month constitutes one-twelfth of a year and partial
calendar months which when aggregated equal thirty days constitute
one-twelfth of a year.
(c) In the case of a person who terminates employment before he becomes
a Participant and who is not reemployed before the date he incurs
the greater of.
(i) a five year Period of Severance, or
(ii) a Period of Severance greater than his service before the date
he terminated employment,
8
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his Service before he terminated employment will be disregarded.
(d) Notwithstanding anything in this Plan to the contrary, Service that
was credited to a Participant under the terms of the FHP Money
Purchase Pension Plan shall be counted as Service under this Plan
for purposes of vesting and eligibility.
1.26 TRUST FUND
"Trust Fund" means the assets of the Plan as invested pursuant to Section
6.01 and held by the Trustee and subject to the trust agreement described
in Article XIV.
1.27 TRUSTEE
"Trustee" means the person, persons, bank and/or other entity selected by
the Board to hold the Trust Fund according to Article XIV.
1.28 VALUATION DATE
"Valuation Date" means March 31, June 30, September 30, and December 31 of
each Plan Year. Notwithstanding the preceding sentence, upon a
determination by the Committee, in its sole discretion, that more frequent
Valuation Dates are administratively feasible, Valuation Date means the
last day of any other months selected by the Committee. Valuation Date
may also mean any date selected by the Committee in the event the
Committee in its sole discretion determines that events affecting the
market value of the Trust Fund require an interim Valuation Date.
9
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ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.01 PARTICIPATION IN THE PLAN
The Participants in the Plan are those Eligible Employees whose account
balances under the FHP Money Purchase Pension Plan were transferred to
this Plan in connection with the rights offering which resulted in the
Company becoming a separate publicly-traded corporation. Participation in
the Plan is otherwise frozen. Accordingly, no additional Eligible
Employees will be permitted to participate in the Plan.
2.02 REEMPLOYMENT
A Participant whose employment with all Affiliates terminated and who is
subsequently reemployed and becomes an Eligible Employee again, becomes a
Participant on the date he becomes an Eligible Employee again.
An employee who was not a Participant when his employment with all
Affiliates terminated and who is later reemployed by an Affiliate becomes
a Participant in the Plan pursuant to the provisions of Section 2.01.
Hours of Service before he terminated employment will be considered in
determining his eligibility to become a Participant.
2.03 EMPLOYMENT AFTER NORMAL RETIREMENT AGE
A Participant who continues employment as an Eligible Employee after his
Normal Retirement Age continues to be a Participant for all purposes of
the Plan.
2.04 TERMINATION OF PARTICIPATION
A Participant will cease to be a Participant on the date on which he or
his Beneficiary receives distribution of the entire vested portion of his
Accounts under the Plan due to his termination of employment, retirement,
death or Permanent and Total Disability.
2.05 INACTIVE PARTICIPATION AND TRANSFERS
A Participant who transfers to an employment status with an Affiliate in
which he is no longer an Eligible Employee becomes an Inactive
Participant. Employer Contributions will not be allocated to his Employer
Contribution Account after the date of his transfer.
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If a Participant becomes an Inactive Participant, his Accounts will
continue to be held under the Plan until he becomes entitled to a
distribution under the provisions of Articles VIII and IX.
An employee who transfers to an employment status with an Affiliate in
which he is an Eligible Employee may become a Participant pursuant to
Section 2.01. Employer Contributions to his Employer Contribution Account
will not be based on his Compensation earned before the date he
transferred and became a Participant.
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ARTICLE III
CONTRIBUTIONS
3.01 EMPLOYER CONTRIBUTIONS
The Plan is frozen with respect to Employer Contributions. Accordingly,
until such time as this Plan is further amended, no additional Employer
Contributions will be made to the Plan.
3.02 LIMITATION ON REVERSION OF CONTRIBUTIONS
Except as provided in subsections (a), (b) and (c) below, contributions
made under the Plan are held for the exclusive benefit of Participants and
their Beneficiaries and may not revert to the Employer.
(a) A contribution which is made by a mistake of fact may be returned to
the Employer within one year after it is contributed to the Plan.
(b) All contributions to the Plan are conditioned on their deductibility
under Code Section 404. To the extent the deduction is disallowed,
the amount disallowed will be returned to the Employer within one
year after the disallowance.
(c) All contributions to the Plan are conditioned on the Plan's
qualification under Code Section 401(a). If the Plan does not so
qualify, any contributions will be returned to the Employer within
one year after the qualification is denied.
3.03 MAKE-UP CONTRIBUTIONS
In addition to other Employer Contributions described in Section 3.01, an
Employer may make special make-up contributions to the Plan, if necessary.
A make-up contribution will be necessary if there are insufficient
forfeitures under the Plan to restore a Participant's Employer
Contribution Account pursuant to Section 9.04, if a Participant or
Beneficiary's Accounts must be reinstated pursuant to Section 17.04, or if
a mistake or omission in the allocation of contributions is discovered and
cannot be corrected by revising prior allocations.
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ARTICLE IV
PARTICIPANT'S ACCOUNT: ALLOCATIONS
4.01 PARTICIPANT ACCOUNTS
The Committee will maintain the following Accounts for each Participant:
(a) An EMPLOYER CONTRIBUTION TRANSFER ACCOUNT which is:
(i) credited with the Participant's Employer Contribution Account
transferred from the FHP Money Purchase Pension Plan;
(ii) adjusted for investment results and expenses; and
(iii) charged with distributions.
(b) An EMPLOYEE AFTER-TAX CONTRIBUTION TRANSFER ACCOUNT which is:
(i) credited with the Participant's Employee After-Tax
Contribution Account transferred from the FHP Money Purchase
Pension Plan;
(ii) adjusted for investment results and expenses; and
(iii) charged with withdrawals and distributions.
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ARTICLE V
ALLOCATION LIMITATIONS
5.01 BASIC LIMITATION ON ANNUAL ADDITIONS
(a) Notwithstanding any other provisions of the Plan and subject to the
provisions of Subsections (b), (c) and (d) below, the amount of
Annual Additions, as defined below, allocated to a Participant for
any Limitation Year will not exceed the lesser of:
(i) $30,000; or
(ii) twenty-five percent of the Participant's Earnings (as defined
below) for the Limitation Year.
The dollar limitation referred to in Subsection (a)(i) above is
adjusted as of January 1 of each Plan Year pursuant to Code Section
415. The adjusted amount applies for the Limitation Year which ends
within that Plan Year.
(b) For purposes of this Article V, a Participant's Annual Additions
means the amount of:
(i) Employer and Affiliate contributions,
(ii) Participant contributions,
(iii) forfeitures, and
(iv) contributions for post retirement medical benefits, to the
extent required by Code Section 415(c) or 419A(d)(2),
allocated to his Accounts under this Plan and his accounts under all
other defined contribution plans (as defined in Code Section 414(i))
adopted by an Affiliate.
(c) For purposes of this Article V, a Participant's Earnings means his
earned income, wages, salaries, commissions and bonuses received
from all Affiliates. It excludes the following:
(i) Contributions by an Affiliate to a plan of deferred
compensation which are not included in the Participant's gross
income for the taxable year in which contributed, or any
distribution from a plan of deferred compensation;
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(ii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
Participant either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(iii) Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option; and
(iv) Other amounts which received special tax benefit including
pre-tax deferrals under the Talbert Medical Management
Holdings International Corporation Employee Stock Ownership
Plan and salary reduction under any other tax qualified
program.
Earnings for any Limitation Year are the amount actually paid or
includable in gross income during such year. A Participant's annual
Earnings in excess of $150,000 are disregarded for all purposes
under this Plan. Such dollar limit will be adjusted each year
pursuant to Code Section 401(a)(17).
5.02 PARTICIPATION IN THIS PLAN AND A DEFINED BENEFIT PLAN
If a Participant is or has been a participant in a qualified defined
benefit plan (as defined Code Section 414(j)) maintained by an Affiliate,
the sum of the Participant's defined benefit plan fraction and defined
contribution plan fraction (as defined in Code Section 415(e)) for any
year will not exceed one. In calculating the defined contribution plan
fraction, the Committee may, at its discretion, make the election
described in Code Section 415(e)(6).
5.03 REDUCTION IN ANNUAL ADDITIONS AND ELIMINATION OF EXCESS AMOUNTS
If the limitations described in Section 5.01 and 5.02 would otherwise be
exceeded for a Participant for a Limitation Year, the excess will be
eliminated as follows:
(a) Amounts attributable to the Participant's pre-tax deferrals under
the Talbert Medical Management Holdings Corporation Employee Stock
Ownership Plan will be reduced, pursuant to the applicable
provisions of such plan.
(b) Second, the excess allocations of Employer Contributions will be
removed from the Participant's Employer Contribution Account and
will be held unallocated in a suspense account. If a suspense
account exists at any time during a Limitation Year,
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other than the Limitation Year described in the preceding sentence,
all amounts in the suspense account must be allocated to
Participants' Accounts (subject to the limitations of Code Section
415) before any Employer Contributions which are Annual Additions
may be made to the Plan for that Limitation Year.
(c) Third, the provisions of any other plans established by an Affiliate
which have caused the limits to be exceeded for the Participant will
be applied. The provisions of a defined benefit plan will be
applied before the provisions of a defined contribution plan.
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ARTICLE VI
INVESTMENTS: ALLOCATION OF GAINS AND LOSSES
6.01 INVESTMENT OF ACCOUNTS
Each Participant's Accounts are invested in the Trust Fund. Within the
Trust Fund, two different Investment Funds have been designated. They are
identified as Trust I and Trust II. A Participant's Employer Contribution
Transfer Account will be invested in Trust I. His Employee After-Tax
Contribution Transfer Account will be invested in Trust II. The
Participant will not have the right to direct the investment of these
funds.
The investment objectives of Trust I and Trust II may be different. The
investment policies associated with each of these funds will be determined
by the Company.
6.02 ALLOCATION OF INVESTMENT FUND GAINS AND LOSSES
As of each Valuation Date, the Committee will determine the net investment
gain or loss, after adjustment for applicable expenses, if any, of Trust I
and Trust II since the immediately preceding Valuation Date.
Notwithstanding the preceding sentence, the net gain or loss in the value
of any portion of the Plan's assets invested in real estate will be
determined no less frequently than once every Plan Year. The resulting
value, without adjustment for gain or loss, will be the value for all
subsequent Valuation Dates until the Valuation Date on which the net gain
or loss of such assets is redetermined.
The net investment gain or loss of Trust I and Trust II will be
apportioned to each Participant's Accounts. The apportionment will be in
the same proportions as the following for the Participant bears to the
total of the following for all Participants:
(a) The balance of the Participant's Account which was held in Trust I
or Trust II, whichever is applicable, as of the immediately
preceding Valuation Date;
(b) One-half of the Participant's loan repayments, if any, made to the
Account since the immediately preceding Valuation Date; and
(c) A reduction for any withdrawals, distributions or loan proceeds paid
from the portion of the Account invested in Trust I or Trust II,
whichever is applicable, and paid after the allocation of gains or
losses as of the immediately preceding Valuation Date.
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All withdrawals, distributions and loan proceeds which are paid as of a
Valuation Date shall be paid after the allocation of net investment gain
or loss applicable to such Valuation Date has been apportioned pursuant to
this Section. The amounts paid out will not share in the allocation of
net investment gain or loss in the subsequent Valuation Date.
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ARTICLE VII
WITHDRAWALS AND LOANS
7.01 WITHDRAWALS FROM EMPLOYEE AFTER-TAX CONTRIBUTION TRANSFER ACCOUNT
(a) A Participant may withdraw up to one hundred percent of the value of
his Employee After-Tax Contribution Transfer Account determined as
of the most recent Valuation Date (a) which precedes the date the
withdrawal request is received by the Committee on a written form
prescribed by the Committee, and (b) for which the allocation
process described in Section 6.02 has been completed. A Participant
may not withdraw from his Employer Contribution Transfer Account
except as provided in Articles VIII, IX, and X.
(b) A Participant may not withdraw less than the entire value of his
Employee After-Tax Contribution Transfer Account. Any request for a
withdrawal of a portion of a Participant's Employee After-Tax
Contribution Transfer Account shall be deemed to be a request for a
withdrawal of the entire value of a Participant's Employee After-Tax
Contribution Transfer Account.
7.02 AMOUNT AND PAYMENT OF WITHDRAWALS
Application for a withdrawal shall be made on such forms as the Committee
prescribes. Payment will be made to the Participant as soon as
administratively possible following the date the Committee receives and
approves the withdrawal request from the Participant. The amount of such
withdrawal shall be taken from the Participant's Account at such time and
paid to the Participant in a single sum. No withdrawal under this Article
VII shall cause forfeiture of any interests of the Participant in the
Plan.
If a Participant is married, his spouse must consent in writing to any
withdrawal of his Employee After-Tax Contribution Transfer Account no more
than 90 days before the withdrawal is approved by the Committee. The
spouse's consent must be witnessed by a notary public.
7.03 LOANS TO PARTICIPANTS
(a) Some Participants may have outstanding loans in their Accounts which
were transferred to this Plan from the FHP Money Purchase Pension
Plan. Such loans shall be repaid according to the repayment
schedule established when the loan was made and pursuant to this
Section 7.03. Notwithstanding anything else contained herein
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to the contrary, no new Participant loans shall be permitted under
this Plan.
(b) A Participant may have no more than one loan from this Plan
outstanding at any time.
(c) The Participant must apply for the loan, sign a note payable to the
Trustee in the proper amount on a form prescribed by the Committee,
and authorize payroll deductions for payment of interest and
principal, all in accordance with procedures adopted by the
Committee.
If the Participant is married, his spouse must consent in writing to
the loan no more than ninety days before the date of the loan. The
spouse's consent must be witnessed by a notary public.
Any loan processing fees (charged by a person other than the
Employer) shall be deducted from the principal amount available to
the Participant.
(d) The period of repayment for any loan shall be arrived at by mutual
agreement between the Committee and the Participant. However, the
period of repayment, including any extensions resulting from the
consolidation of a loan into a subsequent loan, shall not extend
beyond the earlier of five years or the date such Participant
terminates employment with the Employer. The five year limit shall
not apply to any portion of the loan used to acquire the
Participant's principal place of residence.
(e) The amount of the loan must be at least $1,000, but may not exceed
the lesser of:
(i) $50,000 reduced by (A) the Participant's current outstanding
loan balance under all plans qualified under Code Section
401(a) and maintained by an Affiliate, and (B) the excess of
the Participant's highest outstanding loan balance under such
plans during the twelve months preceding the date of the loan
over the Participant's current outstanding loan balance under
such plans; or
(ii) 50% of the vested portion of all of the Participant's Accounts
under this Plan (including the Employer Contribution Account)
valued on the Applicable Valuation Date immediately before the
date the request for a loan is received. "Applicable
Valuation Date" means the most recent Valuation Date (A) which
precedes the date the loan request is received by the
Committee on a written form prescribed by the Committee, and
(B)
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for which the allocation process described in Section 6.02 has
been completed.
(f) All loans shall bear an interest rate equal to two percentage points
above the published prime lending rate of Bank of America N.T. &
S.A. on the last business day of the month preceding the month in
which the request for a loan is received, provided, however, that no
loan shall bear a rate of interest which exceeds the maximum rate
permitted by law. The interest rate so determined shall be fixed
for the term of the loan.
(g) The Committee shall establish a loan account for the Participant,
and shall credit the loan account with an amount equal to the
principal amount of the loan granted. The principal amount will be
withdrawn from Trust I or Trust II as directed by the Participant.
Each repayment of principal on the loan received by the Trustee from
the Participant shall reduce the balance credited to the loan
account and each payment of principal and interest shall increase
the balance in the Participant's Employee After-Tax Contribution
Transfer Account or Employer Contribution Transfer Account,
depending on which account served as the source of the loan.
(h) Repayment shall be accomplished through regular payroll deductions.
The Committee may restrict loan amounts if withholdings of principal
and interest would exceed twenty percent of Compensation in each
payroll period. A Participant shall be entitled to prepay, without
penalty, the total accrued interest and outstanding principal amount
of the loan. Such prepayment may be made by increasing the amount
of his payroll deduction or by any other means.
(i) If a Participant terminates employment with all Affiliates, incurs a
Permanent and Total Disability or undergoes bankruptcy prior to his
repayment of the total principal and interest on a note held by his
loan account, the note in the Participant's Account shall be
cancelled and the unpaid principal balance deemed distributed to him
by the Trust Fund.
(j) This paragraph applies only to Participants who (i) were employed by
FHP Fountain Valley Hospital ("FHP Hospital") on or before January
13, 1996, (ii) had an outstanding loan under the FHP Money Purchase
Pension Plan as of January 13, 1996, and (iii) became employed by
Orange Coast Memorial Hospital on January 14, 1996. A Participant
who satisfies the requirements of the preceding sentence is referred
to herein as a
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"Qualified Participant." Notwithstanding anything else contained
herein to the contrary, Qualified Participants may repay loans under
this Plan by payroll deduction in accordance with paragraph (h) of
this Section except that Orange Coast Memorial Hospital shall remit
such payroll deductions to the Trustee. The repayment period with
respect to a loan subject to this subparagraph shall be the same as
the original repayment period of such loan, provided that such
period of repayment, including any extensions resulting from the
consolidation of a loan into a subsequent loan, shall not extend
beyond five years from the original date of the loan. This five
year limit shall not apply to any portion of the loan used to
acquire the Participant's principal residence.
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ARTICLE VIII
RETIREMENT, DISABILITY AND DEATH BENEFITS
8.01 RETIREMENT BENEFITS
The retirement benefit payable under the Plan in the case of a Participant
whose employment with all Affiliates terminates on or after he attains
Normal Retirement Age is one hundred percent of the value of his Accounts
on his Distribution Date. The Participant's Distribution Date is the
Valuation Date coincident with or immediately following the date the
terminated Participant's request for a distribution on a written form
prescribed by the Committee is received by the Committee.
8.02 DISABILITY BENEFITS
The disability benefit payable under the Plan in the case of a Participant
whose employment with all Affiliates terminates because he is Permanently
and Totally Disabled is one hundred percent of the value of his Accounts
on his Distribution Date. The Participant's Distribution Date is the
Valuation Date coinciding with or immediately following the later of the
date the Permanently and Totally Disabled Participant's request for a
distribution on a written form prescribed by the Committee is received by
the Committee or the date the Committee determines the Participant is
Permanently and Totally Disabled.
8.03 DEATH BENEFITS
The death benefit payable to a Beneficiary under the Plan in the case of a
Participant whose employment with an Affiliate terminates due to his death
(or who dies after termination of employment under Sections 8.01 and 8.02,
but before his Distribution Date under such Sections) is one hundred
percent of the value of his Accounts on the Distribution Date. The
Distribution Date with respect to such Participant is the Valuation Date
coincident with or immediately following the date the request for a
distribution by the deceased Participant's Beneficiary (or if no
Beneficiary has been designated, the representative of his estate) is
received by the Committee on a written form prescribed by the Committee.
8.04 ANNUITY REQUIREMENTS
Benefits distributed under Section 8.01, 8.02, and 8.03 are subject to the
joint and survivor annuity and qualified pre-retirement survivor annuity
requirements described in Article X.
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ARTICLE IX
TERMINATION BENEFITS AND VESTING REQUIREMENTS
9.01 BENEFITS UPON TERMINATION OF EMPLOYMENT
The benefit payable under the Plan in the case of a Participant whose
employment with all Affiliates terminates for any reason other than
because he became Permanently and Totally Disabled, died, or retired on or
after his Normal Retirement Age is the vested portion (determined pursuant
to Section 9.02) of the value of his Accounts on his Distribution Date.
The Participant's Distribution Date is the Valuation Date coincident with
or immediately following the date the terminated Participant's request for
a distribution on a written form prescribed by the Committee is received
by the Committee.
9.02 VESTING REQUIREMENTS
The vested portion of a Participant's Employer Contribution Transfer
Account and Employee After-Tax Contribution Transfer Account shall always
be one hundred percent.
9.03 ANNUITY REQUIREMENT
Benefits distributed under this Article IX are subject to the joint and
survivor annuity and qualified pre-retirement survivor annuity
requirements described in Article X.
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ARTICLE X
DISTRIBUTION OF BENEFITS
10.01 FORM OF BENEFITS FOR RETIREMENT AND OTHER TERMINATION
(a) Amounts distributable pursuant to Articles VIII and IX are
distributed, at the Participant's or, if applicable, Beneficiary's
election, in one of the following forms:
(i) A single sum payment in cash of the value of his benefit as of
his Distribution Date; or
(ii) Payments beginning as of his Distribution Date, of his entire
benefit in substantially equal monthly cash installments over
a period not to exceed the life expectancy of the Participant
on the date his payments begin (or the joint life expectancies
of the Participant and his Beneficiary on the date his
payments begin). Until the Participant, and his Beneficiary,
if applicable, receive all installments under this Subsection,
the Participant's benefit will remain invested in the Trust
Fund and will continue to share in the allocations of gains
and losses of the Trust Fund pursuant to Article VI. If the
Participant dies before he receives his entire benefit under
this Subsection, his Beneficiary will be entitled to a single
sum cash payment of the remaining benefit. Payment will be
made as soon as practicable after the Valuation Date
coincident with or immediately following the Participant's
death and will be equal to the value of the Participant's
remaining benefit as of such Valuation Date.
(b) If the value of the vested portion of a Participant's Accounts on
the Valuation Date coinciding with or immediately following the date
he terminates employment does not exceed $3,500, he will not be
permitted to elect the form in which his benefit will be
distributed, and his benefit will be distributed in accordance with
Section 10.01(a)(i).
10.02 JOINT AND SURVIVOR ANNUITY REQUIREMENTS
(a) Notwithstanding anything in the Plan to the contrary, unless a
Participant who is entitled to a benefit pursuant to Section 8.01,
8.02 or 9.01:
(i) Makes an election under Section 8.01, 8.02 or 9.01, his
Distribution Date will be the Valuation Date coincident with
or immediately following the
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later of the date he attains age sixty-five or the date he
terminates employment.
(ii) Makes an election under Section 10.01 that complies with
Subsection (b) below, his benefit will be distributed in one
of the following forms:
(1) If the Participant is not married on his Distribution
Date, he will receive a paid up life annuity providing a
lifetime benefit to him with no continuation of benefits
after his death. The benefit payable pursuant to
Section 8.01, 8.02 or 9.01 will be used to purchase a
single premium immediate annuity in such a form with a
premium equal to the value of his benefit as of his
Distribution Date.
(2) If the Participant is married on his Distribution Date,
he will receive a paid up joint and fifty percent
survivor annuity providing a lifetime benefit to him
with fifty percent of his monthly payments continuing to
his spouse, if the spouse survives him, for the spouse's
lifetime. The benefit payable pursuant to Section 8.01,
8.02 or 9.01 will be used to purchase a single premium
immediate annuity in such form with a premium equal to
the value of his benefit as of the Distribution Date.
(b) An election will comply with this Subsection (b) if it is made
within ninety days before the date the Participant's benefit
payments begin. The election will not be valid unless the spouse to
which the Participant is married on the date of the election
consents in writing to the election. The spouse's consent must be
witnessed by a notary public. The spouse's consent requirement will
not apply if the Participant's spouse cannot be located or the
Participant has no spouse. A Participant may revoke an election at
anytime.
(c) The Committee will provide each Participant, no less than thirty
days and no more than ninety days before his Distribution Date, a
written explanation of:
(i) the automatic form of payment in Subsection (a),
(ii) when and how the Participant may elect not to be paid in the
automatic form, including the requirement that the
Participant's spouse consent to such election,
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(iii) when and how the Participant may revoke an election not to be
paid in the automatic form, and
(iv) the effect of an election or revocation of an election to be
paid in the automatic form.
10.03 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY REQUIREMENTS
(a) Notwithstanding anything in the Plan to the contrary, in the case of
a Participant who is married on his date of death:
(i) unless his spouse elects otherwise under Subsection (b) below,
or
(ii) unless the Participant has named a Beneficiary in accordance
with Section 1.03 which is other than his spouse as his sole
beneficiary.
the benefit payable under Section 8.03 will be paid by distribution
of a paid up life annuity providing a lifetime benefit to the
Participant's spouse, with payments beginning at the direction of
the spouse, within a reasonable time after the Participant died.
The benefit payable pursuant to Section 8.03 will be used to
purchase a single premium annuity in such a form, with a premium
equal to the value of the benefit as of the Distribution Date.
(b) In lieu of the life annuity described above, the spouse may elect to
be paid as of the Distribution Date described in Section 8.03 and in
one of the payment forms described in Section 10.01.
(c) The Committee will provide each Participant, within the period
described below, a written explanation of the death benefit
described in Subsection (a) above. The written explanation will be
comparable to the information required under Section 10.02(c).
The written explanation will be provided during whichever of the
following periods ends last:
(i) The period beginning on the first day of the Plan Year in
which the Participant attains age thirty-two and ending on the
last day of the Plan Year in which the Participant attains age
thirty-four;
(ii) By the end of the three year period beginning with the first
day of the Plan Year in which the Participant became a
Participant pursuant to Section 2.01; or
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(iii) Within one year after the Participant terminates employment,
provided the Participant terminates employment before
attaining age thirty-five.
(d) Notwithstanding the above, if the benefit payable to the spouse
(calculated on the Valuation Date coinciding with or immediately
following the Participant's date of death) exceeds $3,500, then the
spouse has to consent in writing in the manner established by the
Committee for the distribution to commence before the date the
Participant would have attained age 65.
10.04 TIMING OF DISTRIBUTIONS
(a) Notwithstanding the provisions of Articles IX and X, if a
Participant's employment terminates for any reason and the value of
the vested portion of his Accounts on the Valuation Date coinciding
with or immediately following the date he terminates employment does
not exceed $3,500, his Distribution Date is the Valuation Date
coinciding with or immediately following the date he terminates
employment. If a Participant who is otherwise entitled to elect a
Distribution Date does not consent in writing in the manner
established by the Committee, his Distribution Date is the Valuation
Date coinciding with or immediately following the date he reaches
age sixty-five.
(b) Distributions under the Plan pursuant to Articles VIII, IX and X are
made as soon as practicable following the applicable Distribution
Date but in no event later than sixty days after the end of the Plan
Year in which the Participant reaches age sixty-five, reaches the
tenth anniversary of the date he began participation in the Plan, or
terminates employment, whichever is latest.
Notwithstanding anything to the contrary contained herein, the
distribution options under the Plan shall comply with Section
401(a)(9) of the Code and regulations promulgated thereunder, which
are hereby incorporated by this reference as part of the Plan.
Accordingly, with respect to a Participant who is a five percent
(5%) owner of the Company or an Affiliated Employer at any time
during the Plan Year ending in the calendar year in which he or she
attains age 70-1/2, the entire interest of each such Participant
shall be distributed by April 1 of the calendar year in which the
Participant reaches age 70-1/2. With respect to a Participant who
is not a five percent (5%) owner of the Company or an Affiliated
Employer at any time during Plan Year ending in the calendar year in
which he or she attains age 70-1/2, and except as otherwise provided
by law, such a Participant is not required to
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receive a distribution of his or her interest until the April 1 of
the calendar year following the calendar year in which he or she
retires. Except as provided by law, a Participant who reached age
70-1/2 before January 1, 1988 and who was not a five percent owner
of the Company at any time during the Plan Year ending with or
within the calendar year in which the Participant attains age 66-1/2
or thereafter, is not required to receive distribution of his
interest until he separates from service. Benefits distributed
under this Section 10.04(b) are subject to the qualified joint and
survivor annuity and qualified pre-retirement survivor annuity
requirements described in Sections 10.02 and 10.03.
(c) Distributions to an alternate payee pursuant to a qualified domestic
relations order ("QDRO"), as defined in Code Section 414(p), will be
paid in accordance with such order. Notwithstanding anything to the
contrary in the Plan, a payment to an alternate payee may be made
before the date the applicable Participant is otherwise entitled to
a distribution from the Plan, as permitted under Code Section
414(p)(10). Accordingly, subject to the procedures established by
the Committee, benefits may be paid from the balance of a
Participant's Account in accordance with a QDRO without regard to
whether the Participant has attained the "earliest retirement age,"
as defined in Section 414(p) of the Code. The amount paid to an
alternate payee, and any amounts remaining in the affected
Participant's Accounts after such payment, will be determined as of
the Valuation Date coincident with or immediately following the date
the request for a distribution by the alternate payee is received by
the Committee on a written form prescribed by the Committee.
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ARTICLE XI
COMMITTEE
11.01 APPOINTMENT OF COMMITTEE
A Committee consisting of at least three members will be appointed by the
Board to administer the Plan on behalf of the Company. A vacancy on the
Committee which results from death, resignation or otherwise, will be
filled from time to time by appointment of a new Committee member by the
Board, and a member of the Committee may be removed at any time at the
discretion of the Board.
11.02 MANNER OF ACTION
A majority of the members of the Committee at the time in office will
constitute a quorum for the transaction of business. All resolutions
adopted, and other actions taken by the Committee at any meeting will be
by the vote of a majority of those present at the meeting. Upon the
unanimous written consent of the members at the time in office, action of
the Committee may be taken without a meeting.
11.03 CHAIRMAN, SECRETARY AND EMPLOYMENT OF SPECIALISTS
The Company may appoint a Chairman of the Committee. The Committee will
elect a Secretary who may, but need not, be a member of the Committee.
They may authorize one or more of their number or any agent to execute or
deliver any instrument or instruments on their behalf, and may employ such
counsel, auditors, and other specialists and such clerical, medical,
actuarial and other services as they may require in carrying out the
provisions of the Plan.
11.04 SUBCOMMITTEES
The Committee may appoint one or more subcommittees and delegate such of
its power and duties as it deems desirable to any such subcommittee, in
which case every reference in the Plan made to the Committee is deemed to
mean or include the subcommittees as to matters within their jurisdiction.
The members of any subcommittee will consist of such officers or other
employees of the Company and such other persons as the Committee may
appoint.
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11.05 OTHER AGENTS
On behalf of the Company, the Committee may also appoint one or more
persons or agents to aid it in carrying out its duties and delegate such
of its power and duties as it deems desirable to such person or agents.
11.06 RECORDS
All resolutions, proceedings, acts and determinations of the Committee
shall be recorded by the Secretary thereof or under his supervision, and
all such records, together with such documents and instruments as may be
necessary for the administration of the Plan, shall be preserved in the
custody of the Secretary.
11.07 POWERS AND DUTIES
(a) The Committee has full power and discretion to administer the Plan
and to construe and interpret the terms and provisions of this Plan
and apply all of its provisions on behalf of the Company. The
Company is the Plan Administrator. The Company is the Named
Fiduciary within the meaning of ERISA Section 402(a). The Company
and Committee may delegate to any other person or organizations any
of its powers and duties with respect to the operation of this Plan.
The Committee's powers and duties, unless properly delegated,
include, but are not limited to:
(i) Deciding questions relating to eligibility, continuity of
Service and amount of benefits;
(ii) Deciding disputes which may arise with regard to the rights of
employees, Participants and their legal representatives or
Beneficiaries under the terms of the Plan. Such decisions by
the Committee shall be deemed final in each case;
(iii) Obtaining such information from the Employer with respect to
employees as shall be necessary to determine the rights and
benefits of such employees under the Plan. The Committee may
rely conclusively upon such information furnished by the
Employer.
(iv) Compiling and maintaining all records necessary for the Plan;
(v) Furnishing the Employer, upon request, such reports with
respect to the administration of the Plan as are reasonable
and appropriate;
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(vi) Authorizing the Trustee to make payment of all benefits as
they become payable under the Plan;
(vii) Engaging such legal, administrative, actuarial, investment,
accounting, consulting and other professional services as the
Committee deems proper;
(viii) Adopting rules and regulations for the administration of the
Plan not inconsistent with the Plan; and
(ix) Doing and performing such other actions as may be provided
for in other parts of this Plan.
11.08 INTERESTED MEMBERS
No Committee member shall participate in any action of the Committee on a
matter in which such member has a specialized individual interest as a
Participant in the Plan. Such matters shall be determined by a majority
of the remainder of the members of the Committee.
11.09 INDEMNIFICATION
The Company shall and does by the following terms indemnity and hold the
members of the Committee and each of them, harmless from the effects and
consequences of their acts, omissions and conduct in their official
capacities, except to the extent that the effects and consequences thereof
shall result from their own willful misconduct, breach of good faith or
gross negligence in the performance of their duties. The Company shall
have the right, but not the obligation, to conduct the defense of such
members in any proceeding to which this Section applies. The foregoing
right of indemnification shall not be exclusive of other rights to which
each such member may be entitled as a matter of law or by other indemnity
coverage provided by the Company.
The Company's obligations under this Section may be satisfied through
purchase of a policy or policies of insurance providing equivalent
protection.
11.10 CONCLUSIVENESS OF ACTION
Any action on matters within the discretion of the Committee shall be
conclusive, final and binding upon all Participants of the Plan and upon
all persons claiming any rights hereunder including Beneficiaries.
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11.11 PAYMENT OF EXPENSES
The members of the Committee shall serve without compensation for services
as such. However, the Company may reimburse such members for all
necessary and proper expenses incurred in carrying out their duties under
the Plan. The compensation or fees of accountants, counsel, employee
benefit consultants, and other specialists and any other costs of
administering the Plan or Trust, unless paid directly by the Company are
paid from the Trust Fund and will be charged against Participants'
Accounts.
Investment costs and taxes that are paid from the Trust Fund are paid as
follows. Brokerage commissions, transfer taxes, and other charges and
expenses in connection with the purchase and sale of securities are added
to the cost of such securities, as the case may be. There will be no
commissions on transactions with the Company or any other party in
interest. Taxes, if any, applicable to the Trust Fund which are payable
by the Trustee will be charged against Participants' Accounts, other than
any excise tax payable directly by the Trustee pursuant to Section 4975 of
the Code.
11.12 CLAIMS PROCEDURE
Benefits are provided from this Plan through procedures initiated by the
Committee, and the Participant need not file a claim. However, if a
Participant or Beneficiary believes he is entitled to a benefit, or a
benefit different from the one he receives, then the Participant or
Beneficiary may file a claim for the benefit by writing a letter to the
Committee.
If any claim for benefits under the Plan is wholly or partially denied,
the claimant will be given a written notice of the denial within ninety
days after the claim is received. However, if special circumstances
require an extension of time, and written notice of the extension is
furnished to the claimant, he will be given a written notice of the denial
within one hundred and eighty days after the claim is received. Notice of
the denial will state the following information:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent Plan provisions on which denial is
based;
(c) A description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why the
material or information is necessary.
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(d) An explanation that a full and fair review by the Committee of the
decision denying the claim may be requested by the Claimant or his
authorized representative by filing with the Company, within sixty
days after the claimant receives the denial, a written request for
review; and
(e) If a request for review is filed, the claimant or his authorized
representative may review pertinent documents and submit issues and
comments in writing within the same sixty day period specified in
paragraph (d) above.
The decision of the Committee upon review will be made by the
Committee's delegate, will be made promptly, and not later than
sixty days after the Committee's receipt of the request for review.
However, if special circumstances require an extension of time for
processing, the claimant will be so notified and a decision will be
rendered as soon as possible, but not later than one hundred and
twenty days after receipt of the request for review. If the claim
is denied, wholly or in part, the claimant will be given a copy of
the decision promptly. The decision will be in writing and will
include specific reasons for the denial, specific references to the
pertinent Plan provisions on which the denial is based and will be
written in a manner calculated to be understood by the claimant.
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ARTICLE XII
AMENDMENT TO THE PLAN
12.01 RIGHT TO AMEND
The Board, or the Committee if authorized by the Board, has the right to
amend the Plan at any time and, from time to time, to any extent that it
deems advisable. No amendment will increase the duties or
responsibilities of the Trustee without the Trustee's written consent. No
amendment may be made to this Plan which attempts to transfer any part of
the corpus or income of the Trust Fund for purposes other than the
exclusive benefit of Participants and their Beneficiaries. No amendment
may deprive any Participant or Beneficiary of any benefits to which he is
entitled under the Plan with respect to contributions previously made to
the Plan. No amendment may eliminate or reduce an early retirement
benefit or eliminate an optional form of distribution.
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ARTICLE XIII
TERMINATION OF THE PLAN
13.01 RIGHT TO TERMINATE
The Board has the right to terminate the Plan in whole or in part at any
time. In the event of a termination, or partial termination, each
affected Participant will become one hundred percent vested in the value
of all his Accounts.
13.02 CORPORATE REORGANIZATION
In the event the Company is dissolved or liquidated or shall by
appropriate legal proceedings be adjudged bankrupt, or in the event
judicial proceedings of any kind result in the involuntary dissolution of
the Company, the Plan shall be terminated. The merger, consolidation or
reorganization of the Company, or the sale of the Company or of all or
substantially all of its assets or stock, shall not terminate the Plan if
there is delivered to the Company, by its successor or by the purchaser of
all or substantially all of its stock or assets, a written instrument
requesting that it be substituted for the Company and agreeing to perform
all the provisions hereof which the Company is required to perform
hereunder. Upon the receipt of said instrument, with the approval of the
Company, the successor or the purchaser shall be substituted for the
Company herein, and the Company shall be relieved and released from all
obligations of any kind, character or description herein or in any trust
agreement.
13.03 PLAN MERGER AND CONSOLIDATION
In the event that the Plan and Trust Fund merges or consolidates with, or
transfers its assets or liabilities to, any other qualified plan of
deferred compensation, no Participant herein shall, solely on account of
such merger, consolidation or transfer, have an account balance on the day
following such event which is less than his account balance on the day
preceding such event. For the purpose of this Section, a Participant's
account balance shall be calculated based upon the assumption that a plan
termination and distribution of assets occurred on each of the
above-mentioned days. In no event will this provision be construed to
require full vesting upon a merger, consolidation, or transfer of assets
unless the Plan is subsequently partially or wholly terminated or
contributions are completely discontinued.
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ARTICLE XIV
TRUST AND THE TRUSTEE
14.01 BOARD TO SELECT TRUSTEE
The Board will select one or more Trustees to hold and invest the Trust
Fund in accordance with the terms of a trust agreement and/or other
contract. The Trustee must be an individual or individuals, a bank or
trust company incorporated under the laws of the United States or of any
state and qualified to operate as a trustee, a legal reserve life
insurance company, or a combination of such entities. The Board may, from
time to time, change any Trustee then serving under a trust agreement
and/or other contract to another Trustee or elect to terminate a trust
and/or other contract and hold the Plan assets in any other method
acceptable under ERISA.
Any trust agreement and/or other contract are designated as and constitute
a part of the Plan. Any rights which a person has under this Plan are
subject to all of the terms and provisions of the trust agreement and/or
other contract.
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ARTICLE XV
ADOPTION BY AFFILIATE
15.01 AFFILIATE
An Affiliate may become a party to the Plan and Trust Agreement by
adopting the Plan for the benefit of any specified group of its employees,
effective as of the date specified in such adoption:
(a) By filing with the Company a certified copy of a resolution of its
board of directors to that effect, and/or such other instruments as
the Company may require; and
(b) By the Company's filing with the then Trustee a copy of such
resolution, together with a certified copy of resolutions of the
Board approving such adoption.
The Company may require an adopting Affiliate to execute an instrument of
adoption in such form as is acceptable to the Company. Except as provided
below, an employee of an Affiliate shall earn Service only with respect to
periods for which his employer is an Affiliate. Notwithstanding the
above, to the extent explicitly provided by the Company in a stock or
asset acquisition, merger or other similar transaction, an employee of a
Affiliate shall earn Service with respect to periods of employment with
such Affiliate prior to the time it became an Affiliate.
15.02 ACTION BINDING ON PARTICIPATING AFFILIATES
As long as the Company is party to the Plan and the Trust Agreement it
shall be empowered to act thereunder for any Employer in all matters
respecting the Committee and the Trustee and the designation of
Affiliates, and any action taken by the Company with respect thereto shall
automatically include and be binding upon any Employer which is a party to
the Plan.
15.03 TERMINATION OF PARTICIPATION OF AFFILIATE
The Company reserves the right, in its sole discretion and at any time, to
terminate the participation in this Plan of any or all Affiliates. Such
termination shall be effective immediately upon notice of such termination
from the Company to the Trustee and the Affiliate being terminated. In
event of such termination, this Plan shall not terminate, but the portion
of the Plan attributable to the Affiliate shall become a separate Plan,
and the Company shall inform the Trustee of the portion of the Trust Fund
that is then
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attributable to the participation of such terminated Affiliate. Such
portion shall as soon thereafter as is administratively feasible be set
apart by the Trustee as a separate Trust which shall be part of the
separate Plan of such terminated Affiliate.
Thereafter the administration, control and operation of the Plan with
respect to such terminated Affiliate shall be on a separate basis (with
the Affiliate assuming the functions assigned to the Company hereunder) in
accordance with the terms hereof, or as such terms may be amended by
appropriate action of such terminated Affiliate in accordance with the
provisions of Article XII.
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ARTICLE XVI
TOP-HEAVY PROVISIONS
16.01 DEFINITIONS
Wherever used in this Article XVI, the following words and phrases have
the meaning specified below:
(a) "Accumulated Account" means the total value of an employee's
Accounts as of the Valuation Date which coincides with or
immediately precedes the Determination Date. Accumulated Accounts
includes:
(i) amounts attributable to employee contributions (other than
deductible employee contributions),
(ii) amounts rolled over or transferred directly from a plan
sponsored by an unrelated employer (within the meaning of Code
Section 414(b), (c) or (m)), but only if received by the Plan
before January 1, 1984,
(iii) amounts rolled over or transferred directly from a plan
sponsored by a related employer (within the meaning of Code
Section 414(b), (c) or (m), without regard to when received by
the Plan, and
(iv) as determined in accordance with Code Section 416(g)(3),
distributions to the employee during the Plan Year which
includes the Determination Date and the four immediately
preceding Plan Years, unless already reflected in the
employee's Accounts. The preceding sentence shall also apply
to distributions under a terminated plan which, if it had not
been terminated would have been required to be included in the
Aggregation Group.
Accumulated Accounts will not include any distribution rolled over
or transferred directly to a related employer (within the meaning of
Code Section 414(b), (c) or (m)). With respect to a Nonkey Employee
who was a Key Employee with respect to a plan in a prior year,
Accumulated Accounts will not include any of the employee's
Accounts.
Accumulated Accounts will not include the Account of an employee who
has not performed any service for the Employer during the five-year
period ending on the Determination Date. However, if the employee
again performs services his Account will be included.
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(b) "Determination Date" means in any Plan Year the last day of the
immediately preceding Plan Year.
(c) "Key Employee" means at any given time an employee, a deceased
employee, or the beneficiary of an employee or a deceased employee
who during the current Plan Year or any of the four immediately
preceding Plan Years is:
(i) an officer of an Employer with annual earnings from the
Employer greater than 50% of the maximum dollar limit under
Code Section 415(b)(1)(a) in effect for the calendar year in
which the Plan Year ends. In any Plan Year, officer will not
include more than the lesser of:
(A) fifty employees, or
(B) the greater of three employees or ten percent of the
greatest number of employees the Employer had during the
current Plan Year or any of the four immediately
preceding Plan Years.
Such limited number of officers will be selected from
the group of all persons otherwise considered officers
under this paragraph (i) in the current Plan Year or
four immediately preceding Plan Years, selecting only
those who had the highest annual earnings in such five
year period;
(ii) an employee who is one of the ten employees of the Employer
having annual compensation from such Employer of more than the
limitation in effect under Section 415(c)(1)(a) of the Code
and owning (or considered as owning within the meaning of
Section 318 of the Code) both more than a 1/2% interest and
the largest interests in such Employer. An employee's
ownership interest during a Plan Year is his greatest
ownership interest at anytime during the Plan Year. If two
employees have the same ownership interest, the employee with
the greater earnings in the Plan Year of such ownership will
be deemed to have the greater ownership interest.
(iii) an employee who owns at least five percent of an Employer; or
(iv) an employee who owns at least one percent of an Employer and
has annual earnings from the Employer of more than $150,000.
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For purposes of determining the number of officers of the Employer,
all employees of organizations required to be aggregated under Code
Section 414(b), (c) and (m) will be considered employees of the
Employer. For purposes of determining earnings from the Employer,
all earnings, as stated on Form W-2 for the calendar year ending
within the Plan Year, from all organizations required to be
aggregated under Code Section 414(b), (c) and (m) will be treated as
earned from the Employer. For purposes of determining ownership
interest, each entity that would otherwise be aggregated under Code
Section 414(b), (c) and (m) will be treated as a separate Employer.
Ownership includes any interest constructively owned under the
applicable provisions of the Code.
Employee will not include any employee or beneficiary of an employee
who did not have earnings from an Employer during the five year
period ending on the Determination Date.
(d) "Nonkey Employee" means at any given time an employee who is not a
Key Employee.
16.02 DETERMINATION OF TOP HEAVY STATUS - SINGLE PLAN
If this Plan is the only retirement plan qualified under Code Section
401(a) maintained by an Affiliate, the rules of this Section 16.02 will
apply to determine if this Plan is Top Heavy. The Plan will be Top Heavy
during a Plan Year if as of the Determination Date in such Plan Year the
value of the Accumulated Accounts under the Plan of all Key Employees
exceeds sixty percent of the value of Accumulated Accounts under the Plan
of all employees.
16.03 DETERMINATION OF TOP HEAVY STATUS - MULTIPLE PLANS
(a) If an Affiliate maintains more than one retirement plan qualified
under Code Section 401(a), the rules of this Section 16.03 will
apply to determine if this Plan is Top Heavy. This Plan will be Top
Heavy during a Plan Year if the Plan is required to be in the
Aggregation Group on the Plan's Determination Date for such Plan
Year and the Aggregation Group is Top Heavy.
The Aggregation Group is Top Heavy if the value of the Accumulated
Accounts for all Key Employees of all the plans in the group exceeds
sixty percent of the value of the Accumulated Accounts for all
employees of all the plans in the group. The Accumulated Accounts
of each plan will be determined separately as of each plan's
Determination Date and then aggregated by calendar year. If a plan
in the Aggregation Group is a
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defined benefit plan (as defined in Code Section 4140)), for
purposes of this subsection (a) value of the Accumulated Accounts
means the present value of benefits as defined under the top heavy
provisions of such plan.
(b) The Aggregation Group consists of all the Affiliate's retirement
plans qualified under Code Section 401(a) which are either required
or permitted to be in the Aggregation Group.
A plan is required to be in the Aggregation Group if during the Plan
Year containing the Determination Date or any of the four preceding
Plan Years;
(i) the Plan has at least one Key Employee, or
(ii) the Plan is required to be aggregated with a plan with at
least one Key Employee so that the later plan meets the
requirements of Code Sections 401(a)(4) or 410.
A plan, which has been formally terminated, has ceased crediting
service for benefit accruals and vesting, and has been or is
distributing all plan assets to participants or their beneficiaries
as soon as administratively feasible, is required to be in the
Aggregation Group if it was maintained during the Plan Year
containing the Determination Date or any of the four preceding Play
Years and it would, but for the fact that it terminated, be required
to be in the Aggregation Group pursuant to the preceding sentence.
A plan is permitted to be in the Aggregation Group if it is not
required to be in the Aggregation Group, provided including it does
not prevent the Aggregation Group as a whole from meeting the
requirements of Code Sections 401(a)(4) or 410.
16.04 EFFECT OF TOP HEAVY STATUS
If the Plan is Top Heavy for any Plan Year, the requirements of this
Section 16.04 apply during such Plan Year, superseding all other Plan
provision inconsistent with its terms.
(a) MINIMUM VESTING
The vested portion of a Participant who has completed one Hour of
Service in any Plan Year in which the Plan is Top Heavy is
determined under the schedule designated below in this Section
16.04(a) or the
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applicable schedules in Section 9.02, whichever is more favorable to
the Participant:
Service Vested Portion
---------- ---------------
Less than 2 years 0%
2 but less than 3 years 20%
3 but less than 4 years 40%
4 but less than 5 years 60%
5 but less than 6 years 80%
6 or more years 100%
In each Plan Year in which the Plan is not Top Heavy, which occurs
immediately after a Plan Year in which the Plan is Top Heavy, an
employee who is participating in the Plan during the Election Period
has the right to elect to continue to be subject to the vesting
schedule in this sub-paragraph (a). The Election Period begins on
the date the Plan is determined not to be Top Heavy and ends on the
later of sixty days after the Plan is determined not to be Top Heavy
or sixty days after the employee is given written notice that the
Plan is no longer Top Heavy.
(b) MINIMUM CONTRIBUTION
On the last day of any Plan Year in which the Plan is Top Heavy an
Employer Contribution will be allocated to the appropriate Account
of each employee who is eligible to participate in the Plan pursuant
to Section 2.01 on such date. The amount of such contribution, when
aggregated with all other contributions allocated to the
Participant's Employer Contribution Account and his pre-tax deferral
account and employer contribution account under the Talbert Medical
Management Holdings Corporation Employee Stock Ownership Plan during
the Plan Year must equal the lesser of:
(i) Three percent of the Participant's earnings, as stated on Form
W-2 for the calendar year ending within such Plan Year, or
(ii) A percent of the Participant's earnings, as defined in
subsection (i) above, equal to the percentage at which
contributions are allocated pursuant to Section 4.02 (or
required to be allocated) for the Plan Year for the Key
Employee for whom such percentage is the highest for the year.
The Employer will make an additional contribution to the Plan
sufficient to make the allocation described above.
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This Subsection (b) applies without regard to contributions or
benefits under Social Security or any other Federal or State law.
(c) ADJUSTMENT TO LIMITATION ON ANNUAL ADDITIONS
(i) If an Affiliate also maintains a qualified defined benefit
plan (as defined in Code Section 414(j) the denominator of
both the defined benefit plan fraction and defined
contribution plan fraction, as described in Code Section
415(e), for the Limitation Year ending in such Plan Year will
be adjusted by substituting one for one and twenty-five one
hundredths in each place the figure occurs.
(ii) The adjustments referred to in paragraph (i) are not required
if:
(1) the Plan would not be Top Heavy if ninety percent were
substituted for sixty percent in Sections 16.02 and
16.03, and
(2) Subsection (b)(i) above is adjusted by substituting four
percent for three percent where the figure occurs.
(iii) The adjustments referred to in paragraph (i) above do not
apply to any Participant as long as no Employer Contributions,
forfeitures or Employee After-Tax Contributions are allocated
to such Participant's Accounts and the Participant does not
accrue any benefits under the defined benefit plan.
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ARTICLE XVII
MISCELLANEOUS
17.01 VOLUNTARY PLAN
The Plan is purely voluntary on the part of the Company and Employer and
neither the establishment of the Plan nor any amendment thereof, nor the
creation of any fund or account, nor the payment of any benefits shall be
construed as giving any person a legal or equitable right as against the
Company, an Employer, the Trustee or the Committee unless the same shall
be specifically provided for in this Plan or conferred by affirmative
action of the Committee or the Company in accordance with the terms and
provisions of this Plan. Nor shall such actions be construed as giving
any Employee or Participant the right to be retained in the service of the
Employer. All Employees and/or Participants shall remain subject to
discharge to the same extent as though this Plan had not been established.
17.02 NONALIENATION OF BENEFITS
Participants and their Beneficiaries shall be entitled to all the benefits
specifically set out under the terms of the Plan, but neither said
benefits nor any of the property rights therein shall be assignable or
distributable to any creditor or other claimant of such Participant. A
Participant shall not have the right to anticipate, assign, pledge,
accelerate or in any way dispose of or encumber any of the monies or
benefits or other property which may be payable or become payable to such
Participant or his Beneficiary. The preceding sentence shall also apply
to the creation, assignment, or recognition of a right to any benefit
payable with respect to Participant pursuant to a domestic relations
order, unless such order is determined to be a qualified domestic
relations order, as defined in Code Section 414(p).
17.03 INABILITY TO RECEIVE BENEFITS
If the Committee receives evidence that (a) a person entitled to receive
any payment under the Plan is physically or mentally incompetent to
receive payment and to give a valid release therefore, and (b) another
person or an institution is then maintaining or has custody of such
person, and no guardian, committee or other representative of the estate
of such person has been duly appointed by a court of competent
jurisdiction, such payment may be made to such other person or institution
referred to in (b) above. The release to such other person or institution
shall be a valid and complete discharge for the payment.
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17.04 LOST PARTICIPANTS
If the Committee is unable within two years after a distribution becomes
due, and after reasonable and diligent effort, to locate a Participant or
Beneficiary who is entitled to payment under the Plan, the payment due
such person shall become a forfeiture; provided, however, that if the
Participant or Beneficiary later files a claim for his benefit it shall be
reinstated. Notification by certified or registered mail to the last
known address of the Participant or Beneficiary shall be deemed a
reasonable and diligent effort to locate such person.
17.05 LIMITATION OF RIGHTS
Nothing in the Plan expressed or implied is intended or shall be construed
to confer upon or give to any person, firm or association other than the
Company, an Employer, the Participant and their successors in interest any
right, remedy or claim under or by reason of this Plan.
17.06 ABSENCE OF GUARANTY
Each Participant (and his Beneficiary) assumes all risk connected with any
decreased in the market value of any assets held under the Plan. Neither
the Company nor the Employer in any way guarantees the Trust Fund from
loss or depreciation, or the payment of any amount that may be or become
due to any person from the Trust Fund. The Trust Fund shall be the sole
source of distributions to be made under this Plan.
17.07 INVALID PROVISIONS
In case any provision of this Plan shall be held illegal or invalid for
any reason, said illegality or invalidity shall not affect the remaining
parts of this Plan, but this Plan shall be construed and enforced as if
said illegal and invalid provisions had never been inserted herein.
17.08 ONE PLAN
This Plan may be executed in any number of counterparts, each of which
shall be deemed an original and said counterparts shall constitute but one
and the same instrument and may be sufficiently evidenced by any one
counterpart.
17.09 GOVERNING LAW
The Plan shall be governed by and construed in accordance with the Federal
laws governing employee benefit plans qualified under the Code and in
accordance with the laws of
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the State of California where such laws are not preempted by the
aforementioned federal laws.
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ARTICLE XVIII
DIRECT ROLLOVERS
18.01 DIRECT ROLLOVERS
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a Distributee's election under this Article, if a
Distributee will receive an Eligible Rollover Distribution of at
least $200, the Distributee may elect, at the time and in the manner
prescribed by the Committee, to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible Retirement Plan
specified by the Distributee in a Direct Rollover; provided,
however, that a Distributee may not elect to have an Eligible
Rollover Distribution of less than $500 paid directly to an Eligible
Retirement Plan unless the Distributee elects to have his or her
entire Eligible Rollover Distribution paid directly to the Eligible
Retirement Plan.
18.02 DEFINITIONS
(a) Eligible rollover distribution: An eligible rollover distribution
is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover
distribution does not include: any distribution that is one of a
series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the
extent such distribution is required under Section 401(a)(9) of the
Code; and the portion of any distribution that is not includable in
gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(b) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in Section 408(a) of the
Code, an individual retirement annuity described in Section 408(b)
of the Code, an annuity plan described in Section 403(a) of the
Code, or a qualified plan described in Section 401(a) of the Code,
that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
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(c) Distributee: A distributee includes an employee or former employee.
In addition, the employee's or former employee's surviving spouse
and the employee's or former employee's spouse or former spouse who
is the alternate payee under a qualified domestic relations order,
as defined in Section 414(p) of the Code, are distributees with
regard to the interest of the spouse or former spouse.
(d) Direct rollover: A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
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ARTICLE XIX
EXECUTION
IN WITNESS WHEREOF, the Company has caused its duly authorized
officer to execute this Plan on this ____ day of __________, 1997.
TALBERT MEDICAL MANAGEMENT HOLDINGS
CORPORATION
By: ______________________________
Its: ______________________________
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AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
<PAGE>
AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
This AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT ("Management
Agreement") is entered into effective January 1, 1997 by and between Talbert
Medical Management Corporation, a Delaware corporation ("Manager") and
Talbert Medical Group, Inc., a Utah professional medical corporation
("Group").
R E C I T A L S
A. Manager is a Delaware corporation which is operated, in part, for
the purposes of providing management services related to the operation of
medical groups such as Group.
B. Group is a Utah professional medical corporation which is duly
licensed and qualified through service agreements with its independent
contractors and employees ("Group Physicians"), to provide physician services
to its patients ("Patients"). The Patients include individuals to whom
services are provided under the terms of contracts with payors for health
care services ("Group Agreements").
C. In connection with Group's providing physician services under
agreements with payors, negotiated by Manager, and for other valuable
consideration, Manager has agreed to provide the management services provided
for herein.
D. This Management Agreement is made in order to provide the terms upon
which Manager will provide management services to Group.
ARTICLE I
RESPONSIBILITIES OF MANAGER
Except as otherwise specifically provided herein, during the term of this
Management Agreement and any extensions and renewals hereof, Manager shall,
at its sole cost and expense, provide all management services including
providing facilities, support, non-physician personnel, billing, equipment,
furnishings, and supplies required for the operation of Group as an integral
part thereof at the premises established for such purposes. Such performance
by Manager shall be carried out in accordance with the following standards
and procedures:
I.1 PRACTICE SITES. Manager shall provide certain premises set forth on
EXHIBIT 1.1 hereto, together with all appurtenances, improvements, and
fixtures, (hereinafter collectively
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referred to as the "Practice Sites") at which Group will render professional
medical services. Changes in the location of a Practice Site may be effected
as of the expiration of any lease or other arrangement under which Manager
leases or occupies any Practice Site or at any other time as may be approved
by Manager. Any additional Practice Sites will be established as may be
approved by the Joint Operating Committee.
I.2 UTILITIES, BUILDING SERVICES, AND SUPPLIES. Manager shall provide
or arrange for all utilities and building services related to the utilization
by Group of Practice Sites. Manager shall also provide telephones,
reception, secretarial and transcribing services, paging devices, postage,
duplication services, office supplies and medical supplies which Manager
determines to be necessary or appropriate for the operation of the Practice
Sites.
I.3 EQUIPMENT, FURNITURE AND FURNISHINGS. Manager shall provide or
arrange for all the equipment (including computer equipment and software),
furniture, furnishings and personal property which Manager determines to be
necessary for the operation of Group ("Equipment").
I.4 REPAIR AND MAINTENANCE OF PRACTICE SITES AND EQUIPMENT. Manager
shall have the responsibility for:
I.4.1 REPAIR AND MAINTENANCE OF PRACTICE SITES. All of the lessee
maintenance and repair obligations for the Practice Sites required to be
provided pursuant to the terms of any Practice Site lease or similar
agreement, and any and all other maintenance and repairs to Practice Sites
which Manager determines to be necessary or appropriate for the efficient and
proper operation of Group.
I.4.2 REPAIR AND MAINTENANCE OF EQUIPMENT. The maintenance and
repair of all Equipment as determined by Manager to be necessary or
appropriate for the efficient and proper operation of Group.
I.5 REPLACEMENT EQUIPMENT. Should Manager determine that any then
existing Equipment utilized in the operations of Group is worn out or
obsolete and it is unreasonable, impossible, or economically impractical to
repair; and if Manager further determines that such Equipment is necessary or
appropriate for the efficient and proper operation of Group; then Manager
shall procure replacement Equipment.
I.6 SIGNS. Manager shall provide signage, including but not limited to
signage containing such name(s) as may be determined by Manager for
designation of Practice Sites.
I.7 PAYMENT OF TAXES. Manager shall have the responsibility to pay (i)
all taxes (excluding taxes measured by or based upon Group income or
professional service revenue), assessments, license fees and other charges
payable that are the responsibility of the occupant of the Practice Sites
which become payable during the term of this Management Agreement; (ii) all
taxes, assessments, license fees and other charges assessed on personal
property owned
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by Manager relating to the operation of Group; and (iii) all other business
taxes, licenses, or fees other than those related to the professional
licensure of physicians. Notwithstanding the foregoing, if Group or any
Group Physician maintains personal property at any Practice Site, then Group
or the Group Physician, as applicable, shall be responsible for the payment
of any taxes with respect to such property.
I.8 INSURANCE.
I.8.1 PRACTICE SITES. Manager shall procure and maintain all
insurance coverages deemed necessary by Manager for the operation of the
Practice Sites, including without limitation the following: (i)
comprehensive general liability insurance covering activities of Group naming
Manager, Manager's employees and Group as insured, (ii) general property
casualty insurance on the Practice Sites and contents owned or leased by
Manager in amounts consistent with Manager's risk management policies and
(iii) workers compensation insurance for employees of Manager and Group.
I.8.2 PROFESSIONAL LIABILITY INSURANCE. Manager, directly or
through its affiliates, shall procure and maintain, a policy or policies of
professional liability insurance providing coverage for Group and its
professional personnel. Such policy shall cover any acts of Group for the
professional negligence of its personnel which may have occurred during the
term of this Management Agreement. These policies of insurance shall be
written with limits of liability of no less than One Million Dollars
($1,000,000) per claim/Three Million Dollars ($3,000,000) annual aggregate.
Group shall cooperate with all reasonable requests of Manager in connection
with obtaining and maintaining this coverage.
I.8.3 DIRECTORS AND OFFICERS INSURANCE. Manager, directly or
through its affiliates, shall procure and maintain, a policy or policies of
directors and officers liability insurance providing coverage for the
directors, officers and authorized agents of Group. These policies of
insurance shall be written with limits of liability of no less than Five
Million Dollars ($5,000,000) per claim annual aggregate. Group shall
cooperate with all reasonable requests of Manager in connection with
obtaining and maintaining this coverage.
I.8.4 SELF INSURANCE. Notwithstanding any other provisions of
this Section 1.8, Manager may, at any time Manager deems appropriate, choose
to self insure for any or all insurance coverages for which Manager is
responsible pursuant to this Management Agreement.
I.9 NON-PROFESSIONAL PERSONNEL.
I.9.1 MANAGER TO EMPLOY; INITIAL EMPLOYMENT DECISIONS. Manager
shall provide all non-professional personnel to Group which Manager deems
reasonable and necessary for the efficient and proper operation of Group
based upon patient volume. For purposes of this Agreement, "Professional
Personnel" shall mean individuals employed by
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Group as physicians, optometrists, chiropractors, podiatrists, nurse
practitioners, nurse anesthetists, nurse midwives and physician assistants.
I.9.2 SPECIAL PROVISIONS APPLICABLE TO ALLIED HEALTH
PROFESSIONALS. Manager shall adhere to appropriate credentialing and other
professional review and qualification standards with respect to all personnel
to be employed or retained by Manager to perform services under this
Management Agreement who are licensed or certified to practice their
respective health care professions by the State of Utah (hereinafter
collectively referred to as "Allied Health Professionals").
I.9.3 SUPERVISION OF CLERICAL AND OTHER NON-MEDICAL SUPPORT
PERSONNEL. Manager shall supervise all clerical and other non-medical
support personnel and the non-medical functions of all Allied Health
Professionals. In addition, Manager shall provide for periodic review and
evaluation, including input from Group, of the performance of such personnel.
Manager shall establish a procedure through which Group may request
reassignment of particular personnel for express reasons relating to job
qualifications, training or performance, and Manager shall reasonably
accommodate such requests by Group which conform to this procedure.
I.9.4 DECISIONS RESERVED TO MANAGER. Manager shall make all
hiring and firing decisions and all determinations as to those wages,
salaries and compensation, including all determinations regarding the
retention, promotion, demotion, awarding of bonuses, salary adjustments, and
other matters affecting the terms and conditions of the employment of all
non-physician personnel in accordance with and subject to personnel policies
as may be adopted and modified from time to time by Manager. Staffing
levels, work hours and shifts, and employee benefit programs shall be
established and implemented by Manager in accordance with the policies and
funding arrangements developed by Manager.
I.10 BOOKKEEPING AND ACCOUNTING SERVICES. Manager shall provide Group
with all bookkeeping and accounting services Manager deems necessary or
appropriate for the efficient and proper operation of Group. Such services
shall include, without limitation, the maintenance, custody and supervision
of business records, papers, documents, ledgers, journals and reports
relating to the business operations of Group; the establishment,
administration and implementation of accounting procedures, controls, forms
and systems; the preparation of financial reports; the planning of the
business operations of the Group; the payment of accounts payable (including
claims administration and payment) and collection of accounts receivable; the
preparation of necessary Group tax returns (as opposed to the tax returns of
individual Group Physicians which shall be the responsibility of each
physician); and the administration of the compensation formula and
compensation distribution system established pursuant to the terms of this
Management Agreement.
I.11 FEE-FOR-SERVICE ADMINISTRATION. For Group Agreements which are not
subject to Section 1.12, and all care provided by Group other than under
Group Agreements, Manager shall provide the following additional
administrative services:
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I.11.1 FEE SCHEDULE. Development of a "chargemaster" fee schedule
for Group and determination of the appropriateness of revisions and
modifications to the fee schedule to reflect changed circumstances, with
approval from the Joint Operating Committee, in accordance with Section 5.2
of this Management Agreement.
I.11.2 BILLING AND COLLECTION. Billing and collection services
that Manager determines to be necessary or appropriate in connection with
charges resulting from the rendition of professional services by Group to
Patients; such services to include, but not be limited to, collection of
payments derived from coordination of benefits, collection of payments from
third party payors, and other payments due Group. Manager shall adhere to
the then current fee schedule provisions for discounts and courtesy services
to Patients. Manager shall maintain internal accounting records of all
billings to fee-for-service Patients and third-party payors.
I.12 CAPITATION ADMINISTRATION. For Group Agreements which involve
capitated payments to Group ("Capitated Agreements"), Manager shall provide
the following additional administrative services:
I.12.1 CALCULATION OF AMOUNTS DUE. Calculation of primary care and
specialty capitation and specialty, ancillary and other payable claims of
Group based upon contracts with non-Group Physicians and to prepare checks on
behalf of Group to pay amounts due.
I.12.2 BILLING UNDER CAPITATED AGREEMENTS. Billing in Group's name
and on its behalf, (a) payors for coordination of benefits and other third
party liability payments according to the terms of the Capitated Agreements,
(b) Patients in accordance with the terms and provisions of applicable
Capitated Agreements and (c) for amounts deemed ineligible under the terms of
Capitated Agreements where permitted by such Capitated Agreements. Manager
shall also review claim and capitation expense data to monitor any other
revenue receipt programs which any of the Capitated Agreements may have or
may institute, and to seek reimbursement pursuant to Capitated Agreements.
I.12.3 RECORDS. Manager shall maintain internal accounting records
including primary care encounters and authorizations for specialist referrals
under Capitated Agreements which will identify the services provided to
Patients covered by Capitated Agreements and the compensation received
therefor to enable a determination of the fee-for-service equivalency to be
made.
I.13 REVIEW AND AUDIT OF MANAGER. The annual financial statements of
Manager shall be annually audited in accordance with generally accepted
accounting standards or such other standards as may be appropriate for a
business of the size and scope of that conducted by Manager, by duly
qualified independent auditors. Copies of audited financial statements of
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Manager, subject to such restrictions as may be necessary to assure the
preservation of their confidentiality, shall be made available for review by
Group.
I.14 ADDITIONAL FINANCIAL AND MANAGEMENT REPORTS AND INFORMATION.
Manager shall prepare and deliver to Group, copies of the following reports:
I.14.1 INCOME STATEMENTS AND BALANCE SHEETS. Monthly income
statements and annual balance sheets of Group relating to the operation of
Group.
I.14.2 OTHER REPORTS. Any additional financial and management
reports and information prepared by Manager which Manager determines will
assist Group in evaluating physician productivity and the efficiency or
effectiveness of the medical services provided by Group to Patients.
I.15 MANAGEMENT INFORMATION SYSTEM. Manager shall be responsible for
the development or procurement and operation of a management information
system.
I.16 PHYSICIAN RECRUITMENT. Manager shall provide physician recruitment
services to Group.
I.17 HUMAN RESOURCES; CREDENTIALING. Manager shall provide any
necessary personnel and human resources services for its employees and the
Group. Manager shall provide credentialing services to the Group, in
accordance with standards established by Group.
I.18 MARKETING AND PUBLIC RELATIONS. Manager shall coordinate and
provide marketing and public relations services.
I.19 UM/QM POLICIES AND PROCEDURES; PREAUTHORIZATION. Manager shall
assist Group in the development of utilization management, quality management
and risk management policies and procedures for Group and Group Physicians.
Manager shall assist Group in the development of preauthorization protocols
for the administration of care under Capitated Agreements, other Group
Agreements in which Group is permitted to authorize care and for
fee-for-service Patients. Manager shall administer all such policies and
protocols under the direction and supervision of Group.
I.20 DISTRIBUTION OF COMPENSATION AND BONUSES TO GROUP PHYSICIANS; GROUP
BENEFITS ADMINISTRATION. Manager, on behalf of Group, shall administer the
payment of all compensation to all Group Physicians for providing services to
Patients including, without limitation, all applicable vacation pay, sick
leave, retirement benefits, social security and workers' compensation.
Manager shall also distribute to Group Physicians any bonuses or risk pool
amounts from whatever source derived, in accordance with the policies and
procedures adopted by Group. Manager shall contract for benefits on behalf
of Group and
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administer such benefits for Group, including any health, disability
insurance and life insurance.
I.21 ATTORNEY-IN-FACT. Group hereby constitutes and appoints Manager
for the term hereof as its true and lawful attorney-in-fact for the following
purposes:
I.21.1 DEPOSITORY ACCOUNT. To create and maintain a depository
account in the name of Group with a banking institution selected by Manager
(the "Account"). Group agrees to designate Manager as the sole party
authorized to make withdrawals from the Account, which designation may be
changed only by written notice to said institution, executed by both Group
and Manager; withdrawals from the Account shall be made only in accordance
with the terms of Sections 1.12, 2.15 or 3.1.4 of this Management Agreement.
I.21.2 RECEIPT OF PAYMENTS. To receive and deposit on a timely
basis capitation and other payments arising from Group Agreements, take
possession of and endorse in the name of Group all cash, notes, checks, money
orders, insurance payments, and any other instruments received as payment of
accounts receivable of Group however arising. Group shall immediately
forward to Manager in full any such payments that may come into the
possession of Group.
I.21.3 BILLING/CLAIMS PROCESSING. To perform the functions
described in Sections 1.11 and 1.12.
I.21.4 COLLECTION OF OTHER AMOUNTS DUE. To collect in the name of
Group and on its behalf all other charges or fees resulting from or related
to the provision of services to Patients including but not limited to any and
all hospital incentive funds and funds from shared risk pools under any risk
sharing arrangements wherein Group is or is deemed to be the provider of
medical services.
I.21.5 STOP-LOSS CLAIMS. To review claim and capitation expense
data to monitor Patients for whom patient care expenses exceed stop-loss
deductibles under Group Agreements, and to submit with the applicable Group
Agreements or other providers of stop-loss coverage orally or in writing
reimbursement requests on behalf of Group.
I.22 COMPLIANCE WITH LAW. The obligations of Manager pursuant to this
Management Agreement shall be subject to any limitations or restrictions
which may be imposed by law or regulation, and Manager may suspend any or all
obligations hereunder in the event that it reasonably determines, upon advice
of counsel, that the performance of any obligation pursuant to this
Management Agreement may contravene applicable law or regulation, the effect
of which would be to have a material adverse effect on the business,
financial condition, or operations of Manager or any affiliate.
ARTICLE II
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OBLIGATIONS OF GROUP
In providing its professional services to Patients, Group shall have the
following obligations:
II.1 GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL. Group shall notify
Manager, upon execution of this Management Agreement, of the identities of
the Group Physicians and Professional Personnel (as defined in Section 1.9),
together with a list of all such individuals and their respective areas of
practice shall be attached hereto as EXHIBIT 2.1. Group shall enter into
employment agreements or contracts with all Group Physicians and Professional
Personnel. Any new employment agreements or contracts shall be reviewed and
approved by Manager prior to execution, and Manager shall promptly be
provided with copies of the executed employment agreements and contracts and
any revisions or amendments thereto. All Group Physicians shall be licensed
by the State of Utah and hold staff privileges at one or more hospitals
designated by Manager as participating hospitals.
II.2 PROVISION OF MEDICAL SERVICES. Group shall perform, or subcontract
to perform as necessary, all medically necessary services for Patients in
accordance with the terms of Group Agreements and subject to the utilization
review protocols. All subcontracts shall be negotiated and executed by
Manager on behalf of Group.
II.3 ADDITIONAL PHYSICIANS. Group shall use its best efforts to provide
any additional physicians required by the level of patient activity
anticipated by Manager and communicated to Group, with the specialty mix and
geographical location specified by Manager, within a reasonable period of
time.
II.4 HOURS OF SERVICE. Group shall maintain Group Physicians and
Professional Personnel at Practice Sites during the following hours of
service. Hours of service at any Practice Site shall be subject to review by
the Joint Operating Committee, in accordance with Section 5.2.
II.4.1 PATIENT MEDICAL SERVICES. Group shall provide available,
accessible and medically necessary services for Patients during regular
working hours established by Manager for each Practice Site.
II.4.2 WALK-IN AND COMMUNITY SERVICES. For walk-in and community
services, which may be provided at Practice Sites, Group shall provide (or
subcontract as necessary to provide) such services at the hours, including
extended hours, established by Manager.
II.4.3 AFTER HOURS CARE. Group shall provide (or subcontract as
necessary to provide) access to after hours services in accordance with Group
protocols and community standards of care.
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II.5 NON-DISCRIMINATION; COMPLIANCE WITH LAW. All employment policies,
standards and practices of Group shall be in accordance with applicable
equality provisions of state and federal law. In the event that any
government contract or regulation requires reports or disclosures of Manager
and its contractors, Group, upon Manager's request, shall make, execute and
deliver such reports, disclosures or other written information, guarantees or
assurances as may be reasonably requested by Manager to assure timely
compliance.
II.6 NON-DISCRIMINATORY PATIENT SELECTION AND SERVICES;
NON-DISCRIMINATORY PATIENT ASSIGNMENT. No Patient shall be discriminated
against for any reason prohibited by law. The Group Physicians shall also
abide by the patient service and assignment policies established from time to
time by Manager or applicable third party payors, including those relating to
accepting Patients who select or are assigned to Group under Group Agreements.
II.7 STANDARDS, ACCREDITATION, SURVEYS AND INSPECTIONS. Group shall
meet all medical practice, licensure and ethical standards, which are
pertinent to its activities or which by contract it has agreed to abide.
Group shall in good faith cooperate with inspections and on-site surveys of
Practice Sites as may be conducted by governmental agencies, accrediting
organizations or payors. Manager shall, to the extent possible, give Group
advance notice of such inspections and surveys and schedule them during
reasonable business hours.
II.8 CONTRACTS. Group and the Group Physicians shall abide by the terms
of any Group Agreements entered into by or with Manager on behalf of Group,
including, without limitation, self-insured, PPO, EPO, HMO and indemnity
contracts.
II.9 COMPLIANCE WITH POLICIES AND PROCEDURES.
II.9.1 ORGANIZATION AND REVIEW OF CARE. Group shall comply with
policies and procedures pertinent to quality management, utilization
management, risk management, scheduling, billing, claims payment, claims
adjudication, reconciliation of payments or reimbursements, and other
administrative matters relating to the organization of the non-professional
aspects of the delivery of care as may be established by Manager from time to
time.
II.9.2 UTILIZATION MANAGEMENT; QUALITY MANAGEMENT. Group shall
contractually bind each Group Physician to cooperate with and participate in
the applicable program and systems of quality management, grievance
procedures, peer review and utilization management. Information developed in
the course of physician quality assurance and peer review activities shall be
maintained by Manager as privileged and confidential except where its
disclosure is assented to by Group or is required by law.
II.9.3 PRIOR AUTHORIZATION. Group and each Group Physician agrees to
obtain prior authorization in accordance with any administrative procedures
developed in accordance
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with Section 1.19 or required pursuant to any administrative procedures of
third party payors in effect from time to time before rendering any service
requiring prior authorization.
II.10 RECORDS AND REPORTS. Group shall assist Manager in maintaining
and, where by law or legal process required, in divulging, records and
information concerning its health care services. Group shall give Manager
full access to all of its medical and financial records.
II.11 GROUP TO PROVIDE NECESSARY BILLING AND ENCOUNTER INFORMATION.
Group agrees to provide Manager with all billing and encounter information
for Patients, including, but not limited to the name of the patient, the date
of service, the nature and extent of services provided and any supporting
medical information, necessary to obtain payment or reimbursement for
services.
II.12 CONTINUING EDUCATION. Group Physicians shall maintain competence
in, and remain currently well-informed as to recent developments about, their
particular areas of medical practice, interest and specialization.
Accordingly, subject to Group at all times providing sufficient physicians to
care for the needs of Patients, the Group Physicians shall, in compliance
with policies set by Group and administered by Manager, attend seminars, keep
current with journals and take other reasonable steps to remain proficient in
their particular specialties. All seminars necessary to maintain licensure
or competence shall be the responsibility of the Group and the individual
Group Physician.
II.13 REFERRALS. Group and the Group Physicians shall make referrals to
specialists in a manner consistent with (a) pertinent policies and procedures
(which shall be developed in consultation with Manager), (b) the terms and
conditions of government programs or Group Agreements applicable to the care
of the Patient, and (c) any federal or state laws or regulations.
II.14 PHYSICIAN COMPENSATION. Group shall compensate Group Physicians
in accordance with a compensation formula developed in consultation with
Manager. Group shall make all final determinations as to the compensation
paid to Group Physicians.
II.15 GROUP EXPENSES. Payment of those expenses related to the
operation of Group which are designated on EXHIBIT 2.15 hereto ("Group
Expenses") shall be the sole responsibility of Group. To the extent that
Manager pays or incurs any Group Expenses, Group authorizes Manager to
promptly reimburse Manager from funds in the Account as soon as such funds
become available.
II.16 PROVIDER NUMBERS. Group shall procure and maintain a medical
group provider number, including without limitation, Medicare and Medicaid
provider numbers, necessary or appropriate to obtain payment or reimbursement
on Group's behalf.
ARTICLE III
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COMPENSATION OF MANAGER
III.1 MANAGEMENT FEE. Group and Manager agree that the compensation set
forth in this Article III is being paid to Manager in consideration of the
substantial commitment made by Manager hereunder and that such fees are fair
and reasonable. Subject to the provisions of Section 3.2, Manager shall be
paid the following amounts (collectively the "Management Fee"):
III.1.1 CLINIC EXPENSES. Manager shall be reimbursed the amount of
all Clinic Expenses paid by Manager.
III.1.2 ADVANCES TO GROUP. Manager shall be reimbursed any amounts
advanced to Group to fund obligations of Group, subject to the provisions of
Section 3.3.
III.1.3 OPERATIONS FEE. Manager shall receive a fee equal to fifteen
percent (15%) of the excess of Group Revenues over Clinic Expenses as a
result of Group operations.
III.1.4 ADDITIONAL MANAGED CARE PAYMENTS. Manager shall receive a fee
equal to thirty percent (30%) of Additional Managed Care Payments made to
Group.
III.1.5 MIS ALLOCATION. The Joint Operating Committee shall determine
from time to time a portion of the Management Fee which shall reasonably
represent the payment for services to Manager for the provision of
information, data and computer services in accordance with Section 1.15;
other than for transaction costs.
III.2 CALCULATION AND PAYMENT OF MANAGEMENT FEE. The Management Fee
under this Article III shall be payable monthly. The payment amounts shall
be estimated based upon the operating results of Group for the previous
month. Adjustments to the estimated payments shall be made to reconcile
actual amounts due under this Article III, by the end of the following month
during each calendar quarter. Upon preparation of quarterly financial
statements, final adjustments to the service fee for the quarter shall be
made and any additional payments owing to Manager or Group shall then be
made. Any audit adjustments shall be reflected in the calculation for the
fourth quarter. Manager shall be entitled to withdraw the Management Fee
from the Account maintained by Manager in accordance with Section 1.21.1.
III.3 ADVANCES TO GROUP. In the event that Manager and Group have
entered into an agreement which prescribes a minimum amount of compensation
for distribution by Group to Group Physicians in accordance with Section 2.14
("Minimum Group Compensation") and the payment of the Management Fee in
accordance with this Article III will leave Group with less than the amount
of the Minimum Group Compensation, Manager shall pay to Group an amount
necessary to provide Group with Minimum Group Compensation. Commencing
January 1, 1997, any such payment shall not be considered a reduction of the
Management
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Fee, but shall be an advance by Manager to Group, which shall be repaid from
revenues otherwise allocable to Group in the next succeeding monthly periods
for which Group receives at least Minimum Group Compensation.
III.4 ADJUSTMENT IN MANAGEMENT FEE. Manager shall periodically review
and have the right to adjust all or any components of the Management Fee,
taking into account such factors as the adequacy of compensation to Group and
changes in Manager's costs. Any adjustments made pursuant to this Section
3.4 shall be effective for the next succeeding calendar quarter following the
notice required by this Section 3.4. In the event that Manager proposes a
change in any component of the Management Fee, Manager shall consult with the
Joint Operating Committee about the proposed change and the reasons therefor.
Manager shall advise Group at least thirty (30) days in advance of the date
on which the revised Management Fee is to be effective by a written statement
which includes the basis for the change.
III.5 DEFINITIONS. For purposes of this Article III:
III.5.1 "ADDITIONAL MANAGED CARE PAYMENTS" shall mean all fees and
revenues recorded by or on behalf of Group or Manager for profits, whether
from the assumption of hospital risk funds in managed care risk assumption
arrangements or otherwise, including bonus, incentive and surplus payments
from pharmacy funds or other similar risk arrangements in effect from time to
time.
III.5.2 "CLINIC EXPENSES" shall mean all operating and non-operating
expenses of Manager incurred in the operation of Group, including, without
limitation, the items listed below.
(i) Salaries, benefits, (including contributions
under benefit plans), severance benefits and other direct
costs of all employees of Manager at each Practice Site;
(ii) Direct costs of all outside consultants
retained by Manager and approved by the Joint Operating
Committee to provide services at or in connection with Group
or who actually provide services at or in connection with
Group required for improved clinic performance; provided,
however, only that portion of such consultant's costs without
mark-up by Manager that is allocable to work performed at or
for the benefit of Group will be a Clinic Expense;
(iii) Obligations of Manager under leases or subleases;
(iv) Personal property and intangible taxes
assessed against Manager's assets, commencing on the date of
this Agreement;
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(v) Interest expense on indebtedness incurred by
Manager to finance or refinance any of its obligations
hereunder or services provided (interest expense will be
charged for funds borrowed from outside sources as well as
from Manager's affiliates; in the latter case, charges will
be computed at Manager's (or its finance subsidiary's)
intracompany borrowing rate as in effect from time to time
but not to exceed the prime rate of interest of Citibank,
N.A., as published from time to time in THE WALL STREET
JOURNAL (hereinafter, "Intracompany Borrowing Rate");
(vi) Other expenses incurred by Manager in carrying
out its obligations under this Agreement, but not including
corporate overhead charges as described below;
(vii) In the event an opportunity arises for
additional physicians in the service area of Group to become
employed by or merge with Group, and in the event such merger
is completed, amortization of intangible asset value as a
result of each such merger; and
(viii) Management information systems transaction
costs.
Clinic Expenses shall not include:
(i) Any corporate overhead charge from Manager
other than the kind of tems listed above, including costs of
employees of Manager who provide services at Group;
(ii) Any federal or state income taxes;
(iii) Amounts paid for ancillary or professional
services not provided by Group Physicians or Group, but for
which Group is responsible under the applicable Group
Agreement;
(iv) Any expenses which are expressly designated
herein as expenses or responsibilities of Group in accordance
with Section 2.15;
(v) Compensation to Group Physicians, in
accordance with Section 2.14, and to Allied Health
Professionals;
(vi) Any expenses associated with procuring and
maintaining professional liability insurance in accordance
with Section 1.8.2.
III.5.3 "GROUP REVENUE" shall consist of all fees or other
compensation actually recorded each month by or on behalf of Group as a
result of professional medical services rendered by Group (including Allied
Health Professionals) at the Practice Sites.
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Fee-for-service revenue of Group shall be calculated on an accrual basis,
with gross charges for services being reduced by all allowances for bad
debts, contractual adjustments, discounts, professional courtesies and
compromises or cancellations of accounts receivable of any kind or nature.
Capitated Agreement revenue of Group shall include coordination of benefits
payments, co-payment amounts, coinsurance amounts, withhold distributions,
and stop-loss insurance reimbursements.
ARTICLE IV
EXECUTION OF GROUP AGREEMENTS
IV.1 APPOINTMENT OF MANAGER AS ATTORNEY-IN-FACT. In order to facilitate
the execution of Group Agreements and other contracts, Group hereby
constitutes and appoints Manager as attorney-in-fact for Group and the Group
Physicians with the following powers:
IV.1.1 CONTRACTING GUIDELINES. The Joint Operating Committee shall
develop guidelines for Group Agreements, which guidelines shall include terms
minimally acceptable to Group for all such Agreements. Manager shall observe
the guidelines in the negotiation of Group Agreements, and in the event
Manager proposes entry into a Group Agreement which varies from the
guidelines, Manager shall seek approval of the Joint Operating Committee for
such Group Agreement.
IV.1.2 ENTRY INTO AGREEMENTS. To negotiate and execute in the name
of Group, all contracts or other arrangements for the provision of health care
services by Group Physicians, including Capitated Agreements.
IV.1.3 ADMINISTRATION OF AGREEMENTS. To exercise such rights
respecting the administration of Group Agreements or other arrangements
negotiated by Manager pursuant to Section 4.1.2, on behalf of Group and the
Group Physicians as may reasonably be requested by the third party payor with
whom the Group Agreement is executed and as are customary in the health care
industry to facilitate the effective participation of the Group Physicians.
This Section 4.1.3 is not intended and shall not be construed to delegate any
authority to Manager to modify any term or provision of this Management
Agreement, to confess or accept any liability or obligation not authorized
under the standards respecting Group Agreements as may be established by
Manager, or to exercise any rights respecting the management of Group, the
performance of professional services by any Group Physician, or to interfere
in any way with the professional practices and prerogatives of Group or any
Group Physician. The foregoing limitation shall not, however, be construed to
modify or limit any rights or obligations of any party arising under any
other provision of this Management Agreement, or pursuant to any other
contract or agreement to which such party is bound.
4.2 RESTRICTIONS ON GROUP. Group shall not, nor shall any Group
Physician, during the term of this Management Agreement enter into any
contract or other arrangement
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for the provision of health care services other than those negotiated by
Manager in accordance with Section 4.1.2.
ARTICLE V
JOINT OPERATING COMMITTEE
V.1 COMPOSITION. Manager and Group shall constitute a Joint Operating
Committee, consisting of not fewer than three (3) representatives of Group's
Board of Directors and three (3) representatives of Manager. Each party may
change its representatives on the Joint Operating Committee from time to
time, upon notice to the other.
V.2 FUNCTIONS. The Joint Operating Committee shall advise Manager on
its administration of services under this Management Agreement and Group on
its performance of professional services pursuant to this Management
Agreement. The Joint Operating Committee shall have the specific functions
set forth on EXHIBIT 5.2 attached hereto and incorporated herein by this
reference. It is intended that the Joint Operating Committee provide
management support to Manager as required and that Manager and Group have a
duty to consult with, or seek approval from, the Joint Operating Committee on
those matters set forth in EXHIBIT 5.2 or as otherwise provided in this
Management Agreement.
V.3 MEETINGS. The Joint Operating Committee shall meet, upon the
request of Manager or of the representatives of Group, not less frequently
than quarterly.
V.4 RULES. The Joint Operating Committee may develop such rules and
procedures to govern its meetings and activities as its members deem
necessary.
ARTICLE VI
TERM; TERMINATION
VI.1 TERM; TERMINATION. The initial term of this Management Agreement
shall be twenty (20) years ("Initial Term"), commencing as of January 1, 1997
(the "Effective Date"), unless earlier terminated as hereinafter provided.
At the conclusion of the Initial Term, this Management Agreement shall be
extended for an additional ten (10) years ("First Extension"), and at the end
of the First Extension for an additional ten (10) years ("Second Extension"),
unless either Manager or Group notifies the other of its intention that the
Management Agreement terminate not later than 180 days prior to the end of
(a) the Initial Term, in the case of the First Extension or (b) the First
Extension, in the case of the Second Extension.
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VI.2 TERMINATION FOR CAUSE. Either party may terminate this Management
Agreement at any time for "cause", which, for purposes of this Section 6.2
shall be defined as, and limited to, the following defaults by the other
party:
VI.2.1 LIQUIDATION; BANKRUPTCY. The defaulting party's application
for or consent to the appointment of a receiver, trustee or liquidator of all or
a substantial part of its assets, filing of a voluntary petition in
bankruptcy, making a general assignment for the benefit of creditors, filing
a petition or answer seeking reorganization or arrangement with creditors, or
taking advantage of any insolvency, or the entry of any order, judgment or
decree by any court of competent jurisdiction on the application of a
creditor or otherwise, adjudicating such party bankrupt or approving a
petition seeking reorganization of such party or appointment of a receiver,
trustee or liquidator of such party or of all or a substantial part of its
assets, and if such order, judgment or decree shall continue unstayed and in
effect for sixty (60) calendar days after its entry. Termination under this
Subsection 6.2.1 shall be effective automatically and immediately upon the
giving of written notice of termination by the non-defaulting party.
VI.2.2 BREACH. A failure by the defaulting party to perform any
material obligation required hereunder, if such default shall continue for
thirty (30) calendar days after the giving of written notice from the
nondefaulting party specifying the nature and extent of such default, or, if
the breach cannot reasonably be cured in thirty (30) days, if the breaching
party has not acted diligently, or subsequently acted diligently, to attempt
to cure the breach within the thirty (30) day period following notice from
the nondefaulting party. If the parties disagree as to the existence of a
breach, whether the breach has been cured or whether diligent efforts have
been made towards cure, the parties shall use their good faith efforts to
resolve the dispute through negotiation. Termination under this Subsection
6.2.2 shall be effective upon the conclusion of the thirty (30) day period.
VI.3 TERMINATION FOR CERTAIN TRANSACTIONS. Manager shall have the right
to terminate this Management Agreement in the event that Group, or any
successor to Group composed of fifty percent (50%) or more of Group
Physicians, become affiliated with another medical group, medical foundation,
management services organization, hospital or health system or third party
payor, any of which Manager, in its absolute discretion, deems a competitor,
or any affiliate or agent thereof and Group does not terminate such
affiliation within thirty (30) calendar days after the giving of written
notice by Manager.
VI.4 EFFECT OF TERMINATION.
VI.4.1 MANAGER TO CONTINUE TO PROVIDE SERVICES. Upon termination of
this Management Agreement, Manager shall continue to collect and receive all
compensation, reimbursement and payments due for services provided to
Patients prior to the effective date of termination, subject to the rights of
the parties hereunder to cancel, forgive, waive and settle such payments due,
and Manager shall be entitled to receive from such amounts any compensation
in accordance with the terms of Article III for services rendered by Manager.
To the extent necessary under Section 6.4.2, Manager shall provide
management services to
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Group, in accordance with the terms of this Management Agreement, following
termination of this Management Agreement, and shall be entitled to
compensation in accordance with the terms of Article III.
VI.4.2 SERVICES UNDER GROUP AGREEMENTS; CARE OF PATIENTS. To the
extent required by Group Agreements, the parties shall observe the following
covenants, notwithstanding termination of this Management Agreement:
VI.4.2.1 GROUP AGREEMENT OBLIGATIONS. Each party shall
continue to perform services as required under the terms and conditions of
any Group Agreement in which Group and/or Manager is then participating or
otherwise has existing contractual obligations in accordance with the terms
of the Group Agreement.
VI.4.2.2 CARE OF PATIENTS. Each party shall continue to
perform such services as may be required to assure adequate care and
arrangements for appropriate referrals for patients who are receiving
hospital or other institutional services or who are involved in an active
regimen or course of medical treatment or other services at the time of such
termination.
VI.4.2.3 COLLECTIONS. The parties shall cooperate to pursue
collection of any payments to which they may be entitled for services
rendered after the termination of this Management Agreement.
VI.5 POST TERMINATION. Upon the termination of this Management Agreement:
VI.5.1 PRACTICE SITES. Subject to continuing care obligations in
Section 6.4.2, Group shall surrender to Manager all Practice Sites and
Equipment and other appurtenances thereto, in good condition, excepting
reasonable use and wear thereof and damage by fire, act of God, or by the
elements.
VI.5.2 PROPRIETARY INFORMATION. Group shall immediately
discontinue the use of and shall promptly return all proprietary information,
manuals, and other materials associated with or respecting Manager that have
been made available to Group by reason of its participation therein and shall
return all such property, together with any copies thereof in its possession,
to Manager.
VI.5.3 SOFTWARE. Group shall immediately cease to use all
software arranged for or provided by Manager and, within thirty (30) calendar
days after such termination, shall return to Manager the software, all
related documentation and computer programs and any copies thereof.
VI.5.4 ACCESS TO MEDICAL RECORDS. Group shall provide to Manager
access, at reasonable times and upon reasonable request, to Group's medical
records relating to Patients for a period not shorter than the applicable
statute of limitations for any claim
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which may be asserted against Manager arising from its activities pursuant to
this Management Agreement.
VI.5.5 COVENANT NOT TO COMPETE. For a period of one (1) year
following the termination of this Agreement Group shall not, directly or
indirectly engage in the provision of medical care within a three (3) mile
radius of any of the Practice Sites, and no Group Physician shall engage in
the provision of medical care within a three (3) mile radius of the Practice
Site at which they practiced prior to termination. The parties agree that
the duration, area and scope of activities restricted hereunder are
reasonable and necessary to protect Manager's legitimate business interests.
In the event that a court or arbitrator shall determine that this covenant is
unenforceable because of its area, duration or prohibited scope of
activities, this covenant shall be construed, in a manner consistent with
applicable law, to provide the maximum restriction on the post termination
activities of Group and Group Physicians.
ARTICLE VII
RELATIONSHIP OF THE PARTIES
VII.1 NO FIDUCIARY DUTIES. None of the provisions of this Management
Agreement are intended to create, nor shall be deemed or construed to create,
any fiduciary duty between the parties or any relationship between the
parties other than that of independent parties contracting with each other
hereunder solely for the purpose of effecting the provisions of this
Management Agreement. The parties are not, and shall not be construed to be
in a relationship of joint venturers, partners or employer-employee.
VII.2 EXCLUSIVITY.
VII.2.1 PHYSICIAN SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall provide any medical
services except in accordance with the terms of this Management Agreement. A
Group Physician who terminates employment by Group shall be relieved of this
obligation, except that for a period of one (1) year following termination of
employment, such Group Physician shall not practice medicine or solicit any
Patient of Group served at the Practice Site for the purpose of treating such
patient at a medical facility within a three (3) mile radius of such Practice
Site. The parties agree that the duration, area and scope of activities
restricted hereunder are reasonable and necessary to protect Manager's
legitimate business interests. In the event that a court or arbitrator shall
determine that this covenant is unenforceable because of its area, duration
or prohibited scope of activities, this covenant shall be construed, in a
manner consistent with applicable law, to provide the maximum restriction on
the activities of Group and Group Physicians. Manager shall not, during the
term of this Agreement, contract with any physician or group of physicians to
provide services at a Practice Site or within a three (3) mile radius of a
Practice Site, unless Manager offers Group the opportunity to Group to
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provide the services and Group declines to provide Group Physicians or hire
new physicians necessary to provide the requested services.
VII.2.2 MANAGEMENT SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall contract or arrange to
receive any services described in Article I (or any services substantially
similar to them) from any entity or person other than Manager. To the extent
that Group may require any service other than those described in Article I,
Group shall request such services from Manager, and Manager shall use
reasonable efforts to provide such service to Group.
VII.2.3 EXPANSION OF SERVICE AREA. In the event that Manager
determines to add Practice Sites or arrange to expand the services or service
area for which it contracts (an "Expansion"), it shall propose the Expansion
to the Joint Operating Committee and Group. In the event that Group declines
to provide Group Physicians or to add new physicians to provide necessary
medical services for the Expansion, then Manager may contract with other
physicians or groups to provide medical services for the Expansion.
ARTICLE VIII
MISCELLANEOUS
VIII.1 NOTICES. All notices to be given under this Management Agreement
shall be in writing and may be personally served upon the parties hereto or
may be served by depositing the same in the United States mail, postage
prepaid, as follows:
Manager: Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attn: President
Group: Talbert Medical Group, Inc.
2500 South State Street
Salt Lake City, Utah 84115
Attn: President
subject to the right of either party to change said address or addresses by
written notice of such new address to the other party.
VIII.2 PROPRIETY PROPERTY. Manager is and shall be the sole owner and
holder of all right, title and interest to the "Proprietary Property of
Manager" consisting of all copyright, service mark and trademark rights and
interests in the logo, systems, software, forms, form contracts, policy
manuals, marketing and public relations materials relating to the delivery
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system for the Group. Group agrees that is shall not at any time knowingly
harm, misuse or bring into disrepute the Proprietary Property of Manager.
VIII.3 CONFIDENTIALITY. The terms of this Management Agreement are
confidential and shall not be disclosed except as necessary to the
performance of this Management Agreement or as required by law. Neither
Group nor Group Physicians shall disseminate or publish information developed
under this Management Agreement or contained in reports to be furnished
pursuant to this Management Agreement without prior written approval of
Manager.
VIII.4 ENTIRE AGREEMENT. The provisions of this Management Agreement
and any exhibits hereto and any writing signed by the party to be charged
contemporaneously herewith constitute the entire agreement between the
parties, and supersede any prior negotiations, understandings or agreements.
VIII.5 MODIFICATIONS. This Management Agreement may be amended,
modified or otherwise changed only upon the written consent of the parties
hereto.
VIII.6 THIRD PARTY RIGHTS. This Management Agreement shall not be
construed as conferring upon any third party any right or benefit and any and
all claims which may arise hereunder may be enforced solely by Group or by
Manager.
VIII.7 NO ASSIGNMENT. No party may assign its rights or delegate its
obligations under this Management Agreement without the prior written consent
of the other party; provided that Manager may assign its rights and
obligations under this Management Agreement to an affiliate, successor or a
wholly-owned subsidiary without the consent of Group.
VIII.8 GOVERNING LAW; ARBITRATION. This Management Agreement shall be
governed by Utah law. Any dispute between the parties shall be settled by
binding arbitration in accordance with the commercial arbitration rules of
the American Arbitration Association. No punitive damages shall be awarded
in any such arbitration. The prevailing party in any such arbitration shall
be entitled to the recovery of reasonable attorneys' fees (including charges
for in-house counsel) and costs.
VIII.9 DOCUMENTS; NECESSARY ACTS. Each of the parties shall execute and
deliver all documents, papers, and instruments and perform such other acts as
may be necessary or convenient to carry out the terms of this Management
Agreement.
VIII.10 NON-WAIVER; BREACH. Any waiver of any term and condition hereof
must be in writing and signed by the party against whom it is sought to be
asserted. A party's neglect or failure in any case or circumstance to
require performance of the other party's obligations or to enforce its rights
in the event of a breach by the other party shall not affect such party's
right to enforce such rights and obligations in any other case or
circumstance. A waiver of any individual term or condition shall not be
construed as a waiver of any other term or
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condition nor, unless so provided in such written waiver, of the term or
condition thereby waived in the event of a future or continuing breach by the
other party, except in the particular circumstance(s) in or for which such
waiver was provided.
VIII.11 SEVERABILITY; INVALIDITY OF ANY PROVISION. Nothing contained in
this Management Agreement shall be construed so as to require the commission
of an act contrary to law, and whenever there is any conflict between any
provision of this Management Agreement and any present statute, law,
ordinance or regulation contrary to which the parties have no legal right to
contract, the latter shall prevail. In such event, and in any case in which
any provision of this Management Agreement is determined by a court of
competent jurisdiction to be in violation of a statute, law, ordinance, or
regulation, the affected provision(s) shall be curtailed and limited only to
the extent necessary to bring it within the requirements of the law and,
insofar as possible under the circumstances, to carry out the purposes of
this Management Agreement.
VIII.12 CAPTIONS AND HEADINGS. The captions and headings in this
Management Agreement are intended for convenience only and are not to be
interpreted as part of this Agreement.
VIII.13 FORCE MAJEURE. Neither party shall be liable nor deemed to be
in default for any delay or failure in performance under this Management
Agreement or other interruption of service or employment deemed resulting,
directly or indirectly, from acts of God, civil or military authority, acts
of public enemy, war, accidents, fires, explosions, earthquakes, floods,
failure of transportation, machinery or supplies, vandalism, strikes or other
work interruptions beyond the reasonable control of either party. However,
both parties shall make good faith efforts to perform under this Management
Agreement in the event of any such circumstances.
VIII.14 MEDICARE AND MEDICAID PATIENTS. Manager and Group agree to
generate such records and make such disclosures as may be required, from time
to time, by the Medicare, Medicaid and other third party payment programs
with respect to their participation in this Management Agreement and the
rendition of services hereunder, in order to assure that both parties will be
able to meet all requirements for participation and payment associated with
such programs, including but not limited to the matters covered by Section
1861(v)(1)(I) of the Social Security Act. If either party is requested to
disclose books, documents, or records pursuant to any provision of this
Section 8.14 for an audit, it shall notify the other party of the nature and
scope of such request and each party shall make available, upon written
request of the other, all such books, documents, or records, during such
party's regular business hours.
EXECUTION
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement on the day and year first written above.
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TALBERT MEDICAL MANAGEMENT
CORPORATION ("Manager")
By:
------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
TALBERT MEDICAL GROUP, INC. ("Group")
By:
------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
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EXHIBIT 1.1
PRACTICE SITES
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EXHIBIT 2.1
GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL
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EXHIBIT 2.15
GROUP EXPENSES
1. Group Physician personal expenditures, including licensure costs,
continuing medical education allowances, sabbatical allowances and
auto allowances.
2. Group Physician personal equipment and furnishings, including
beepers, telephone equipment, white coats, and stethoscopes.
3. Meals related to Group activities and meetings.
4. Books and periodicals for Group Physicians.
5. Off-site meetings of Group Physicians.
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EXHIBIT 5.2
JOINT OPERATING COMMITTEE FUNCTIONS
1. Develop strategy for new business, network development, new
Practice Sites, capital budgeting, marketing, and Group Agreements.
2. Evaluate and monitor operational parameters for assuring ongoing
success including but not limited to financial performance,
utilization trends, medical center operations, and overall quality
of care.
3. Address problem areas or opportunities which may be raised by
either of the two entities. Where problems are identified which can
not be solved at the medical center level, the Joint Operating
Committee will resolve and implement appropriate remedial action.
Decisions will be made by majority vote with a quorum present, which
majority shall consist of a majority of Group representatives and
Manager representatives.
4. Ensure that all responsibilities are identified and accounted for,
and any unnecessary duplication of effort shall be avoided by both the
Group and the Manager.
5. Ensure that communication between the Group and the Manager and
between the staff of these two entities is clear and unambiguous and
that a consistent and uniform perspective is presented to the
patients, employees, and external service partners.
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ARTICLE I RESPONSIBILITIES OF MANAGER . . . . . . . . . . . . . . . . . . 1
1.1 Practice Sites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Utilities, Building Services, and Supplies. . . . . . . . . . . . . . . . 2
1.3 Equipment, Furniture and Furnishings. . . . . . . . . . . . . . . . . . . 2
1.4 Repair and Maintenance of Practice Sites and Equipment. . . . . . . . . . 2
1.4.1 Repair and Maintenance of Practice Sites. . . . . . . . . . . . 2
1.4.2 Repair and Maintenance of Equipment . . . . . . . . . . . . . . 2
1.5 Replacement Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8.1 Practice Sites. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8.2 Professional Liability Insurance. . . . . . . . . . . . . . . . 3
1.8.3 Directors and Officers Insurance. . . . . . . . . . . . . . . . 3
1.8.4 Self Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9 Non-Professional Personnel. . . . . . . . . . . . . . . . . . . . . . . . 3
1.9.1 Manager to Employ; Initial Employment Decisions . . . . . . . . 3
1.9.2 Special Provisions Applicable to Allied Health
Professionals . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9.3 Supervision of Clerical and Other Non-Medical Support Personnel 4
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1.9.4 Decisions Reserved to Manager . . . . . . . . . . . . . . . . . 4
1.10 Bookkeeping and Accounting Services . . . . . . . . . . . . . . . . . . . 4
1.11 Fee-For-Service Administration. . . . . . . . . . . . . . . . . . . . . . 4
1.11.1 Fee Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.11.2 Billing and Collection. . . . . . . . . . . . . . . . . . . . . 5
1.12 Capitation Administration . . . . . . . . . . . . . . . . . . . . . . . . 5
1.12.1 Calculation of Amounts Due. . . . . . . . . . . . . . . . . . . 5
1.12.2 Billing Under Capitated Agreements. . . . . . . . . . . . . . . 5
1.12.3 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.13 Review and Audit of Manager . . . . . . . . . . . . . . . . . . . . . . . 5
1.14 Additional Financial and Management Reports and Information . . . . . . . 5
1.14.1 Income Statements and Balance Sheets. . . . . . . . . . . . . . 5
1.14.2 Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.15 Management Information System . . . . . . . . . . . . . . . . . . . . . . 6
1.16 Physician Recruitment . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.17 Human Resources; Credentialing. . . . . . . . . . . . . . . . . . . . . . 6
1.18 Marketing and Public Relations. . . . . . . . . . . . . . . . . . . . . . 6
1.19 UM/QM Policies and Procedures; Preauthorization . . . . . . . . . . . . . 6
1.20 Distribution of Compensation and Bonuses to Group Physicians;
Group Benefits Administration . . . . . . . . . . . . . . . . . . . . . . 6
1.21 Attorney-in-Fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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1.21.1 Depository Account. . . . . . . . . . . . . . . . . . . . . . . 6
1.21.2 Receipt of Payments . . . . . . . . . . . . . . . . . . . . . . 7
1.21.3 Billing/Claims Processing . . . . . . . . . . . . . . . . . . . 7
1.21.4 Collection of Other Amounts Due . . . . . . . . . . . . . . . . 7
1.21.5 Stop-Loss Claims. . . . . . . . . . . . . . . . . . . . . . . . 7
1.22 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II OBLIGATIONS OF GROUP. . . . . . . . . . . . . . . . . . . . . . 7
2.1 Group Physicians and Professional Personnel . . . . . . . . . . . . . . . 7
2.2 Provision of Medical Services . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Additional Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Hours of Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4.1 Patient Medical Services. . . . . . . . . . . . . . . . . . . . 8
2.4.2 Walk-In and Community Services. . . . . . . . . . . . . . . . . 8
2.4.3 After Hours Care. . . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Non-discrimination; Compliance with Law . . . . . . . . . . . . . . . . . 8
2.6 Non-discriminatory Patient Selection and Services;
Non-discriminatory Patient Assignment . . . . . . . . . . . . . . . . . . 8
2.7 Standards, Accreditation, Surveys and Inspections . . . . . . . . . . . . 8
2.8 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.9 Compliance with Policies and Procedures . . . . . . . . . . . . . . . . . 9
2.9.1 Organization and Review of Care . . . . . . . . . . . . . . . . 9
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2.9.2 Utilization Management; Quality Management. . . . . . . . . . . 9
2.9.3 Prior Authorization . . . . . . . . . . . . . . . . . . . . . . 9
2.10 Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.11 Group to Provide Necessary Billing and Encounter Information. . . . . . . 9
2.12 Continuing Education. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.14 Physician Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.15 Group Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.16 Provider Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III COMPENSATION OF MANAGER . . . . . . . . . . . . . . . . . . . . 10
3.1 Management Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Clinic Expenses.. . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.2 Advances to Group.. . . . . . . . . . . . . . . . . . . . . . . 10
3.1.3 Operations Fee. . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.4 Additional Managed Care Payments. . . . . . . . . . . . . . . . 11
3.1.5 MIS Allocation. . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Calculation and Payment of Management Fee.. . . . . . . . . . . . . . . . 11
3.3 Advances to Group.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Adjustment in Management Fee. . . . . . . . . . . . . . . . . . . . . . . 11
3.5 Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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3.5.1 "Additional Managed Care Payments". . . . . . . . . . . . . . . 11
3.5.2 "Clinic Expenses" . . . . . . . . . . . . . . . . . . . . . . . 12
3.5.3 "Group Revenue" . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV EXECUTION OF GROUP AGREEMENTS . . . . . . . . . . . . . . . . . 13
4.1 Appointment of Manager as Attorney-in-Fact. . . . . . . . . . . . . . . . 13
4.1.1 Contracting Guidelines. . . . . . . . . . . . . . . . . . . . . 13
4.1.2 Entry Into Agreements . . . . . . . . . . . . . . . . . . . . . 14
4.1.3 Administration of Agreements. . . . . . . . . . . . . . . . . . 14
4.2 Restrictions on Group . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V JOINT OPERATING COMMITTEE . . . . . . . . . . . . . . . . . . . 14
5.1 Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.2 Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.3 Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.4 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI TERM; TERMINATION . . . . . . . . . . . . . . . . . . . . . . . 15
6.1 Term; Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.2 Termination for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.2.1 Liquidation; Bankruptcy . . . . . . . . . . . . . . . . . . . . 15
6.2.2 Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.3 Termination for Certain Transactions. . . . . . . . . . . . . . . . . . . 16
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6.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.4.1 Manager to Continue to Provide Services . . . . . . . . . . . . 16
6.4.2 Services Under Group Agreements; Care of Patients . . . . . . . 16
6.4.2.1 Group Agreement Obligations . . . . . . . . . . . . . . . . 16
6.4.2.2 Care of Patients. . . . . . . . . . . . . . . . . . . . . . 16
6.4.2.3 Collections . . . . . . . . . . . . . . . . . . . . . . . . 16
6.5 Post Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.5.1 Practice Sites. . . . . . . . . . . . . . . . . . . . . . . . . 17
6.5.2 Proprietary Information . . . . . . . . . . . . . . . . . . . . 17
6.5.3 Software. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.5.4 Access to Medical Records . . . . . . . . . . . . . . . . . . . 17
6.5.5 Covenant Not to Compete . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VII RELATIONSHIP OF THE PARTIES . . . . . . . . . . . . . . . . . . 17
7.1 No Fiduciary Duties.. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.2 Exclusivity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2.1 Physician Services. . . . . . . . . . . . . . . . . . . . . . . 18
7.2.2 Management Services.. . . . . . . . . . . . . . . . . . . . . . 18
7.2.3 Expansion of Service Area . . . . . . . . . . . . . . . . . . . 18
ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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8.2 Propriety Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.4 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.5 Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.6 Third Party Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.7 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.8 Governing Law; Arbitration. . . . . . . . . . . . . . . . . . . . . . . . 20
8.9 Documents; Necessary Acts . . . . . . . . . . . . . . . . . . . . . . . . 20
8.10 Non-Waiver; Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.11 Severability; Invalidity of Any Provision . . . . . . . . . . . . . . . . 20
8.12 Captions and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.13 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.14 Medicare and Medicaid Patients. . . . . . . . . . . . . . . . . . . . . . 21
Exhibit 1.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit 2.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exhibit 2.15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Exhibit 5.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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<PAGE>
AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
<PAGE>
AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
This Amended and Restated Management Services Agreement ("Management
Agreement") is entered into effective January 1, 1997 by and between Talbert
Medical Management Corporation, a Delaware corporation ("Manager") and
Talbert Medical Group, Inc., a California professional medical corporation
("Group").
R E C I T A L S
A. Manager is a Delaware corporation which is operated, in part, for
the purposes of providing management services related to the operation of
medical groups such as Group.
B. Group is a California professional medical corporation which is duly
licensed and qualified through service agreements with its independent
contractors and employees ("Group Physicians"), to provide physician services
to its patients ("Patients"). The Patients include individuals to whom
services are provided under the terms of contracts with payors for health
care services ("Group Agreements").
C. In connection with Group's providing physician services under
agreements with payors, negotiated by Manager, and for other valuable
consideration, Manager has agreed to provide the management services provided
for herein.
D. This Management Agreement is made in order to provide the terms upon
which Manager will provide management services to Group.
ARTICLE I
RESPONSIBILITIES OF MANAGER
Except as otherwise specifically provided herein, during the term of this
Management Agreement and any extensions and renewals hereof, Manager shall,
at its sole cost and expense, provide all management services including
providing facilities, support, non-physician personnel, billing, equipment,
furnishings, and supplies required for the operation of Group as an integral
part thereof at the premises established for such purposes. Such performance
by Manager shall be carried out in accordance with the following standards
and procedures:
I.1 PRACTICE SITES. Manager shall provide certain premises set forth on
EXHIBIT 1.1 hereto, together with all appurtenances, improvements, and
fixtures, (hereinafter collectively referred to as the "Practice Sites") at
which Group will render professional medical services. Changes in the
location of a Practice Site may be effected as of the expiration of any lease
or other arrangement under which Manager leases or occupies any
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Practice Site or at any other time as may be approved by Manager. Any
additional Practice Sites will be established as may be approved by the Joint
Operating Committee.
I.2 UTILITIES, BUILDING SERVICES, AND SUPPLIES. Manager shall provide
or arrange for all utilities and building services related to the utilization
by Group of Practice Sites. Manager shall also provide telephones,
reception, secretarial and transcribing services, paging devices, postage,
duplication services, office supplies and medical supplies which Manager
determines to be necessary or appropriate for the operation of the Practice
Sites.
I.3 EQUIPMENT, FURNITURE AND FURNISHINGS. Manager shall provide or
arrange for all the equipment (including computer equipment and software),
furniture, furnishings and personal property which Manager determines to be
necessary for the operation of Group ("Equipment").
I.4 REPAIR AND MAINTENANCE OF PRACTICE SITES AND EQUIPMENT. Manager
shall have the responsibility for:
I.4.1 REPAIR AND MAINTENANCE OF PRACTICE SITES. All of the lessee
maintenance and repair obligations for the Practice Sites required to be
provided pursuant to the terms of any Practice Site lease or similar
agreement, and any and all other maintenance and repairs to Practice Sites
which Manager determines to be necessary or appropriate for the efficient and
proper operation of Group.
I.4.2 REPAIR AND MAINTENANCE OF EQUIPMENT. The maintenance and
repair of all Equipment as determined by Manager to be necessary or appropriate
for the efficient and proper operation of Group.
I.5 REPLACEMENT EQUIPMENT. Should Manager determine that any then
existing Equipment utilized in the operations of Group is worn out or
obsolete and it is unreasonable, impossible, or economically impractical to
repair; and if Manager further determines that such Equipment is necessary or
appropriate for the efficient and proper operation of Group; then Manager
shall procure replacement Equipment.
I.6 SIGNS. Manager shall provide signage, including but not limited to
signage containing such name(s) as may be determined by Manager for
designation of Practice Sites.
I.7 PAYMENT OF TAXES. Manager shall have the responsibility to pay (i)
all taxes (excluding taxes measured by or based upon Group income or
professional service revenue), assessments, license fees and other charges
payable that are the responsibility of the occupant of the Practice Sites
which become payable during the term of this Management Agreement; (ii) all
taxes, assessments, license fees and other charges assessed on personal
property owned by Manager relating to the operation of Group; and (iii) all
other business taxes, licenses, or fees other than those related to the
professional licensure of physicians. Notwithstanding the foregoing, if
Group or any Group Physician maintains personal property at any Practice
Site,
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then Group or the Group Physician, as applicable, shall be responsible for
the payment of any taxes with respect to such property.
I.8 INSURANCE.
I.8.1 PRACTICE SITES. Manager shall procure and maintain all
insurance coverages deemed necessary by Manager for the operation of the
Practice Sites, including without limitation the following: (i) comprehensive
general liability insurance covering activities of Group naming Manager,
Manager's employees and Group as insured, (ii) general property casualty
insurance on the Practice Sites and contents owned or leased by Manager in
amounts consistent with Manager's risk management policies and (iii) workers
compensation insurance for employees of Manager and Group.
I.8.2 PROFESSIONAL LIABILITY INSURANCE. Manager, directly or through
its affiliates, shall procure and maintain, a policy or policies of professional
liability insurance providing coverage for Group and its professional
personnel. Such policy shall cover any acts of Group for the professional
negligence of its personnel which may have occurred during the term of this
Management Agreement. These policies of insurance shall be written with
limits of liability of no less than One Million Dollars ($1,000,000) per
claim/Three Million Dollars ($3,000,000) annual aggregate. Group shall
cooperate with all reasonable requests of Manager in connection with
obtaining and maintaining this coverage.
I.8.3 DIRECTORS AND OFFICERS INSURANCE. Manager, directly or through
its affiliates, shall procure and maintain, a policy or policies of directors
and officers liability insurance providing coverage for the directors, officers
and authorized agents of Group. These policies of insurance shall be written
with limits of liability of no less than Five Million Dollars ($5,000,000)
per claim annual aggregate. Group shall cooperate with all reasonable
requests of Manager in connection with obtaining and maintaining this
coverage.
I.8.4 SELF INSURANCE. Notwithstanding any other provisions of this
Section 1.8, Manager may, at any time Manager deems appropriate, choose to
self insure for any or all insurance coverages for which Manager is
responsible pursuant to this Management Agreement.
I.9 NON-PROFESSIONAL PERSONNEL.
I.9.1 MANAGER TO EMPLOY; INITIAL EMPLOYMENT DECISIONS. Manager shall
provide all non-professional personnel to Group which Manager deems
reasonable and necessary for the efficient and proper operation of Group
based upon patient volume. For purposes of this Agreement, "Professional
Personnel" shall mean individuals employed by Group as physicians,
optometrists, chiropractors, podiatrists, nurse practitioners, nurse
anesthetists, nurse midwives and physician assistants.
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I.9.2 SPECIAL PROVISIONS APPLICABLE TO ALLIED HEALTH PROFESSIONALS.
Manager shall adhere to appropriate credentialing and other professional
review and qualification standards with respect to all personnel to be
employed or retained by Manager to perform services under this Management
Agreement who are licensed or certified to practice their respective health
care professions by the State of California (hereinafter collectively
referred to as "Allied Health Professionals").
I.9.3 SUPERVISION OF CLERICAL AND OTHER NON-MEDICAL SUPPORT PERSONNEL.
Manager shall supervise all clerical and other non-medical support personnel
and the non-medical functions of all Allied Health Professionals. In
addition, Manager shall provide for periodic review and evaluation, including
input from Group, of the performance of such personnel. Manager shall
establish a procedure through which Group may request reassignment of
particular personnel for express reasons relating to job qualifications,
training or performance, and Manager shall reasonably accommodate such
requests by Group which conform to this procedure.
I.9.4 DECISIONS RESERVED TO MANAGER. Manager shall make all hiring
and firing decisions and all determinations as to those wages, salaries and
compensation, including all determinations regarding the retention,
promotion, demotion, awarding of bonuses, salary adjustments, and other
matters affecting the terms and conditions of the employment of all
non-physician personnel in accordance with and subject to personnel policies
as may be adopted and modified from time to time by Manager. Staffing
levels, work hours and shifts, and employee benefit programs shall be
established and implemented by Manager in accordance with the policies and
funding arrangements developed by Manager.
I.10 BOOKKEEPING AND ACCOUNTING SERVICES. Manager shall provide Group
with all bookkeeping and accounting services Manager deems necessary or
appropriate for the efficient and proper operation of Group. Such services
shall include, without limitation, the maintenance, custody and supervision
of business records, papers, documents, ledgers, journals and reports
relating to the business operations of Group; the establishment,
administration and implementation of accounting procedures, controls, forms
and systems; the preparation of financial reports; the planning of the
business operations of the Group; the payment of accounts payable (including
claims administration and payment) and collection of accounts receivable; the
preparation of necessary Group tax returns (as opposed to the tax returns of
individual Group Physicians which shall be the responsibility of each
physician); and the administration of the compensation formula and
compensation distribution system established pursuant to the terms of this
Management Agreement.
I.11 FEE-FOR-SERVICE ADMINISTRATION. For Group Agreements which are not
subject to Section 1.12, and all care provided by Group other than under
Group Agreements, Manager shall provide the following additional
administrative services:
I.11.1 FEE SCHEDULE. Development of a "chargemaster" fee schedule for
Group and determination of the appropriateness of revisions and modifications
to the fee
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schedule to reflect changed circumstances, with approval from the Joint
Operating Committee, in accordance with Section 5.2 of this Management
Agreement.
I.11.2 BILLING AND COLLECTION. Billing and collection services that
Manager determines to be necessary or appropriate in connection with charges
resulting from the rendition of professional services by Group to Patients;
such services to include, but not be limited to, collection of payments
derived from coordination of benefits, collection of payments from third
party payors, and other payments due Group. Manager shall adhere to the then
current fee schedule provisions for discounts and courtesy services to
Patients. Manager shall maintain internal accounting records of all billings
to fee-for-service Patients and third-party payors.
I.12 CAPITATION ADMINISTRATION. For Group Agreements which involve
capitated payments to Group ("Capitated Agreements"), Manager shall provide
the following additional administrative services:
I.12.1 CALCULATION OF AMOUNTS DUE. Calculation of primary care and
specialty capitation and specialty, ancillary and other payable claims of
Group based upon contracts with non-Group Physicians and to prepare checks on
behalf of Group to pay amounts due.
I.12.2 BILLING UNDER CAPITATED AGREEMENTS. Billing in Group's name
and on its behalf, (a) payors for coordination of benefits and other third party
liability payments according to the terms of the Capitated Agreements, (b)
Patients in accordance with the terms and provisions of applicable Capitated
Agreements and (c) for amounts deemed ineligible under the terms of Capitated
Agreements where permitted by such Capitated Agreements. Manager shall also
review claim and capitation expense data to monitor any other revenue receipt
programs which any of the Capitated Agreements may have or may institute, and
to seek reimbursement pursuant to Capitated Agreements.
I.12.3 RECORDS. Manager shall maintain internal accounting records
including primary care encounters and authorizations for specialist referrals
under Capitated Agreements which will identify the services provided to
Patients covered by Capitated Agreements and the compensation received
therefor to enable a determination of the fee-for-service equivalency to be
made.
I.13 REVIEW AND AUDIT OF MANAGER. The annual financial statements
of Manager shall be annually audited in accordance with generally accepted
accounting standards or such other standards as may be appropriate for a
business of the size and scope of that conducted by Manager, by duly
qualified independent auditors. Copies of audited financial statements of
Manager, subject to such restrictions as may be necessary to assure the
preservation of their confidentiality, shall be made available for review by
Group.
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I.14 ADDITIONAL FINANCIAL AND MANAGEMENT REPORTS AND INFORMATION.
Manager shall prepare and deliver to Group, copies of the following reports:
I.14.1 INCOME STATEMENTS AND BALANCE SHEETS. Monthly income
statements and annual balance sheets of Group relating to the operation of
Group.
I.14.2 OTHER REPORTS. Any additional financial and management
reports and information prepared by Manager which Manager determines will
assist Group in evaluating physician productivity and the efficiency or
effectiveness of the medical services provided by Group to Patients.
I.15 MANAGEMENT INFORMATION SYSTEM. Manager shall be responsible for
the development or procurement and operation of a management information
system.
I.16 PHYSICIAN RECRUITMENT. Manager shall provide physician
recruitment services to Group.
I.17 HUMAN RESOURCES; CREDENTIALING. Manager shall provide any
necessary personnel and human resources services for its employees and the
Group. Manager shall provide credentialing services to the Group, in
accordance with standards established by Group.
I.18 MARKETING AND PUBLIC RELATIONS. Manager shall coordinate and
provide marketing and public relations services.
I.19 UM/QM POLICIES AND PROCEDURES; PREAUTHORIZATION. Manager shall
assist Group in the development of utilization management, quality management
and risk management policies and procedures for Group and Group Physicians.
Manager shall assist Group in the development of preauthorization protocols
for the administration of care under Capitated Agreements, other Group
Agreements in which Group is permitted to authorize care and for
fee-for-service Patients. Manager shall administer all such policies and
protocols under the direction and supervision of Group.
I.20 DISTRIBUTION OF COMPENSATION AND BONUSES TO GROUP PHYSICIANS;
GROUP BENEFITS ADMINISTRATION. Manager, on behalf of Group, shall administer
the payment of all compensation to all Group Physicians for providing
services to Patients including, without limitation, all applicable vacation
pay, sick leave, retirement benefits, social security and workers'
compensation. Manager shall also distribute to Group Physicians any bonuses
or risk pool amounts from whatever source derived, in accordance with the
policies and procedures adopted by Group. Manager shall contract for
benefits on behalf of Group and administer such benefits for Group, including
any health, disability insurance and life insurance.
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I.21 ATTORNEY-IN-FACT. Group hereby constitutes and appoints Manager
for the term hereof as its true and lawful attorney-in-fact for the following
purposes:
I.21.1 DEPOSITORY ACCOUNT. To create and maintain a depository
account in the name of Group with a banking institution selected by Manager
(the "Account"). Group agrees to designate Manager as the sole party authorized
to make withdrawals from the Account, which designation may be changed only
by written notice to said institution, executed by both Group and Manager;
withdrawals from the Account shall be made only in accordance with the terms
of Sections 1.12, 2.15 or 3.1.4 of this Management Agreement.
I.21.2 RECEIPT OF PAYMENTS. To receive and deposit on a timely basis
capitation and other payments arising from Group Agreements, take possession
of and endorse in the name of Group all cash, notes, checks, money orders,
insurance payments, and any other instruments received as payment of accounts
receivable of Group however arising. Group shall immediately forward to
Manager in full any such payments that may come into the possession of Group.
I.21.3 BILLING/CLAIMS PROCESSING. To perform the functions described
in Sections 1.11 and 1.12.
I.21.4 COLLECTION OF OTHER AMOUNTS DUE. To collect in the name of
Group and on its behalf all other charges or fees resulting from or related to
the provision of services to Patients including but not limited to any and all
hospital incentive funds and funds from shared risk pools under any risk
sharing arrangements wherein Group is or is deemed to be the provider of
medical services.
I.21.5 STOP-LOSS CLAIMS. To review claim and capitation expense data
to monitor Patients for whom patient care expenses exceed stop-loss deductibles
under Group Agreements, and to submit with the applicable Group Agreements or
other providers of stop-loss coverage orally or in writing reimbursement
requests on behalf of Group.
I.22 COMPLIANCE WITH LAW. The obligations of Manager pursuant to this
Management Agreement shall be subject to any limitations or restrictions
which may be imposed by law or regulation, and Manager may suspend any or all
obligations hereunder in the event that it reasonably determines, upon advice
of counsel, that the performance of any obligation pursuant to this
Management Agreement may contravene applicable law or regulation, the effect
of which would be to have a material adverse effect on the business,
financial condition, or operations of Manager or any affiliate.
ARTICLE II
OBLIGATIONS OF GROUP
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In providing its professional services to Patients, Group shall have the
following obligations:
II.1 GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL. Group shall notify
Manager, upon execution of this Management Agreement, of the identities of
the Group Physicians and Professional Personnel (as defined in Section 1.9),
together with a list of all such individuals and their respective areas of
practice shall be attached hereto as EXHIBIT 2.1. Group shall enter into
employment agreements or contracts with all Group Physicians and Professional
Personnel. Any new employment agreements or contracts shall be reviewed and
approved by Manager prior to execution, and Manager shall promptly be
provided with copies of the executed employment agreements and contracts and
any revisions or amendments thereto. All Group Physicians shall be licensed
by the State of California and hold staff privileges at one or more hospitals
designated by Manager as participating hospitals.
II.2 PROVISION OF MEDICAL SERVICES. Group shall perform, or
subcontract to perform as necessary, all medically necessary services for
Patients in accordance with the terms of Group Agreements and subject to the
utilization review protocols. All subcontracts shall be negotiated and
executed by Manager on behalf of Group.
II.3 ADDITIONAL PHYSICIANS. Group shall use its best efforts to
provide any additional physicians required by the level of patient activity
anticipated by Manager and communicated to Group, with the specialty mix and
geographical location specified by Manager, within a reasonable period of
time.
II.4 HOURS OF SERVICE. Group shall maintain Group Physicians and
Professional Personnel at Practice Sites during the following hours of
service. Hours of service at any Practice Site shall be subject to review by
the Joint Operating Committee, in accordance with Section 5.2.
II.4.1 PATIENT MEDICAL SERVICES. Group shall provide available,
accessible and medically necessary services for Patients during regular
working hours established by Manager for each Practice Site.
II.4.2 WALK-IN AND COMMUNITY SERVICES. For walk-in and community
services, which may be provided at Practice Sites, Group shall provide (or
subcontract as necessary to provide) such services at the hours, including
extended hours, established by Manager.
II.4.3 AFTER HOURS CARE. Group shall provide (or subcontract as
necessary to provide) access to after hours services in accordance with Group
protocols and community standards of care.
II.5 NON-DISCRIMINATION; COMPLIANCE WITH LAW. All employment policies,
standards and practices of Group shall be in accordance with applicable
equality provisions of
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state and federal law. In the event that any government contract or
regulation requires reports or disclosures of Manager and its contractors,
Group, upon Manager's request, shall make, execute and deliver such reports,
disclosures or other written information, guarantees or assurances as may be
reasonably requested by Manager to assure timely compliance.
II.6 NON-DISCRIMINATORY PATIENT SELECTION AND SERVICES;
NON-DISCRIMINATORY PATIENT ASSIGNMENT. No Patient shall be discriminated
against for any reason prohibited by law. The Group Physicians shall also
abide by the patient service and assignment policies established from time to
time by Manager or applicable third party payors, including those relating to
accepting Patients who select or are assigned to Group under Group Agreements.
II.7 STANDARDS, ACCREDITATION, SURVEYS AND INSPECTIONS. Group shall
meet all medical practice, licensure and ethical standards, which are
pertinent to its activities or which by contract it has agreed to abide.
Group shall in good faith cooperate with inspections and on-site surveys of
Practice Sites as may be conducted by governmental agencies, accrediting
organizations or payors. Manager shall, to the extent possible, give Group
advance notice of such inspections and surveys and schedule them during
reasonable business hours.
II.8 CONTRACTS. Group and the Group Physicians shall abide by the
terms of any Group Agreements entered into by or with Manager on behalf of
Group, including, without limitation, self-insured, PPO, EPO, HMO and
indemnity contracts.
II.9 COMPLIANCE WITH POLICIES AND PROCEDURES.
II.9.1 ORGANIZATION AND REVIEW OF CARE. Group shall comply with
policies and procedures pertinent to quality management, utilization management,
risk management, scheduling, billing, claims payment, claims adjudication,
reconciliation of payments or reimbursements, and other administrative
matters relating to the organization of the non-professional aspects of the
delivery of care as may be established by Manager from time to time.
II.9.2 UTILIZATION MANAGEMENT; QUALITY MANAGEMENT. Group shall
contractually bind each Group Physician to cooperate with and participate in
the applicable program and systems of quality management, grievance
procedures, peer review and utilization management. Information developed in
the course of physician quality assurance and peer review activities shall be
maintained by Manager as privileged and confidential except where its
disclosure is assented to by Group or is required by law.
II.9.3 PRIOR AUTHORIZATION. Group and each Group Physician agrees to
obtain prior authorization in accordance with any administrative procedures
developed in accordance with Section 1.19 or required pursuant to any
administrative procedures of third party payors in effect from time to time
before rendering any service requiring prior authorization.
II.10 RECORDS AND REPORTS. Group shall assist Manager in maintaining
and, where by law or legal process required, in divulging, records and
information concerning its health care services. Group shall give Manager
full access to all of its medical and financial records.
II.11 GROUP TO PROVIDE NECESSARY BILLING AND ENCOUNTER INFORMATION.
Group agrees to provide Manager with all billing and encounter information
for Patients, including, but not limited to the name of the patient, the date
of service, the nature and extent of services provided and any supporting
medical information, necessary to obtain payment or reimbursement for
services.
II.12 CONTINUING EDUCATION. Group Physicians shall maintain competence
in, and remain currently well-informed as to recent developments about, their
particular areas of medical practice, interest and specialization.
Accordingly, subject to Group at all times providing sufficient physicians to
care for the needs of Patients, the Group Physicians shall, in compliance
with policies set by Group and administered by Manager, attend seminars, keep
current with journals and take other reasonable steps to remain proficient in
their particular specialties. All seminars necessary to maintain licensure
or competence shall be the responsibility of the Group and the individual
Group Physician.
II.13 REFERRALS. Group and the Group Physicians shall make referrals to
specialists in a manner consistent with (a) pertinent policies and procedures
(which shall be developed in consultation with Manager), (b) the terms and
conditions of government programs or Group Agreements applicable to the care
of the Patient, and (c) any federal or state laws or regulations.
II.14 PHYSICIAN COMPENSATION. Group shall compensate Group Physicians
in accordance with a compensation formula developed in consultation with
Manager. Group shall make all final determinations as to the compensation
paid to Group Physicians.
II.15 GROUP EXPENSES. Payment of those expenses related to the
operation of Group which are designated on EXHIBIT 2.15 hereto ("Group
Expenses") shall be the sole responsibility of Group. To the extent that
Manager pays or incurs any Group Expenses, Group authorizes Manager to
promptly reimburse Manager from funds in the Account as soon as such funds
become available.
II.16 PROVIDER NUMBERS. Group shall procure and maintain a medical
group provider number, including without limitation, Medicare and Medicaid
provider numbers, necessary or appropriate to obtain payment or reimbursement
on Group's behalf.
ARTICLE III
COMPENSATION OF MANAGER
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III.1 MANAGEMENT FEE. For its services provided under this Management
Agreement, Manager shall be entitled to a fee (the "Management Fee"), payable
not later than ten days following the end of each calendar month during the
term of this Management Agreement, which shall be computed as the sum of the
following factors:
III.1.1 FEE FOR SERVICE REVENUES. An amount equal to 60% of all
revenues of the Group arising from the provision of services on a fee-for
service basis (defined in accordance with Section 3.5), whether or not pursuant
to a Group Agreement.
III.1.2 CAPITATED AGREEMENT REVENUE. An amount equal to 60% of
capitation payments or similar revenues of Group (as defined in Section 3.5)
arising from the provision of medical services pursuant to Capitated
Agreements.
III.1.3 HOSPITAL RISK POOLS. An amount equal to 60% of amounts due
Group under hospital risk pool arrangements entered into by Group in accordance
with Group Agreements.
III.1.4 PAYMENT OF FEE. Manager shall be entitled to withdraw the
Management Fee from the Account maintained by Manager in accordance with
Section 1.21.1. Manager shall, concurrently with any such withdrawal,
provide to Group a statement of the calculation of the Management Fee.
III.2 OVERPAYMENTS AND UNDERPAYMENTS. From time to time as necessary,
Manager shall recalculate the Management Fee if a prior payment is deemed to
be an overpayment or an underpayment due to changed circumstances impacting
the calculation of the Management Fee, such as notification by a payor under
a Capitated Agreement of prior overpayment of capitation payments.
III.3 ADVANCES TO GROUP. In the event that Manager and Group have
entered into an agreement which prescribes a minimum amount of compensation
for distribution by Group to Group Physicians in accordance with Section 2.14
("Minimum Group Compensation") and the payment of the Management Fee in
accordance with this Article III will leave Group with less than the amount
of the Minimum Group Compensation, Manager shall pay to Group an amount
necessary to provide Group with Minimum Group Compensation. Any such payment
shall not be considered a reduction of the Management Fee, but shall be an
advance by Manager to Group, which shall be repaid from revenues otherwise
allocable to Group in the next succeeding monthly periods for which Group
receives at least Minimum Group Compensation.
III.4 ADJUSTMENT IN MANAGEMENT FEE. Manager shall periodically review
and have the right to adjust all or any components of the Management Fee,
taking into account such factors as the adequacy of compensation to Group and
changes in Manager's costs. Any adjustments made pursuant to this Section
3.4 shall be effective for the next succeeding calendar quarter following the
notice required by this Section 3.4. In the event that Manager
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proposes a change in any component of the Management Fee, Manager shall
consult with the Joint Operating Committee about the proposed change and the
reasons therefor. Manager shall advise Group at least thirty (30) days in
advance of the date on which the revised Management Fee is to be effective by
a written statement which includes the basis for the change.
III.5 DEFINITIONS OF GROUP REVENUE. For purposes of this Article III:
(a) fee-for-service revenue of Group shall be calculated on an accrual basis,
with gross charges for services being reduced by all allowances for bad
debts, contractual adjustments, discounts, professional courtesies and
compromises or cancellations of accounts receivable of any kind or nature,
and (b) Capitated Agreement revenue of Group shall include coordination of
benefits payments, co-payment amounts, coinsurance amounts, withhold
distributions, and stop-loss insurance reimbursements, less amounts paid for
ancillary or professional services not provided by Group Physicians or Group,
but for which Group is responsible under the applicable Group Agreement.
ARTICLE IV
EXECUTION OF GROUP AGREEMENTS
IV.1 APPOINTMENT OF MANAGER AS ATTORNEY-IN-FACT. In order to
facilitate the execution of Group Agreements and other contracts, Group
hereby constitutes and appoints Manager as attorney-in-fact for Group and the
Group Physicians with the following powers:
IV.1.1 CONTRACTING GUIDELINES. The Joint Operating Committee shall
develop guidelines for Group Agreements, which guidelines shall include terms
minimally acceptable to Group for all such Agreements. Manager shall observe
the guidelines in the negotiation of Group Agreements, and in the event
Manager proposes entry into a Group Agreement which varies from the
guidelines, Manager shall seek approval of the Joint Operating Committee for
such Group Agreement.
IV.1.2 ENTRY INTO AGREEMENTS. To negotiate and execute in the name
of Group, all contracts or other arrangements for the provision of health care
services by Group Physicians, including Capitated Agreements.
IV.1.3 ADMINISTRATION OF AGREEMENTS. To exercise such rights
respecting the administration of Group Agreements or other arrangements
negotiated by Manager pursuant to Section 4.1.2, on behalf of Group and the
Group Physicians as may reasonably be requested by the third party payor with
whom the Group Agreement is executed and as are customary in the health care
industry to facilitate the effective participation of the Group Physicians.
This Section 4.1.3 is not intended and shall not be construed to delegate any
authority to Manager to modify any term or provision of this Management
Agreement, to confess or accept any liability or obligation not authorized
under the standards respecting
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Group Agreements as may be established by Manager, or to exercise any rights
respecting the management of Group, the performance of professional services
by any Group Physician, or to interfere in any way with the professional
practices and prerogatives of Group or any Group Physician. The foregoing
limitation shall not, however, be construed to modify or limit any rights or
obligations of any party arising under any other provision of this Management
Agreement, or pursuant to any other contract or agreement to which such party
is bound.
4.2 RESTRICTIONS ON GROUP. Group shall not, nor shall any Group
Physician, during the term of this Management Agreement enter into any
contract or other arrangement for the provision of health care services other
than those negotiated by Manager in accordance with Section 4.1.2.
ARTICLE V
JOINT OPERATING COMMITTEE
V.1 COMPOSITION. Manager and Group shall constitute a Joint
Operating Committee, consisting of not fewer than three (3) representatives
of Group's Board of Directors and three (3) representatives of Manager. Each
party may change its representatives on the Joint Operating Committee from
time to time, upon notice to the other.
V.2 FUNCTIONS. The Joint Operating Committee shall advise Manager on
its administration of services under this Management Agreement and Group on
its performance of professional services pursuant to this Management
Agreement. The Joint Operating Committee shall have the specific functions
set forth on EXHIBIT 5.2 attached hereto and incorporated herein by this
reference. It is intended that the Joint Operating Committee provide
management support to Manager as required and that Manager and Group have a
duty to consult with, or seek approval from, the Joint Operating Committee on
those matters set forth in EXHIBIT 5.2 or as otherwise provided in this
Management Agreement.
V.3 MEETINGS. The Joint Operating Committee shall meet, upon the
request of Manager or of the representatives of Group, not less frequently
than quarterly.
V.4 RULES. The Joint Operating Committee may develop such rules and
procedures to govern its meetings and activities as its members deem
necessary.
ARTICLE VI
TERM; TERMINATION
VI.1 TERM; TERMINATION. The initial term of this Management Agreement
shall be twenty (20) years ("Initial Term"), commencing as of January 1, 1996
(the "Effective Date"),
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unless earlier terminated as hereinafter provided. At the conclusion of the
Initial Term, this Management Agreement shall be extended for an additional
ten (10) years ("First Extension"), and at the end of the First Extension for
an additional ten (10) years ("Second Extension"), unless either Manager or
Group notifies the other of its intention that the Management Agreement
terminate not later than 180 days prior to the end of (a) the Initial Term,
in the case of the First Extension or (b) the First Extension, in the case of
the Second Extension.
VI.2 TERMINATION FOR CAUSE. Either party may terminate this
Management Agreement at any time for "cause", which, for purposes of this
Section 6.2 shall be defined as, and limited to, the following defaults by
the other party:
VI.2.1 LIQUIDATION; BANKRUPTCY. The defaulting party's application
for or consent to the appointment of a receiver, trustee or liquidator of all or
a substantial part of its assets, filing of a voluntary petition in
bankruptcy, making a general assignment for the benefit of creditors, filing
a petition or answer seeking reorganization or arrangement with creditors, or
taking advantage of any insolvency, or the entry of any order, judgment or
decree by any court of competent jurisdiction on the application of a
creditor or otherwise, adjudicating such party bankrupt or approving a
petition seeking reorganization of such party or appointment of a receiver,
trustee or liquidator of such party or of all or a substantial part of its
assets, and if such order, judgment or decree shall continue unstayed and in
effect for sixty (60) calendar days after its entry. Termination under this
Subsection 6.2.1 shall be effective automatically and immediately upon the
giving of written notice of termination by the non-defaulting party.
VI.2.2 BREACH. A failure by the defaulting party to perform any
material obligation required hereunder, if such default shall continue for
thirty (30) calendar days after the giving of written notice from the
nondefaulting party specifying the nature and extent of such default, or, if
the breach cannot reasonably be cured in thirty (30) days, if the breaching
party has not acted diligently, or subsequently acted diligently, to attempt
to cure the breach within the thirty (30) day period following notice from
the nondefaulting party. If the parties disagree as to the existence of a
breach, whether the breach has been cured or whether diligent efforts have
been made towards cure, the parties shall use their good faith efforts to
resolve the dispute through negotiation. Termination under this Subsection
6.2.2 shall be effective upon the conclusion of the thirty (30) day period.
VI.3 TERMINATION FOR CERTAIN TRANSACTIONS. Manager shall have the
right to terminate this Management Agreement in the event that Group, or any
successor to Group composed of 50% or more of Group Physicians, become
affiliated with another medical group, medical foundation, management
services organization, hospital or health system or third party payor, any of
which Manager, in its absolute discretion, deems a competitor, or any
affiliate or agent thereof and Group does not terminate such affiliation
within thirty (30) calendar days after the giving of written notice by
Manager.
VI.4 EFFECT OF TERMINATION.
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VI.4.1 MANAGER TO CONTINUE TO PROVIDE SERVICES. Upon termination of
this Management Agreement, Manager shall continue to collect and receive all
compensation, reimbursement and payments due for services provided to
Patients prior to the effective date of termination, subject to the rights of
the parties hereunder to cancel, forgive, waive and settle such payments due,
and Manager shall be entitled to receive from such amounts any compensation
in accordance with the terms of Article III for services rendered by Manager.
To the extent necessary under Section 6.4.2, Manager shall provide management
services to Group, in accordance with the terms of this Management Agreement,
following termination of this Management Agreement, and shall be entitled to
compensation in accordance with the terms of Article III.
VI.4.2 SERVICES UNDER GROUP AGREEMENTS; CARE OF PATIENTS. To the
extent required by Group Agreements, the parties shall observe the following
covenants, notwithstanding termination of this Management Agreement:
VI.4.2.1 GROUP AGREEMENT OBLIGATIONS. Each party shall continue
to perform services as required under the terms and conditions of any Group
Agreement in which Group and/or Manager is then participating or otherwise
has existing contractual obligations in accordance with the terms of the
Group Agreement.
VI.4.2.2 CARE OF PATIENTS. Each party shall continue to perform
such services as may be required to assure adequate care and arrangements for
appropriate referrals for patients who are receiving hospital or other
institutional services or who are involved in an active regimen or course of
medical treatment or other services at the time of such termination.
VI.4.2.3 COLLECTIONS. The parties shall cooperate to pursue
collection of any payments to which they may be entitled for services rendered
after the termination of this Management Agreement.
VI.5 POST TERMINATION. Upon the termination of this Management
Agreement:
VI.5.1 PRACTICE SITES. Subject to continuing care obligations
in Section 6.4.2, Group shall surrender to Manager all Practice Sites and
Equipment and other appurtenances thereto, in good condition, excepting
reasonable use and wear thereof and damage by fire, act of God, or by the
elements.
VI.5.2 PROPRIETARY INFORMATION. Group shall immediately
discontinue the use of and shall promptly return all proprietary information,
manuals, and other materials associated with or respecting Manager that have
been made available to Group by reason of its participation therein and shall
return all such property, together with any copies thereof in its possession,
to Manager.
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VI.5.3 SOFTWARE. Group shall immediately cease to use all
software arranged for or provided by Manager and, within thirty (30) calendar
days after such termination, shall return to Manager the software, all related
documentation and computer programs and any copies thereof.
VI.5.4 ACCESS TO MEDICAL RECORDS. Group shall provide to
Manager access, at reasonable times and upon reasonable request, to Group's
medical records relating to Patients for a period not shorter than the
applicable statute of limitations for any claim which may be asserted against
Manager arising from its activities pursuant to this Management Agreement.
VI.5.5 COVENANT NOT TO COMPETE. For a period of one (1) year
following the termination of this Agreement Group shall not, directly or
indirectly engage in the provision of medical care within a three (3) mile
radius of any of the Practice Sites, and no Group Physician shall engage in the
provision of medical care within a three (3) mile radius of the Practice Site at
which they practiced prior to termination. The parties agree that the duration,
area and scope of activities restricted hereunder are reasonable and
necessary to protect Manager's legitimate business interests. In the event
that a court or arbitrator shall determine that this covenant is
unenforceable because of its area, duration or prohibited scope of
activities, this covenant shall be construed, in a manner consistent with
applicable law, to provide the maximum restriction on the post termination
activities of Group and Group Physicians.
ARTICLE VII
RELATIONSHIP OF THE PARTIES
VII.1 NO FIDUCIARY DUTIES. None of the provisions of this Management
Agreement are intended to create, nor shall be deemed or construed to create,
any fiduciary duty between the parties or any relationship between the
parties other than that of independent parties contracting with each other
hereunder solely for the purpose of effecting the provisions of this
Management Agreement. The parties are not, and shall not be construed to be
in a relationship of joint venturers, partners or employer-employee.
VII.2 EXCLUSIVITY.
VII.2.1 PHYSICIAN SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall provide any medical
services except in accordance with the terms of this Management Agreement. A
Group Physician who terminates employment by Group shall be relieved of this
obligation, except that for a period of one (1) year following termination of
employment, such Group Physician shall not practice medicine or solicit any
Patient of Group served at the Practice Site for the purpose of treating such
patient at a medical facility within a three (3) mile radius of such Practice
Site. The
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parties agree that the duration, area and scope of activities restricted
hereunder are reasonable and necessary to protect Manager's legitimate
business interests. In the event that a court or arbitrator shall determine
that this covenant is unenforceable because of its area, duration or
prohibited scope of activities, this covenant shall be construed, in a manner
consistent with applicable law, to provide the maximum restriction on the
activities of Group and Group Physicians. Manager shall not, during the term
of this Agreement, contract with any physician or group of physicians to
provide services at a Practice Site or within a three (3) mile radius of a
Practice Site, unless Manager offers Group the opportunity to Group to
provide the services and Group declines to provide Group Physicians or hire
new physicians necessary to provide the requested services.
VII.2.2 MANAGEMENT SERVICES. During the term of this Management
Agreement, neither Group nor any Group Physician shall contract or arrange to
receive any services described in Article I (or any services substantially
similar to them) from any entity or person other than Manager. To the extent
that Group may require any service other than those described in Article I,
Group shall request such services from Manager, and Manager shall use
reasonable efforts to provide such service to Group.
VII.2.3 EXPANSION OF SERVICE AREA. In the event that Manager
determines to add Practice Sites or arrange to expand the services or service
area for which it contracts (an "Expansion"), it shall propose the Expansion to
the Joint Operating Committee and Group. In the event that Group declines to
provide Group Physicians or to add new physicians to provide necessary
medical services for the Expansion, then Manager may contract with other
physicians or groups to provide medical services for the Expansion.
ARTICLE VIII
MISCELLANEOUS
VIII.1 NOTICES. All notices to be given under this Management
Agreement shall be in writing and may be personally served upon the parties
hereto or may be served by depositing the same in the United States mail,
postage prepaid, as follows:
Manager: Talbert Medical Management Corporation
3540 Howard Way
Costa Mesa, CA 92626
Attn: President
Group: Talbert Medical Group, Inc.
3540 Howard Way
Costa Mesa, CA 92626
Attn: President
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subject to the right of either party to change said address or addresses by
written notice of such new address to the other party.
VIII.2 PROPRIETY PROPERTY. Manager is and shall be the sole owner and
holder of all right, title and interest to the "Proprietary Property of
Manager" consisting of all copyright, service mark and trademark rights and
interests in the logo, systems, software, forms, form contracts, policy
manuals, marketing and public relations materials relating to the delivery
system for the Group. Group agrees that is shall not at any time knowingly
harm, misuse or bring into disrepute the Proprietary Property of Manager.
VIII.3 CONFIDENTIALITY. The terms of this Management Agreement are
confidential and shall not be disclosed except as necessary to the
performance of this Management Agreement or as required by law. Neither
Group nor Group Physicians shall disseminate or publish information developed
under this Management Agreement or contained in reports to be furnished
pursuant to this Management Agreement without prior written approval of
Manager.
VIII.4 ENTIRE AGREEMENT. The provisions of this Management Agreement
and any exhibits hereto and any writing signed by the party to be charged
contemporaneously herewith constitute the entire agreement between the
parties, and supersede any prior negotiations, understandings or agreements.
VIII.5 MODIFICATIONS. This Management Agreement may be amended,
modified or otherwise changed only upon the written consent of the parties
hereto.
VIII.6 THIRD PARTY RIGHTS. This Management Agreement shall not be
construed as conferring upon any third party any right or benefit and any and
all claims which may arise hereunder may be enforced solely by Group or by
Manager.
VIII.7 NO ASSIGNMENT. No party may assign its rights or delegate its
obligations under this Management Agreement without the prior written consent
of the other party; provided that Manager may assign its rights and
obligations under this Management Agreement to an affiliate, successor or a
wholly-owned subsidiary without the consent of Group.
VIII.8 GOVERNING LAW; ARBITRATION. This Management Agreement shall be
governed by California law. Any dispute between the parties shall be settled
by binding arbitration in accordance with the commercial arbitration rules of
the American Arbitration Association. No punitive damages shall be awarded
in any such arbitration. The prevailing party in any such arbitration shall
be entitled to the recovery of reasonable attorneys' fees (including charges
for in-house counsel) and costs.
VIII.9 DOCUMENTS; NECESSARY ACTS. Each of the parties shall execute
and deliver all documents, papers, and instruments and perform such other
acts as may be necessary or convenient to carry out the terms of this
Management Agreement.
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VIII.10 NON-WAIVER; BREACH. Any waiver of any term and condition hereof
must be in writing and signed by the party against whom it is sought to be
asserted. A party's neglect or failure in any case or circumstance to
require performance of the other party's obligations or to enforce its rights
in the event of a breach by the other party shall not affect such party's
right to enforce such rights and obligations in any other case or
circumstance. A waiver of any individual term or condition shall not be
construed as a waiver of any other term or condition nor, unless so provided
in such written waiver, of the term or condition thereby waived in the event
of a future or continuing breach by the other party, except in the particular
circumstance(s) in or for which such waiver was provided.
VIII.11 SEVERABILITY; INVALIDITY OF ANY PROVISION. Nothing contained in
this Management Agreement shall be construed so as to require the commission
of an act contrary to law, and whenever there is any conflict between any
provision of this Management Agreement and any present statute, law,
ordinance or regulation contrary to which the parties have no legal right to
contract, the latter shall prevail. In such event, and in any case in which
any provision of this Management Agreement is determined by a court of
competent jurisdiction to be in violation of a statute, law, ordinance, or
regulation, the affected provision(s) shall be curtailed and limited only to
the extent necessary to bring it within the requirements of the law and,
insofar as possible under the circumstances, to carry out the purposes of
this Management Agreement.
VIII.12 CAPTIONS AND HEADINGS. The captions and headings in this
Management Agreement are intended for convenience only and are not to be
interpreted as part of this Agreement.
VIII.13 FORCE MAJEURE. Neither party shall be liable nor deemed to be
in default for any delay or failure in performance under this Management
Agreement or other interruption of service or employment deemed resulting,
directly or indirectly, from acts of God, civil or military authority, acts
of public enemy, war, accidents, fires, explosions, earthquakes, floods,
failure of transportation, machinery or supplies, vandalism, strikes or other
work interruptions beyond the reasonable control of either party. However,
both parties shall make good faith efforts to perform under this Management
Agreement in the event of any such circumstances.
VIII.14 MEDICARE AND MEDICAID PATIENTS. Manager and Group agree to
generate such records and make such disclosures as may be required, from time
to time, by the Medicare, Medicaid and other third party payment programs
with respect to their participation in this Management Agreement and the
rendition of services hereunder, in order to assure that both parties will be
able to meet all requirements for participation and payment associated with
such programs, including but not limited to the matters covered by Section
1861(v)(1)(I) of the Social Security Act. If either party is requested to
disclose books, documents, or records pursuant to any provision of this
Section 8.14 for an audit, it shall notify the other party of the nature and
scope of such request and each party shall make available, upon written
request of the other, all such books, documents, or records, during such
party's regular business hours.
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EXECUTION
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement on the day and year first written above.
TALBERT MEDICAL MANAGEMENT
CORPORATION ("Manager")
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
TALBERT MEDICAL GROUP, INC. ("Group")
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
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EXHIBIT 1.1
PRACTICE SITES
21
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EXHIBIT 2.1
GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL
22
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EXHIBIT 2.15
GROUP EXPENSES
1. Group Physician personal expenditures, including licensure costs,
continuing medical education allowances, sabbatical allowances and auto
allowances.
2. Group Physician personal equipment and furnishings, including
beepers, telephone equipment, white coats, and stethoscopes.
3. Meals related to Group activities and meetings.
4. Books and periodicals for Group Physicians.
5. Off-site meetings of Group Physicians.
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EXHIBIT 5.2
JOINT OPERATING COMMITTEE FUNCTIONS
1. Develop strategy for new business, network development, new Practice
Sites, capital budgeting, marketing, and Group Agreements.
2. Evaluate and monitor operational parameters for assuring ongoing
success including but not limited to financial performance, utilization
trends, medical center operations, and overall quality of care.
3. Address problem areas or opportunities which may be raised by either
of the two entities. Where problems are identified which can not be solved
at the medical center level, the Joint Operating Committee will resolve and
implement appropriate remedial action. Decisions will be made by majority
vote with a quorum present, which majority shall consist of a majority of
Group representatives and Manager representatives.
4. Ensure that all responsibilities are identified and accounted for,
and any unnecessary duplication of effort shall be avoided by both the Group
and the Manager.
5. Ensure that communication between the Group and the Manager and
between the staff of these two entities is clear and unambiguous and that a
consistent and uniform perspective is presented to the patients, employees,
and external service partners.
24
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TABLE OF CONTENTS
<TABLE>
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ARTICLE I RESPONSIBILITIES OF MANAGER. . . . . . . . . . . . . . . . . . . . . 1
1.1 Practice Sites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Utilities, Building Services, and Supplies. . . . . . . . . . . . . . . . 2
1.3 Equipment, Furniture and Furnishings. . . . . . . . . . . . . . . . . . . 2
1.4 Repair and Maintenance of Practice Sites and Equipment. . . . . . . . . . 2
1.4.1 Repair and Maintenance of Practice Sites. . . . . . . . . . . . 2
1.4.2 Repair and Maintenance of Equipment . . . . . . . . . . . . . . 2
1.5 Replacement Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8.1 Practice Sites. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8.2 Professional Liability Insurance. . . . . . . . . . . . . . . . 3
1.8.3 Directors and Officers Insurance. . . . . . . . . . . . . . . . 3
1.8.4 Self Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9 Non-Professional Personnel. . . . . . . . . . . . . . . . . . . . . . . . 3
1.9.1 Manager to Employ; Initial Employment Decisions . . . . . . . . 3
1.9.2 Special Provisions Applicable to Allied Health
Professionals . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9.3 Supervision of Clerical and Other Non-Medical Support
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.9.4 Decisions Reserved to Manager . . . . . . . . . . . . . . . . . 4
</TABLE>
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<TABLE>
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1.10 Bookkeeping and Accounting Services . . . . . . . . . . . . . . . . . . . 4
1.11 Fee-For-Service Administration. . . . . . . . . . . . . . . . . . . . . . 4
1.11.1 Fee Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.11.2 Billing and Collection. . . . . . . . . . . . . . . . . . . . . 4
1.12 Capitation Administration . . . . . . . . . . . . . . . . . . . . . . . . 5
1.12.1 Calculation of Amounts Due. . . . . . . . . . . . . . . . . . . 5
1.12.2 Billing Under Capitated Agreements. . . . . . . . . . . . . . . 5
1.12.3 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.13 Review and Audit of Manager . . . . . . . . . . . . . . . . . . . . . . . 5
1.14 Additional Financial and Management Reports and Information . . . . . . . 5
1.14.1 Income Statements and Balance Sheets. . . . . . . . . . . . . . 5
1.14.2 Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.15 Management Information System . . . . . . . . . . . . . . . . . . . . . . 6
1.16 Physician Recruitment . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.17 Human Resources; Credentialing. . . . . . . . . . . . . . . . . . . . . . 6
1.18 Marketing and Public Relations. . . . . . . . . . . . . . . . . . . . . . 6
1.19 UM/QM Policies and Procedures; Preauthorization . . . . . . . . . . . . . 6
1.20 Distribution of Compensation and Bonuses to Group Physicians;
Group Benefits Administration . . . . . . . . . . . . . . . . . . . . . . 6
1.21 Attorney-in-Fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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1.21.1 Depository Account. . . . . . . . . . . . . . . . . . . . . . . 6
1.21.2 Receipt of Payments . . . . . . . . . . . . . . . . . . . . . . 6
1.21.3 Billing/Claims Processing . . . . . . . . . . . . . . . . . . . 7
1.21.4 Collection of Other Amounts Due . . . . . . . . . . . . . . . . 7
1.21.5 Stop-Loss Claims. . . . . . . . . . . . . . . . . . . . . . . . 7
1.22 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II OBLIGATIONS OF GROUP . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Group Physicians and Professional Personnel . . . . . . . . . . . . . . . 7
2.2 Provision of Medical Services . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Additional Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Hours of Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4.1 Patient Medical Services. . . . . . . . . . . . . . . . . . . . 8
2.4.2 Walk-In and Community Services. . . . . . . . . . . . . . . . . 8
2.4.3 After Hours Care. . . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Non-discrimination; Compliance with Law . . . . . . . . . . . . . . . . . 8
2.6 Non-discriminatory Patient Selection and Services;
Non-discriminatory Patient Assignment . . . . . . . . . . . . . . . . . . 8
2.7 Standards, Accreditation, Surveys and Inspections . . . . . . . . . . . . 8
2.8 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.9 Compliance with Policies and Procedures . . . . . . . . . . . . . . . . . 9
2.9.1 Organization and Review of Care . . . . . . . . . . . . . . . . 9
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2.9.2 Utilization Management; Quality Management. . . . . . . . . . . 9
2.9.3 Prior Authorization . . . . . . . . . . . . . . . . . . . . . . 9
2.10 Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.11 Group to Provide Necessary Billing and Encounter Information. . . . . . . 9
2.12 Continuing Education. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.14 Physician Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.15 Group Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.16 Provider Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III COMPENSATION OF MANAGER. . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Management Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Fee for Service Revenues. . . . . . . . . . . . . . . . . . . . 10
3.1.2 Capitated Agreement Revenue . . . . . . . . . . . . . . . . . . 10
3.1.3 Hospital Risk Pools . . . . . . . . . . . . . . . . . . . . . . 10
3.1.4 Payment of Fee. . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Overpayments and Underpayments. . . . . . . . . . . . . . . . . . . . . . 11
3.3 Advances to Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Adjustment in Management Fee. . . . . . . . . . . . . . . . . . . . . . . 11
3.5 Definitions of Group Revenue. . . . . . . . . . . . . . . . . . . . . . . 11
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ARTICLE IV EXECUTION OF GROUP AGREEMENTS. . . . . . . . . . . . . . . . . . . . 12
4.1 Appointment of Manager as Attorney-in-Fact. . . . . . . . . . . . . . . . 12
4.1.1 Contracting Guidelines. . . . . . . . . . . . . . . . . . . . . 12
4.1.2 Entry Into Agreements . . . . . . . . . . . . . . . . . . . . . 12
4.1.3 Administration of Agreements. . . . . . . . . . . . . . . . . . 12
4.2 Restrictions on Group . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V JOINT OPERATING COMMITTEE. . . . . . . . . . . . . . . . . . . . . . 13
5.1 Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VI TERM; TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Term; Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Termination for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2.1 Liquidation; Bankruptcy . . . . . . . . . . . . . . . . . . . . 13
6.2.2 Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Termination for Certain Transactions. . . . . . . . . . . . . . . . . . . 14
6.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.4.1 Manager to Continue to Provide Services . . . . . . . . . . . . 14
6.4.2 Services Under Group Agreements; Care of Patients . . . . . . . 14
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6.4.2.1 Group Agreement Obligations . . . . . . . . . . . . . . . . 15
6.4.2.2 Care of Patients. . . . . . . . . . . . . . . . . . . . . . 15
6.4.2.3 Collections . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5 Post Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5.1 Practice Sites. . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5.2 Proprietary Information . . . . . . . . . . . . . . . . . . . . 15
6.5.3 Software. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5.4 Access to Medical Records . . . . . . . . . . . . . . . . . . . 15
6.5.5 Covenant Not to Compete . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VII RELATIONSHIP OF THE PARTIES. . . . . . . . . . . . . . . . . . . . . 16
7.1 No Fiduciary Duties.. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Exclusivity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2.1 Physician Services. . . . . . . . . . . . . . . . . . . . . . . 16
7.2.2 Management Services.. . . . . . . . . . . . . . . . . . . . . . 16
7.2.3 Expansion of Service Area . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 Propriety Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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8.4 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.5 Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 Third Party Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.7 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.8 Governing Law; Arbitration. . . . . . . . . . . . . . . . . . . . . . . . 18
8.9 Documents; Necessary Acts . . . . . . . . . . . . . . . . . . . . . . . . 18
8.10 Non-Waiver; Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.11 Severability; Invalidity of Any Provision . . . . . . . . . . . . . . . . 18
8.12 Captions and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.13 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.14 Medicare and Medicaid Patients. . . . . . . . . . . . . . . . . . . . . . 19
Exhibit 1.1 PRACTICE SITES . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit 2.1 GROUP PHYSICIANS AND PROFESSIONAL PERSONNEL. . . . . . . . . . . . . 21
Exhibit 2.15 GROUP EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit 5.2 JOINT OPERATING COMMITTEE FUNCTIONS. . . . . . . . . . . . . . . . . 23
</TABLE>
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<PAGE>
INTERIM OPERATIONS AGREEMENT
SUMMARY
1. PacifiCare Holding would cause FHP to make a final contribution of
$67 million to Talbert at the time of the closing of the FHP Merger.
2. FHP and Talbert would close the Stock Purchase Agreement (FHP has
waived the condition that the Talbert S-1 be effective at such closing).
3. Talbert would on the next business day pay FHP the amount of the
incorporate receivable at January 31, 1997 it owes FHP (currently estimated
to be approximately $20 million).
4. Two PacifiCare Holding Nominees would immediately be placed on the
Talbert Board, to remain there until the closing of the Talbert Rights
offering.
5. If the Talbert Rights Offering has not commenced prior to the
earlier of (i) May 15, 1997 or (ii) the date Talbert's cumulative operating
losses since 1/1/97 exceed $14 million, the Talbert Board shall take such
actions as are necessary to cause FHP nominees to represent a majority of the
Talbert Board.
6. Until completion of the Rights Offering, Talbert will covenant not
to take actions as set out on the attached Exhibit A.
7. Talbert and FHP will monthly pay any current or past amounts owed to
the other.
8. Within two weeks after signing, Talbert will provide a reasonable
explanation for the differences between the leased property FF&E schedule
provided PacifiCare and the higher amount previously indicated as being the
total for such schedule as well as the location of the assets shown on such
schedule. The last sentence of Section 3.1 to the Stock Purchase Agreement
(relating to the 338(h)(10) election) would be amended to read "The Parent's
consent may not be withheld if Talbert pays FHP the amount mutually agreed as
reflecting the negative economic impact of the election."
PAGE 1 OF 4
<PAGE>
9. Should FHP nominees represent a majority of the Board pursuant to
paragraph 5 above, PacifiCare Holding acknowledges the position of the
holders who would receive Talbert Rights pursuant to the Reorganization
Agreement and will consider their rights and expectations in any subsequent
actions taken with respect to Talbert.
FHP INTERNATIONAL CORPORATION
By: /s/ WESTCOTT W. PRICE III
---------------------------
Westcott W. Price III
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT
HOLDINGS CORPORATION
By: /s/ JACK D. MASSIMINO
-------------------------
Jack D. Massimino
President and Chief Executive Officer
N-T HOLDINGS, INC.
By: /s/ ALAN R. HOOPS
-------------------------
Alan R. Hoops
President and Chief Executive Officer
PAGE 2 OF 4
<PAGE>
EXHIBIT A.
During the period from the date of this Agreement through completion of the
Rights Offering, the Company shall not do, and shall not permit any of its
subsidiaries to do, any of the following, except as disclosed in Amendment
Number 1 to the Talbert Registration Statement, without PacifiCare's written
consent:
(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock;
(ii) split, combine or reclassify any capital stock of the Company or
repurchase, redeem or otherwise acquire any capital stock of the Company or
any of its subsidiaries;
(iii) except for (a) the issuance of up to 900,000 stock options to be
granted to employees or managed physicians; (b) the issuance of options
previously promised or conditionally granted to Kenneth Ord; or (c) previously
authorized automatic grants of options to the Company's or its subsidiaries'
directors, issue, deliver, pledge, encumber, sell or transfer, or authorize
or propose the issuance, delivery, pledge, encumbrance, sale or transfer of,
any shares of capital stock of the Company or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any
such shares of capital stock or other convertible securities (except that the
Company may issue common stock upon the exercise of options issued and
outstanding) or, except as expressly contemplated herein, make any change in
its equity capitalization or to the terms of any option, warrant or other
equity security of the Company or any of its subsidiaries that is currently
outstanding;
(iv) amend the Certificate of Incorporation, Bylaws or other
organizational or charter documents of the Company or any of its subsidiaries,
or amend the Restated Rights Plan;
(v) acquire (by merging or consolidating with, by purchasing any
material portion of the capital stock or assets of or by any other means) any
business or any corporation, partnership, association or other business
organization or division thereof;
(vi) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with
past practice;
(vii) except pursuant to lines of credit and subject to credit limits
in effect prior to the date of the Original Agreement, incur any indebtedness
for borrowed money, or issue or sell any debt securities or guarantee,
endorse or otherwise become responsible for any obligation of any other
person;
(viii) adopt or amend in any material respect any employee benefit
plan, or enter into
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<PAGE>
or amend any employment agreement, severance agreement, special pay
arrangement with respect to termination of employment or other similar
arrangement or agreement with any director or officer, or enter into or
amend any severance or termination arrangement with any director or officer;
(ix) change in any material respect the accounting methods or practices
followed by the Company (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;
(x) except in the ordinary course of business consistent with past
practice enter into any material contract or agreement involving payments in
except of market rates;
(xi) change any compensation payable or to become payable to any of its
officers or directors;
(xii) make any capital expenditures in excess of $500,000 in the
aggregate;
(xiii) make any loan to or engage in any transaction with any director
or officer;
(xiv) settle or compromise any lawsuit or other Proceeding against the
Company or any of its subsidiaries for an amount in excess of $500,000; or
(xv) enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.
PAGE 4 OF 4
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Talbert Medical Management Holdings Corporation
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-17679 of Talbert Medical Management Holdings Corporation on Form S-1 of our
report dated April 4, 1997, appearing in the Prospectus, which is a part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 4, 1997
