-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N0hq/GpnX034qeXNYFaTF+ukk9R59T80RHx8cbxII+uJmowYyI1P5oBXvGfL08Z6 Q/alP7p6j2ldPBPfpueduA== 0000950150-97-001218.txt : 19970828 0000950150-97-001218.hdr.sgml : 19970828 ACCESSION NUMBER: 0000950150-97-001218 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970820 DATE AS OF CHANGE: 19970827 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: TALBERT MEDICAL MANAGEMENT HOLDINGS CORP CENTRAL INDEX KEY: 0001027131 STANDARD INDUSTRIAL CLASSIFICATION: 8093 IRS NUMBER: 330730363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: 1934 Act SEC FILE NUMBER: 005-51023 FILM NUMBER: 97667149 BUSINESS ADDRESS: STREET 1: 3540 HOWARD WAY CITY: COSTA MESA STATE: CA ZIP: 92626-1417 BUSINESS PHONE: 7144364800 MAIL ADDRESS: STREET 1: 3540 HOWARD WAY CITY: COSTA MESA STATE: CA ZIP: 92626-1417 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: TALBERT MEDICAL MANAGEMENT HOLDINGS CORP CENTRAL INDEX KEY: 0001027131 STANDARD INDUSTRIAL CLASSIFICATION: 8093 IRS NUMBER: 330730363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 3540 HOWARD WAY CITY: COSTA MESA STATE: CA ZIP: 92626-1417 BUSINESS PHONE: 7144364800 MAIL ADDRESS: STREET 1: 3540 HOWARD WAY CITY: COSTA MESA STATE: CA ZIP: 92626-1417 SC 14D9 1 SCHEDULE 14D-9 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION (NAME OF SUBJECT COMPANY) TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION (NAME OF PERSON FILING STATEMENT) ------------------------ COMMON STOCK, PAR VALUE $.01 PER SHARE (TOGETHER WITH ASSOCIATED JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS) (TITLE OF CLASS OF SECURITIES) 874121-10-6 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ RUSSELL D. PHILLIPS, JR., ESQ. CHIEF LEGAL OFFICER AND SECRETARY TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION 3540 HOWARD WAY COSTA MESA, CALIFORNIA 92626-1417 (714) 436-4800 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING STATEMENT) With a copy to: C. JAMES LEVIN, ESQ. O'MELVENY & MYERS LLP 400 SOUTH HOPE STREET SUITE 1500 LOS ANGELES, CALIFORNIA 90071 (213) 669-6000 ================================================================================ 2 INTRODUCTION This Solicitation/Recommendation Statement on Schedule 14D-9 (this "Schedule 14D-9" or this "Statement") relates to an offer by Talmed Merger Corporation, a Delaware corporation and wholly-owned subsidiary of MedPartners, Inc., a Delaware corporation, to purchase all Shares (as defined below) of Talbert Medical Management Holdings Corporation, a Delaware corporation. Capitalized terms used and not otherwise defined in this Statement have the meanings assigned to them in the Offer to Purchase dated August 20, 1997 (the "Offer to Purchase"), a copy of which is filed as Exhibit 1 to this Statement. ITEM 1. SECURITY AND SUBJECT COMPANY The name of the subject company is Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"). The address of the principal executive offices of the Company is 3540 Howard Way, Costa Mesa, California 92626-1417. The title of the class of equity securities to which this Statement relates is the shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), together with the associated rights (the "Rights") to purchase shares of preferred stock, par value $.01 per share, of the Company designated as "Junior Participating Preferred Stock" and issued pursuant to the Rights Agreement dated as of May 21, 1997 between the Company and American Stock Transfer and Trust Company, as amended (the "Rights Agreement"). ITEM 2. TENDER OFFER OF THE BIDDER This Statement relates to a tender offer by Talmed Merger Corporation, a Delaware corporation (the "Subsidiary") and wholly-owned subsidiary of MedPartners, Inc., a Delaware corporation (the "Parent"), disclosed in a Tender Offer Statement on Schedule 14D-1 dated August 20, 1997 (the "Schedule 14D-1"), to purchase all outstanding shares of the Common Stock, together with their associated Rights (such shares and Rights being collectively referred to herein as the "Shares"), at a price of $63.00 per Share, net to the seller in cash (the "Per Share Amount"), upon the terms and subject to the conditions set forth in the Offer to Purchase and the related letter of transmittal (the "Letter of Transmittal"; which together with the Offer to Purchase, as they may be amended or supplemented from time to time, constitute the "Offer"), copies of which are filed as Exhibits 1 and 2 to this Statement, respectively, and are incorporated herein by reference. The Offer is being made pursuant to an Agreement and Plan of Merger dated as of August 14, 1997 (the "Merger Agreement") among the Parent, the Subsidiary and the Company. A copy of the Merger Agreement is filed as Exhibit 3 to this Statement and is incorporated herein by reference. The Merger Agreement provides that, among other things, following the consummation of the Offer and upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), the Subsidiary will be merged with and into the Company (the "Merger") at the Effective Time (as defined below). Following the Effective Time, the separate corporate existence of the Subsidiary will cease, and the Company will continue as the surviving corporation (the "Surviving Corporation") and as a wholly-owned subsidiary of the Parent. In the Merger, each Share issued and outstanding immediately prior to the Effective Time (other than (i) Shares owned by the Company, the Parent or any subsidiary of the Company or the Parent, all of which will be cancelled, and (ii) the Dissenting Shares (as defined in the Merger Agreement)) will be converted into the right to receive the Per Share Amount in cash. The Merger Agreement is summarized in Item 3(b) of this Statement. According to the Schedule 14D-1, the principal executive offices of the Parent and the Subsidiary are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244. ITEM 3. IDENTITY AND BACKGROUND (a) The name and address of the Company, which is the person filing this Statement, are set forth in Item 1 above. (b) Certain contracts, agreements, arrangements or understandings between the Company or its affiliates and its executive officers, directors and affiliates are described in Annex I attached to this Statement 3 and incorporated herein by reference. Other such contracts, agreements, arrangements or understandings are summarized below or described in the Company's Prospectus (the "Prospectus") dated April 21, 1997, as filed with the Securities and Exchange Commission (the "Commission") under Rule 424(b) under the Securities Act of 1933, as amended, on April 18, 1997, under the captions "CERTAIN TRANSACTIONS -- Transactions with the Management Investors," and "RELATIONSHIP WITH FHP AND PACIFICARE FOLLOWING THE OFFERING -- Management Stock Exchange Agreement." A copy of the relevant portions of the Prospectus is filed as Exhibit 4 to this Statement, and such portions are incorporated herein by reference. Certain contracts, agreements, arrangements or understandings between the Company or its affiliates and the Parent, the Subsidiary and their respective executive officers, directors and affiliates are also summarized below. MERGER AGREEMENT The following is a summary of certain material provisions of the Merger Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is filed as Exhibit 3 to this Statement. In particular, when the term "material adverse change" or "material adverse effect" is used herein it has the meaning given in the Merger Agreement. The Offer. The Merger Agreement provides that the Subsidiary will commence the Offer not later than the fifth business day from the public announcement of the execution of the Merger Agreement. The obligation of the Subsidiary to commence the Offer and pay for any Shares tendered is subject to certain conditions. See "-- Conditions to the Offer." The Merger Agreement provides that the Subsidiary may in its sole discretion modify the terms and conditions of the Offer, or waive certain conditions to the Offer. However, without the Company's prior written consent, the Subsidiary cannot reduce the Per Share Amount, change the form of consideration payable in the Offer, reduce the number of Shares subject to the Offer, allow the Offer to expire before September 19, 1997, add to or modify the conditions to the Offer set forth in the Merger Agreement, or make any other modification materially adverse to the holders of Shares. The Subsidiary may, without the consent of the Company, extend the term of the Offer on one or more occasions beyond the scheduled expiration date if any of the conditions to the Subsidiary's obligation to consummate the Offer have not been satisfied or waived by that date, provided that the Subsidiary may not extend the Offer for a total of more than 60 days from the commencement of the Offer. The Subsidiary may also extend the Offer for a period not to exceed 10 business days, notwithstanding that all conditions to the Offer are satisfied as of that date, if the Shares tendered at that date equal more than 75% but less than 90% of the outstanding Shares. The Minimum Condition. One of the conditions to the Offer is that there must be validly tendered and not withdrawn at least 51% (determined on a fully diluted basis) of the outstanding Shares (the "Minimum Condition"). The Company has informed the Subsidiary that, as of August 14, 1997, there were 3,000,758 Shares issued and outstanding, that 174,252 shares of Common Stock were reserved for future issuance pursuant to outstanding stock options, and that, except as otherwise disclosed in the Merger Agreement, no other stock of the Company is outstanding or committed to be issued. Based on this information and assuming all outstanding options to purchase shares of Common Stock will have been accelerated so as to be fully exercisable prior to the consummation of the Offer, the Subsidiary believes that the Minimum Condition will be satisfied if the Subsidiary acquires at least 1,619,256 Shares in the Offer. The Parent does not directly or indirectly hold any Shares. Conditions to the Offer. The Subsidiary is not required to accept for payment or (subject to any applicable rules and regulations of the Commission) to pay for Shares tendered pursuant to the Offer unless (i) the Minimum Condition is satisfied, and (ii) any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the "HSR Act"), has expired or been terminated. In addition, the Subsidiary is not obligated to consummate the Offer if, at any time on or after the date of the Merger Agreement and before the acceptance of Shares for payment, any of the following events has occurred (other than as a result of the action or inaction of the Parent or any of its subsidiaries that constitutes a breach of the Merger Agreement): 2 4 (a) any order, injunction, judgment or ruling in any legal proceeding is entered that (i) makes illegal or otherwise restrains or prohibits the acquisition by the Parent or the Subsidiary of any Shares under the Offer or the making or consummation of the Offer or the Merger, the performance by the Company of any of its obligations under the Merger Agreement or the consummation of any purchase of Shares contemplated thereunder, (ii) prohibits or limits the ownership or operation by the Company, the Parent or any of their respective subsidiaries of a material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or the Parent and its subsidiaries, taken as a whole, or compels the Company or the Parent to dispose of or hold separate any material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or the Parent and its subsidiaries, taken as a whole, as a result of the Offer or the Merger, (iii) imposes material limitations on the ability of the Parent or the Subsidiary to acquire or hold, or exercise full rights of ownership of, any Shares accepted for payment pursuant to the Offer including, without limitation, the right to vote such Shares on all matters properly presented to the stockholders of the Company or (iv) prohibits the Parent or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company and its subsidiaries, taken as a whole; or (b) any law is enacted, entered, enforced or deemed applicable to the Offer or the Merger, or any other action is taken by any governmental entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that results in any of the consequences referred to in paragraph (a) above; or (c) any material adverse change to the Company occurs; or (d) (i) the Board of Directors of the Company or any committee thereof withdraws or modifies in a manner adverse to the Parent or the Subsidiary its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approves or recommends any other acquisition proposal or (ii) the Company enters into any agreement to consummate any acquisition proposal; or (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality are not true and correct or any such representations and warranties that are not so qualified are not true and correct in any respect that is reasonably likely to have a material adverse effect, in each case at the date of the Merger Agreement and at the scheduled expiration of the Offer; or (f) the Company fails to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Merger Agreement; or (g) there has occurred and continues for three business days (i) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange (excluding any coordinated trading halt triggered solely as a result of a specified decrease in a market index), (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) commencement of a war or armed hostilities or other national or international calamity involving the United States which is reasonably expected to have a material adverse effect or to materially adversely affect the Parent's or the Subsidiary's ability to complete the Offer or the Merger or materially delay the consummation of the Offer, the Merger or both or (iv) in case of any of the foregoing existing on the date of the Merger Agreement, material acceleration or worsening thereof; or (h) the Merger Agreement terminates in accordance with its terms. For purposes of the Offer and the Merger Agreement, "material adverse change" or "material adverse effect" means with reference to a party any change, effect, event or occurrence that has or is reasonably likely to have a material adverse impact on the business or financial position of such party and its subsidiaries and other controlled entities, taken as a whole. However, the meaning of "material adverse change" or "material adverse effect" excludes (i) changes in generally accepted accounting principles, (ii) changes in applicable law, (iii) changes or effects of any kind that impact the party's industry generally, or, as to the Company, Southern California, (iv) changes in Medicare reimbursement rates, (v) changes or effects arising from the announce- 3 5 ment of the Merger Agreement or from any party's performance under the Merger Agreement, and (vi) any changes resulting from any restructuring or other similar charges or write-offs taken by the Company with the consent of the Parent. The foregoing conditions are for the sole benefit of the Parent and may, subject to the terms of the Merger Agreement, be waived by the Subsidiary and the Parent in whole or in part at any time and from time to time in their sole discretion. The failure by the Parent at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances and each such right will be deemed an ongoing right that may be asserted at any time and from time to time. The Offer is not subject to obtaining any consents from third parties. The Merger. The Merger Agreement provides that, subject to the terms and conditions thereof, and in accordance with the DGCL, the Subsidiary will be merged with and into the Company not later than the second business day after the satisfaction or waiver of the conditions set forth in the Merger Agreement. The Merger will become effective upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware (the "Effective Time"). As a result of the Merger, the separate corporate existence of the Subsidiary will cease, and the Company will continue as the Surviving Corporation. In the Merger, each issued and outstanding Share (other than Shares owned directly or indirectly by the Company, the Parent or any subsidiary of the Company or the Parent, and other than Shares owned by stockholders who have properly exercised dissenters rights under the DGCL) will be converted into the right to receive the Per Share Amount, and each issued and outstanding share of common stock of the Subsidiary will be converted into one fully paid and nonassessable share of common stock of the Surviving Corporation (which will constitute the only issued and outstanding capital stock of the Surviving Corporation). The Merger Agreement provides that the certificate of incorporation and by-laws of the Subsidiary at the Effective Time will be the certificate of incorporation and by-laws of the Surviving Corporation until amended in accordance with applicable law. The Merger Agreement also provides that the directors and officers of the Subsidiary at the Effective Time will be the directors and officers of the Surviving Corporation. The Company's Board of Directors. The Merger Agreement provides that, promptly upon the purchase of Shares by the Subsidiary pursuant to the Offer, seven of the Company's nine directors will resign, and the Parent will designate three replacements for appointment or election to the Company's Board of Directors. The Company will, upon request of the Subsidiary, use its best efforts promptly to cause the Parent's designees to be so appointed or elected. The remaining two directors (and any successors appointed or elected before the Effective Time, which successors will not be affiliated with the Parent) are referred to as the "Original Directors." Once the Parent's designees constitute a majority of the Company's Board of Directors, any amendment of the Merger Agreement, any termination of the Merger Agreement by the Company, any extension of time for performance of any of the obligations of the Parent or the Subsidiary thereunder, any waiver of any condition or any of the Company's rights thereunder or other action by the Company thereunder may be effected only by the joint action of the Original Directors. In connection with the appointment of the Parent's designees to the Board of Directors, the Company has agreed to comply with Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 promulgated thereunder. Rights Agreement. Pursuant to the Merger Agreement, the Rights Agreement was amended so that the Rights will not be distributed and do not become exercisable as a consequence of the execution, announcement or consummation of the transactions contemplated by the Merger Agreement. A copy of the amendment to the Rights Agreement was included as an exhibit in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 filed with the Commission on August 12, 1997, and such amendment is incorporated herein by reference. Recommendation. In the Merger Agreement, the Company states that its Board of Directors has, by unanimous vote of those present, (i) determined that the Offer and the Merger are fair to and in the best interests of the stockholders of the Company and (ii) resolved to recommend acceptance of the Offer and approval and adoption of the Merger Agreement and the Merger by the stockholders of the Company. 4 6 Interim Operations. In the Merger Agreement, the Company has agreed to use its commercially reasonable best efforts to preserve the business organization of the Company intact, to keep available the services of the present employees of the Company, and to preserve the goodwill of the suppliers, customers and others having business relations with the Company. In addition, other than as contemplated by the Merger Agreement and the related documents (including the schedules thereto) or without the prior written consent of the Parent, which consent will not be unreasonably withheld, each of the Company and its subsidiaries will not (other than in the ordinary course of business and consistent with past practice or with respect to binding commitments entered into before the date of the Merger Agreement): (a) Encumber any material asset or enter into any material transaction or make any material contract or commitment relating to the properties, assets and business of the Company. (b) Enter into any employment contract which is not terminable upon notice of 30 days or less, at will, and without penalty to the Company. (c) Enter into any contract or agreement (i) which cannot be performed within three months or less, or (ii) which involves the expenditure of over $100,000. (d) Make any payment or distribution to the trustee under any bonus, pension, profit-sharing or retirement plan or incur any obligation to make any such payment or contribution which is not in accordance with the Company's usual past practice, or, except as required pursuant to the Employee Benefits and Compensation Allocation Agreement dated as of February 14, 1997 between the Company and FHP International Corporation ("FHP"), make any payment or contributions or incur any obligation pursuant to or in respect of any other plan or contract or arrangement providing for bonuses, executive incentive compensation, pensions, deferred compensation, retirement payments, profit-sharing or the like, establish or enter into any such plan, contract or arrangement, or terminate any plan. (e) Extend credit to anyone. (f) Guarantee the obligation of any person, firm or corporation. (g) Amend its Certificate of Incorporation or By-laws. (h) Discharge or satisfy any material lien or encumbrance, or pay or satisfy any material obligation or liability (absolute, accrued, contingent or otherwise) other than (i) liabilities shown or reflected on the unaudited balance sheet dated June 30, 1997 included in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (the "Company Balance Sheet") or (ii) liabilities incurred or due since the date of the Company Balance Sheet in the ordinary course of business, which discharge or satisfaction would have a material adverse effect on the Company. (i) Increase or establish any reserve for taxes or any other liability on its books or otherwise provided therefor which would have a material adverse effect on the Company, except as may have been required due to income or operations of the Company since the date of the Company Balance Sheet. (j) Mortgage, pledge or subject to any material lien, charge or other encumbrance any of the assets, tangible or intangible, which assets are material to the business or financial condition of the Company. (k) Sell or transfer any of the assets material to the consolidated business of the Company, cancel any material debts owed to the Company or claims reflected as assets on the Company Balance Sheet, or waive any material rights. (l) Grant any general or uniform increase in the rates of pay of employees or any material increase in salary payable or to become payable by the Company to any officer or employee, consultant or agent (other than normal increases consistent with past practices), or by means of any bonus or pension plan, contract or other commitment, increased in a material respect the compensation of any officer, employee, consultant or agent. 5 7 (m) Except for the Merger Agreement and any other agreement executed and delivered pursuant to the Merger Agreement, enter into any material transaction other than in the ordinary course of business or permitted under other sections of the Merger Agreement. (n) Issue any stock (other than pursuant to the Stock Incentive Plan (as defined below)), bonds or other securities or any options or rights to purchase any of its securities. No Solicitation. In the Merger Agreement, the Company has agreed not to directly or indirectly furnish information and access, in response to unsolicited requests, to any third party, participate in discussions and negotiate with such third party concerning any proposal to acquire such party upon a merger, purchase of assets, purchase of or tender offer for shares of its Common Stock or similar transaction (an "Acquisition Transaction"). However, if prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors, after receiving advice from outside legal counsel to the Company, determines that a failure to act would be inconsistent with its fiduciary duties to the Company's stockholders under applicable law, the Company may (i) furnish information about and access to the Company to any third party in response to an unsolicited request pursuant to a confidentiality agreement with terms and conditions similar to the Confidentiality Agreement (as defined below), (ii) participate in discussions and negotiations regarding any potential Acquisition Transaction, and/or (iii) terminate the Merger Agreement. The Company will notify the Parent of any unsolicited request for information and access in connection with a possible Acquisition Transaction involving a third party, which notification will include the identity of the third party and the proposed material terms of the possible Acquisition Transaction. Stock Incentive Plan. The Merger Agreement provides that the Company will take all actions necessary to provide that each outstanding stock option to purchase shares of Common Stock (an "Option") under the Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan (the "Stock Incentive Plan") will be accelerated so as to be fully exercisable on or prior to the consummation of the Offer. Options (other than Options granted under Article 7 of the Stock Incentive Plan) therefore may be exercised, and the corresponding Common Stock tendered pursuant to the Offer, except to the extent that such tender could result in short-swing profit liability under Section 16(b) of the Exchange Act. Options granted under Article 7 of the Stock Incentive Plan (other than Options granted within six months of the termination of such Option) will be fully exercisable upon consummation of the Offer and prior to any of the resignations of the current directors of the Company pursuant to the Merger Agreement. With respect to each Option that remains outstanding immediately after the consummation of the Offer, the Company, immediately after the consummation of the Offer, but prior to any termination or resignation of the holder of such Option pursuant to the Merger Agreement, will pay to each such holder in connection with the surrender and termination or settlement of such Options an amount in cash equal to the product of (x) the number of shares of Common Stock then subject to the Option multiplied by (y) the excess of the Per Share Amount over the per share exercise price of the Option, less all applicable tax withholding. The Stock Incentive Plan will terminate as of the Effective Time. A summary of the Stock Incentive Plan is included in Annex I attached to this Statement. Such summary does not purport to be complete and is qualified in its entirety by reference to the text of the Stock Incentive Plan, a copy of which is attached to this Statement as Exhibit 5 and incorporated herein by reference. Management Incentive Program. In March 1997, the Company implemented an executive bonus program (the "Management Incentive Program") for the year ending December 31, 1997. Bonuses are based on the achievement of budgeted objectives and improvements to the quality of services provided to members. Pursuant to the Merger Agreement and a letter agreement dated August 14, 1997 among the Parent, the Subsidiary and the Company, the Parent will cause the Company and the Surviving Corporation to pay at the time of the consummation of the Offer to each corporate-level employee currently participating in the Company's Management Incentive Program cash awards equivalent to the award that would have been received by the participants in such program if calculated as of June 30, 1997. A copy of such letter agreement is filed as Exhibit 6 to this Statement and incorporated herein by reference. Transition Bonus. Certain employees of the Company who do not participate in the Company's Management Incentive Program will receive cash bonuses in the amounts agreed to between the Company 6 8 and the Parent in another letter agreement dated August 14, 1997. A copy of such letter agreement is filed as Exhibit 7 to this Statement and incorporated herein by reference. The bonuses will be paid from a $923,000 contribution from the Parent. The purpose of these cash bonuses is to reward such employees for remaining with the Company in order to facilitate the transactions contemplated by the Merger Agreement. The bonuses will be paid on January 1, 1998 to the listed employees who are then employed by the Surviving Corporation or any of its affiliates. If any listed employee is terminated before January 1, 1998 other than for cause, the employee will be paid the designated amount on the effective date of termination. Other Provisions Relating to Employee Benefits. The Merger Agreement provides that all service credited to each employee by the Company through the Effective Time will be recognized by the Parent for all purposes, including eligibility, vesting and benefit accruals, under any employee benefit plan provided by the Parent or the Surviving Corporation for the benefit of the employees. The Parent further agrees not to take any action, or fail to take any action, that would cause the Surviving Corporation not to honor (without modification) and assume the employment agreements, executive termination agreements and individual benefit arrangements of the Company. Physician Warrant Agreements. In connection with the Merger, the Parent has agreed to enter into nontransferable warrant agreements (the "Physician Warrant Agreements") with certain physicians (the "Physicians") employed by the medical groups managed by Talbert Medical Management Corporation ("TMMC"), a wholly-owned subsidiary of the Company, or by TMMC. A copy of the form of the Physician Warrant Agreement is filed as Exhibit 8 to this Statement and incorporated herein by reference. Each Physician Warrant Agreement provides that the Parent will grant to the Physician party to such agreement warrants with respect to an aggregate of 2,000 shares of the common stock, par value $.001 per share, of the Parent (the "Warrants"). Each Warrant entitles the Physician to purchase one share of the Parent's common stock. The exercise price of the Warrants will be the average closing price of the Parent's common stock for the ten trading days preceding the date which is two days before the Effective Time. Directors' and Officers' Insurance; Indemnification. The Merger Agreement provides that for four years after the Effective Time, the Parent has agreed to cause the Surviving Corporation to maintain in effect directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy on terms (including coverage amounts) comparable to those now applicable under the current Company policy, subject to prescribed limits on premiums. The Merger Agreement provides that all rights to indemnification for acts and omissions occurring prior to the Effective Time existing as of the date of the Merger Agreement in favor of the current or former directors, officers, employees and agents (the "Indemnified Parties") of the Company and its subsidiaries as provided in their respective certificates of incorporation and by-laws (or similar organizational documents) will survive the Merger and continue for at least six years after the Effective Time. Additionally, for not less than six years after the Effective Time, the Parent will, and will cause the Subsidiary to, (i) indemnify and hold harmless the Indemnified Parties to the full extent they may be indemnified by applicable law, their respective certificates of incorporation or by-laws (or similar organizational documents) or pursuant to indemnification agreements in effect as of the date of the Merger Agreement for acts or omissions occurring prior to the Effective Time, and (ii) advance litigation expenses incurred by the Indemnified Parties in connection with defending any action arising out of such acts or omissions to the extent permitted by law or as otherwise provided by such certificates of incorporation, by-laws, similar organizational documents or indemnification agreements. Share Repurchase. The Merger Agreement provides that, after the consummation of the Offer but before the consummation of the Merger, the Company will repurchase, from any current or former director or officer of the Company who is terminated during such period, all Shares held by any such individual who desires to sell such Shares. Conditions to the Merger. The Merger Agreement provides that the respective obligations of the Company, the Parent and the Subsidiary to effect the Merger are subject to the satisfaction at or prior to the 7 9 Effective Time of the following conditions (any of which may be waived in writing by the Parent, the Subsidiary and the Company, to the extent permitted by applicable law): (i) None of the Parent, the Subsidiary or the Company nor any of their respective subsidiaries will be subject to any order, decree or injunction by a United States federal or state court of competent jurisdiction which prevents the consummation of the Merger. (ii) No statute, rule or regulation will have been enacted or promulgated by the government or any governmental agency of the United States or any state that prohibits the consummation of the Merger. (iii) The Subsidiary will have purchased and paid for Shares pursuant to the Offer. (iv) Any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act will have expired or been terminated. (v) If required by law, the holders of shares of the Common Stock will have approved the adoption of the Merger Agreement. Representations and Warranties. In the Merger Agreement, the Company has made customary representations and warranties to the Parent and the Subsidiary with respect to, among other things, its organization, good standing, capitalization, ownership of subsidiaries, foreign qualification, corporate power, Commission reports and financial information, contracts, properties, legal proceedings, events since June 30, 1997, accounts receivable, tax matters, employee benefit plans, compliance with laws, regulatory approvals, and commissions and fees. The Parent and the Subsidiary have made customary representations and warranties to the Company with respect to, among other things, organization, good standing, corporate power, brokers, legal proceedings, available funds, other transactions, and ownership of Shares. Termination; Fees. The Merger Agreement may be terminated at any time prior to the purchase of Shares pursuant to the Offer (i) by mutual written consent of the Parent, the Subsidiary and the Company; (ii) by either the Parent or the Company if a court of competent jurisdiction or other governmental entity issues a nonappealable final order, decree or ruling or takes any other action having the effect of permanently enjoining, restraining or otherwise prohibiting the Offer (or acceptance of or payment for Shares) or the Merger (provided that the party seeking to terminate the Merger Agreement has used all reasonable efforts to remove the order, decree or ruling or the taking of such action); (iii) by either the Parent or the Company if, before the purchase of Shares in the Offer, there is, or is discovered, a material breach by the other party of any representation, warranty, covenant or other agreement contained in the Merger Agreement that cannot be or has not been cured within ten days after the occurrence or discovery of such breach by the breaching party, whichever is later (a "Material Breach") (provided that the terminating party is not then in Material Breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement); (iv) by the Company if the Parent and the Subsidiary fail to commence the Offer in accordance with the Merger Agreement, or if the Offer expires without the purchase of Shares pursuant to the Offer; or (v) by the Company in response to a proposal from a third party for an Acquisition Transaction. If the Company terminates the Merger Agrement in response to a proposal from a third party for an Acquisition Transaction, the Company will pay to the Parent, in immediately available funds, the sum of $8 million and will promptly reimburse upon demand (up to a maximum amount of $2 million) all documented out-of-pocket expenses incurred by the Parent and the Subsidiary in connection with the transactions contemplated by the Merger Agreement. In the event Shares are not purchased pursuant to the Offer, the Parent will pay to the Company, in immediately available funds, the sum of $8 million and will promptly reimburse upon demand (up to a maximum amount of $2 million) all documented out-of-pocket expenses incurred by the Company in connection with the transactions contemplated by the Merger Agreement, unless such failure to purchase Shares is attributable solely to (i) a court or other governmental entity issuing an order or taking any other action permanently enjoining, restraining or otherwise prohibiting the Offer or the Merger, which order has become final and nonappealable (provided that the order or action is not the result of any action or inaction by the Parent or the Subsidiary that constitutes a breach of the Merger Agreement and the party seeking to terminate the Merger Agreement has used all reasonable efforts to remove the order or other action), (ii) the Parent's valid termination of the Merger Agreement by reason of 8 10 the Company's breach of a representation, warranty, covenant or agreement set forth in the Merger Agreement, or (iii) a failure of a condition set forth in the Merger Agreement by reason of any act, event or circumstance that is beyond the control of the Parent and the Subsidiary. All other costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring the expense. EMPLOYMENT AGREEMENTS The Company has entered into Change in Control Employment Agreements (the "Employment Agreements") with Gloria L. Austin, Becky J. Behlendorf, Jennifer M. Gutzmore, Regina B. Lightner, Jack D. Massimino, Peter W. McKinley, Kenneth S. Ord, Russell D. Phillips, Jr. and Walter R. Stone. A copy of the form of the Employment Agreements with Mr. Massimino and Ms. Austin, as amended as described below in connection with the Merger, is filed as Exhibit 9 to this Statement and incorporated herein by reference. A copy of the form of the Employment Agreements with Messrs. McKinley, Ord, Phillips and Stone, Ms. Behlendorf, Ms. Lightner and Dr. Gutzmore, as amended as described below in connection with the Merger, is filed as Exhibit 10 to this Statement and incorporated herein by reference. Pursuant to their respective Employment Agreements, the executives party to such agreements will have their employment continue for two years following the Merger on equivalent terms (including position, duties, compensation and benefits) to those existing immediately prior to the Merger. If during the relevant period the executive's employment is terminated other than for "Cause" (as defined in the Employment Agreements), death or disability, or if the executive terminates his/her employment for "Good Reason" (as defined in the Employment Agreements), the executive is entitled to receive an annual salary and annual incentive payment through the date that is the second anniversary of such "Change of Control" (as defined in the Employment Agreements), 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. Additionally, in connection with the Merger, the Employment Agreements will be amended (i) to remove certain contingent provisions relating to the vesting of stock options which could have caused the vesting of a portion of the executive's outstanding stock options to be deferred under certain conditions and (ii) to revise the consideration that would be forfeited if the executive does not enter into an agreed form of non-compete covenant and settlement agreement. In addition, the Employment Agreements with Mr. Massimino and Ms. Austin will be further amended by adding certain contingent provisions relating to taxes, which could result in certain payments by the Parent of certain additional amounts to Mr. Massimino and Ms. Austin not to exceed $4 million. The summary of the various Employment Agreements included in Annex I to this Statement does not purport to be complete and is qualified in its entirety by reference to the texts of such Employment Agreements, copies of which are filed as Exhibits 9 and 10 to this Statement. The Company also has entered into a letter agreement with Jim Wade providing for one year of benefits upon a "Change of Control." A copy of the letter agreement with Mr. Wade is filed as Exhibit 11 to this Statement and incorporated herein by reference. CONFIDENTIALITY AGREEMENT The Company and the Parent entered into a mutual confidentiality agreement dated July 23, 1997 (the "Confidentiality Agreement") containing customary provisions pursuant to which, among other matters, each party agreed to keep confidential all information (other than information already in the receiving party's possession that was not supplied by the other party or information that is or becomes generally available to the 9 11 public) furnished to it by the other party, to use such material solely for the purpose of evaluating and implementing a possible acquisition or investment transaction between the Company and the Parent, and, except with the prior written consent of the other party, not to disclose the fact that discussions or negotiations are taking place concerning a possible transaction involving the Company. Except with the prior written consent of the other party's Board of Directors, each party has agreed not to, for two years after the date of the Confidentiality Agreement, acquire or offer to acquire any securities or assets of the other party or seek to influence the management of the other party or enter into discussions, negotiations, arrangements or understandings with any third party with respect to any of the foregoing. A copy of the Confidentiality Agreement is filed as Exhibit 12 to this Statement and incorporated herein by reference. ITEM 4. THE SOLICITATION OR RECOMMENDATION OF THE BOARD OF DIRECTORS (a) Recommendation. At a meeting held on August 13, 1997, the Board of Directors of the Company, by a unanimous vote of the directors present, approved the Offer and the Merger, determining that the terms of the Offer and the Merger (including the Per Share Amount of $63.00 per Share in cash) are fair to, and in the best interests of, the stockholders of the Company. At such meeting, the Board, also by a unanimous vote of the directors present, adopted a resolution recommending that the stockholders of the Company accept the Offer and tender their Shares pursuant to the Offer and approved the Merger Agreement. Copies of a press release and a letter from the President and Chief Executive Officer to the Company's stockholders concerning the Offer, the Merger Agreement and the Board's recommendations are filed as Exhibits 13 and 14, respectively, to this Statement and are incorporated herein by reference. (b) Background and Reasons for the Recommendation. Background. The Company was separated from FHP in May 1997 in conjunction with the merger of FHP and PacifiCare Health Systems, Inc. (the "FHP Merger"). Because of its past affiliation with FHP, a large percentage of the Company's capitated enrollment has been historically associated with FHP members. For the years ended December 31, 1994, 1995 and 1996, FHP members accounted for nearly 100% of the Company's revenue. Since its separation from FHP, the Company has sought to reduce its dependence on FHP members, but has not been entirely successful in this effort. Moreover, in connection with the FHP Merger, the Company has experienced declines in the enrollment of FHP members, which has had an adverse effect on the Company's revenues. Since the commencement of operations of the Company's subsidiaries in January 1996, the Company's management has received periodic inquiries from representatives of other parties regarding a possible combination. In light of the uncertainties created by the Company's enrollment declines, at a meeting of the Board of Directors of the Company held on June 25, 1997, the Board of Directors (following a review of financial results and enrollment trends) authorized the Company's management to respond to such inquiries and to explore the possibility of a strategic combination with one or more of the industry's larger participants to enhance stockholder value. On July 11, 1997, Jack D. Massimino, the Company's President and Chief Executive Officer, met with Larry R. House, Chairman of the Board and Chief Executive Officer of the Parent. Mr. Massimino and Mr. House discussed generally the operations and business strategy of the two companies and the potential desirability of a combination. The pricing phase of their discussion focused on consideration of an all cash tender offer at a substantial premium to the Company's market price. On July 18, 1997, Mr. Massimino and Kenneth S. Ord, the Company's Executive Vice President and Chief Financial Officer, met with Mark L. Wagar, the President and Chief Operating Officer of the Parent, and Kent Marquardt, the Chief Operating Officer for West Coast Operations of the Parent. The parties discussed, among other matters, the Company's medical center locations and certain financial performance information. On July 23, 1997, the Company and the Parent executed the Confidentiality Agreement. On July 24, 1997, representatives of the Parent began due diligence at the offices of the Company's outside counsel. On July 25, 1997, Mr. Ord and Walter R. Stone, the Company's Vice President of Finance, 10 12 met with representatives of the Parent to discuss the Company's financial performance, and on July 26, 1997, a meeting was held in which members of the senior management of the Company answered questions from representatives of the Parent. Informational discussions and meetings continued during the week of July 28. On July 29, 1997, Mr. Massimino and Mr. Ord met with Mr. Wagar and Michael S. Faulkner, Vice President of Finance, Mergers and Acquisitions, of the Parent and discussed the potential terms of a transaction. On July 31, 1997, Mr. Massimino and Mr. Ord met with the Chief Executive Officer and Chief Financial Officer of another major physician practice management company (the "Other Party"). Mr. Massimino and Mr. Ord discussed with them the potential for a combination between the Other Party and the Company. On August 1, 1997, the Company received a non-binding letter of intent from the Parent proposing to acquire all outstanding Shares of the Company for $63.00 per Share, subject to legal and financial due diligence. On August 5, 1997, at a special meeting of the Company's Board of Directors, the directors reviewed the letter from the Parent and reviewed with Smith Barney Inc. ("Smith Barney"), the Company's financial advisor, certain matters relating to the financial aspects of the proposal from the Parent. The Board authorized the Company's management to pursue a definitive agreement with the Parent to present to the Board, but also to contact the Other Party concerning its interest. From August 5, 1997 until August 13, 1997, due diligence continued and members of the Company's management met with the Parent's representatives to answer questions and explain material documents. On August 4, 1997, the Parent provided the Company and its counsel with a draft form of the Merger Agreement. Between August 8, 1997 and August 13, 1997, the Company's counsel had a series of meetings with J. Brooke Johnston, Jr., Senior Vice President and General Counsel of the Parent, to negotiate the terms of a definitive agreement. During the first two weeks of August, Smith Barney, at the request of the Company, had discussions with the Other Party to indicate that the Company was nearing an agreement with another party, and that the Other Party would have to move quickly if it were interested in making a bid of its own. The Other Party did not express interest in making a competing offer. On August 12, the Company's Board of Directors met to hear reports from the management and outside counsel concerning the status of discussions with the Parent and the results to that date of contacts with the Other Party. Counsel for the Parent and the Company concluded negotiating the definitive agreements on August 13, 1997. That evening at a special meeting of the Board of Directors of the Company, the Board of Directors approved the Offer and the Merger by unanimous vote of the directors present. The parties executed the Merger Agreement and announced such execution prior to the opening of securities market trading on August 14, 1997. Reasons for the Recommendation. In deciding to approve the Merger Agreement and recommend to the Company's stockholders acceptance of the Offer and approval of the Merger Agreement, the Board considered a number of factors, including, without limitation, the following: (i) The terms and conditions of the Merger Agreement, including the amount and form of consideration. (ii) The likelihood that the Offer and Merger would be consummated, including the experience, reputation and financial condition of the Parent and the risks to the Company if the acquisition were not consummated. (iii) The circumstances giving rise to the Offer and the Merger, the Company's performance on a historical and prospective basis, various factors affecting the Company's strategic plans, the Company's position in its industry and industry conditions generally, the historical price range of Shares and the price-earnings multiples represented by the Offer as compared to historical ratios, the premium presented 11 13 by the price to be paid in the Offer for Shares over the historical price range of Shares, prices paid in recent acquisitions of similar companies, and the familiarity of the Board with the financial condition, results of operations, competitive positions and prospects of the Company, all as reflected in the Company's historical and projected financial information. (iv) The historical market prices of, and recent trading activity in, the Company's shares, particularly the fact that the Offer and the Merger will enable the stockholders of the Company to realize a premium of approximately 53% over the close on the first day of trading on May 21, 1997 and a 38% premium over the Company's stock price at the close of the trading day on the day discussions began with the Parent. (v) The desirability of cash consideration because of the investment considerations affecting a stock transaction, and the Parent's ability to effect a cash transaction without any financing contingency. (vi) The desire to close a transaction quickly to limit the disruption in the Company's operations and its personnel resulting from the acquisition process and uncertainty as to the outcome of the process. (vii) The lack of a competing offer from the Other Party. (viii) The opinion of Smith Barney rendered to the Company's Board of Directors at its August 13, 1997 meeting (which opinion was subsequently confirmed by delivery of a written opinion dated August 14, 1997, the date of execution of the Merger Agreement), to the effect that, as of such date and based upon and subject to certain matters stated therein, the $63.00 per Share cash consideration to be received in the Offer and the Merger by holders of Shares (other than the Parent and its affiliates) was fair, from a financial point of view, to such holders. The full text of Smith Barney's written opinion dated August 14, 1997, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Smith Barney, is attached to this Statement as Exhibit 15 and is incorporated herein by reference. Smith Barney's opinion is directed only to the fairness, from a financial point of view, of the cash consideration to be received in the Offer and the Merger by holders of Shares (other than the Parent and its affiliates) and is not intended to constitute, and does not constitute, a recommendation as to whether any stockholder should tender shares of Shares pursuant to the Offer. HOLDERS OF SHARES ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS ENTIRETY. (ix) The ability of the Company under the Merger Agreement to terminate the Offer and accept a higher offer from another party. The Board did not assign relative weights to the above factors. Rather, the Board viewed its position and recommendations as being based on the totality of the information presented to and considered by it during the process followed by the Board. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED The Company has retained Smith Barney as its financial advisor in connection with the Offer and the Merger. Pursuant to the terms of Smith Barney's engagement, the Company has agreed to pay Smith Barney for its services an aggregate financial advisory fee equal to 1% of the total consideration (including liabilities assumed) payable in connection with the Offer and the Merger. The Company also has agreed to reimburse Smith Barney for reasonable travel and other out-of-pocket expenses, including reasonable legal fees and expenses, and to indemnify Smith Barney and certain related parties against certain liabilities, including liabilities under the federal securities laws, arising out of Smith Barney's engagement. Smith Barney has in the past provided investment banking services to affiliates of the Company and to the Parent unrelated to the Offer and the Merger, for which Smith Barney has received compensation. In the ordinary course of business, Smith Barney and its affiliates may actively trade or hold the securities of the Company and the Parent for their own account or for the account of customers and, accordingly, may at any time hold a long or short position in such securities. Neither the Company nor any person acting on its behalf has employed, retained or agreed to compensate any person to make solicitations or recommendations to the stockholders concerning the Offer. 12 14 ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES (a) No transactions in Shares have been effected during the past 60 days by the Company or, to the best knowledge of the Company, by any executive officer, director or affiliate of the Company. (b) To the best knowledge of the Company, all of the executive officers, directors, affiliates and subsidiaries of the Company (except those individuals who would be subject to liability therefor pursuant to the short-swing profit recapture provisions of Section 16(b) of the Exchange Act), subject to their fiduciary and contractual obligations, currently intend to tender Shares pursuant to the Offer. This intention does not include any Shares over which, or with respect to which, any such person acts in a fiduciary or representative capacity or is subject to instructions from a third party, as to which Shares, to the Company's knowledge, no determination has been made. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY (a) Except as set forth above, the Company is not engaged in any negotiation in response to the Offer which relates to or would result in (i) an extraordinary transaction, such as a merger or reorganization, involving the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as described in Item 3 and 4 above, there are no transactions, board resolutions, agreements in principle or signed contracts in response to the Offer that relate to or would result in one or more of the events referred to in Item 7(a) above. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED Information Statement The Information Statement attached hereto as Annex I is being furnished in connection with the contemplated designation by the Parent, pursuant to the Merger Agreement, of certain persons to be appointed to the Board of Directors of the Company other than at a meeting of the Company's stockholders following the purchase by the Subsidiary of the number of Shares pursuant to the Offer necessary to satisfy the Minimum Condition. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS Exhibit 1 Offer to Purchase* Exhibit 2 Letter of Transmittal* Exhibit 3 Agreement and Plan of Merger Exhibit 4 Relevant Portions from the Prospectus Exhibit 5 Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan Exhibit 6 Letter Agreement Regarding Management Incentive Program Bonus Exhibit 7 Letter Agreement Regarding Transition Bonus Exhibit 8 Form of Physician Warrant Agreement Exhibit 9 Form of Employment Agreement (Massimino/Austin) Exhibit 10 Form of Employment Agreement (Others) Exhibit 11 Letter Agreement with Jim Wade Exhibit 12 Confidentiality Agreement Exhibit 13 Press Release Exhibit 14 Letter from President and Chief Executive Officer to Stockholders* Exhibit 15 Opinion of Smith Barney Inc.*
- - --------------- * Included in copies of this Schedule 14D-9 mailed to stockholders. 13 15 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION By: /s/ JACK D. MASSIMINO ------------------------------------ Name: Jack D. Massimino Title: President and Chief Executive Officer Dated: August 20, 1997 14 16 ANNEX I TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION 3540 HOWARD WAY COSTA MESA, CALIFORNIA 92626-1417 INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY. This Information Statement, which is being mailed on or about August 20, 1997 to the holders of shares of the common stock, par value $.01 per share (the "Common Stock"), of Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), is being furnished in connection with the designation by MedPartners, Inc., a Delaware corporation (the "Parent"), of persons (the "Parent Designees") to the Board of Directors of the Company (the "Board"). Such designation is to be made pursuant to an Agreement and Plan of Merger dated as of August 14, 1997 (the "Merger Agreement") among the Company, the Parent and Talmed Merger Corporation, a Delaware corporation and wholly-owned subsidiary of the Parent (the "Subsidiary"). Pursuant to the Merger Agreement, the Subsidiary commenced a cash tender offer on August 20, 1997 to purchase all of the issued and outstanding shares of Company Stock, together with certain rights (the "Rights") to purchase shares of the preferred stock, par value $.01 per share, of the Company designated as "Junior Participating Preferred Stock" (such shares of Common Stock and their associated Rights are collectively referred to herein as the "Shares"), at a price of $63.00 per Share, net to the seller in cash, as described in the Subsidiary's Offer to Purchase dated August 20, 1997 and the related Letter of Transmittal (which Offer to Purchase and related Letter of Transmittal together constitute the "Offer"). The Offer is scheduled to expire at 12:00 midnight (New York City time) on September 19, 1997, unless extended. The Offer is subject to, among other things, the condition that there have been validly tendered and not withdrawn prior to the expiration of the Offer such number of shares of the Company's Common Stock which would constitute not less than 51% (determined on a fully diluted basis) of the outstanding shares of Common Stock of the Company (the "Minimum Condition"). The Merger Agreement also provides for the merger (the "Merger") of the Subsidiary with and into the Company at the Effective Time (as defined in the Merger Agreement) upon the terms and satisfaction or, if permissible, waiver of the conditions set forth in the Merger Agreement and in accordance with the provisions of the General Corporation Law of the State of Delaware (the "DGCL"). Following the Effective Time, the separate corporate existence of the Subsidiary will cease, and the Company will be the surviving corporation (the "Surviving Corporation") and a wholly-owned subsidiary of the Parent. In the Merger, each Share issued and outstanding immediately prior to the Effective Time (other than (i) Shares held by the Company, the Parent or any subsidiary of the Company or the Parent, all of which will be canceled, and (ii) the Dissenting Shares (as defined in the Merger Agreement)) will be converted into the right to receive the Per Share Amount in cash. The terms of the Merger Agreement, a summary of the events leading up to the Offer and the execution of the Merger Agreement and other information concerning the Offer and the Merger are contained in the Offer to Purchase and in the Solicitation/Recommendation Statement on Schedule 14D-9 of the Company (the "Schedule 14D-9") with respect to the Offer, copies of which are being delivered to stockholders of the Company contemporaneously herewith. Certain other documents (including the Merger Agreement) were filed with the Securities and Exchange Commission (the "Commission") as exhibits to the Schedule 14D-9 and as exhibits to the Tender Offer Statement on Schedule 14D-1 of the Subsidiary and Parent (the "Schedule 14D-1"). The exhibits to the Schedule 14D-9 and the Schedule 14D-1 may be examined at, and A-1 17 copies thereof may be obtained from, the regional offices of and public reference facilities maintained by the Commission (except that the exhibits cannot be obtained from the regional offices of the Commission) in the manner set forth in Section 7 of the Offer to Purchase. 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. No action is required by the stockholders of the Company in connection with the election or appointment of the Parent Designees to the Board. However, Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the mailing to the Company's stockholders of the information set forth in this Information Statement prior to a change in a majority of the Company's directors otherwise than at a meeting of the Company's stockholders. The information contained in this Information Statement concerning the Parent, the Subsidiary and the Parent Designees has been furnished to the Company by such persons, and the Company assumes no responsibility for the accuracy or completeness of such information. The Schedule 14D-1 indicates that the principal executive offices of the Parent and the Subsidiary are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244. BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY GENERAL The shares of Common Stock are the only class of voting securities of the Company outstanding. Each share of Common Stock is entitled to one vote. As of August 14, 1997, there were 3,000,758 shares of Common Stock outstanding. The Board of Directors of the Company currently consists of nine members. The Board is divided into three classes, with each class elected to serve a three-year term. Each director holds office until his successor is elected and qualified or until his earlier death, resignation or removal. RIGHT TO DESIGNATE DIRECTORS; THE PARENT DESIGNEES The Merger Agreement provides that, promptly upon the purchase of Shares pursuant to the Offer, seven of the Company's nine directors will resign, and the Parent will designate three Parent Designees as replacements for appointment or election to the Company's Board of Directors. The Company, upon request of the Subsidiary, will use its best efforts promptly to cause the Parent Designees to be so appointed or elected. The other two directors (the "Original Directors") will remain on the Board until the consummation of the Merger. The Merger Agreement also provides that, once the Parent Designees constitute a majority of the Company's Board of Directors, any amendment of the Merger Agreement, any termination of the Merger Agreement by the Company, any extension of time for performance of any of the obligations of the Parent or Subsidiary under the Merger Agreement, any waiver of any condition or any of the Company's rights under the Merger Agreement or other action by the Company under the Merger Agreement will require the joint action of the Original Directors. The Subsidiary has informed the Company that each of the Parent Designees listed below has consented to act as a director. It is expected that the Parent Designees may assume office at any time following the Subsidiary's purchase of Shares satisfying the Minimum Condition, which purchase cannot be earlier than September 19, 1997, and that, upon assuming office, the Parent Designees will thereafter constitute at least a majority of the Board. A-2 18 Biographical information concerning each of the Parent Designees, directors and executive officers is presented below:
PRESENT PRINCIPAL OCCUPATION AND FIVE YEAR NAME AGE EMPLOYMENT HISTORY - - --------------------------- ---- ------------------------------------------------ Larry R. House 53 Chief Executive Officer of the Parent since August 1993, and Chairman of the Board since January 1993. Mr. House also served as President from August 1993 until June 1997. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH Rehabilitation Corporation, now HEALTHSOUTH Corporation ("HEALTHSOUTH"). From 1992 to 1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr. House is a member of the Board of Directors of each of HEALTHSOUTH, Capstone Capital Corporation, a publicly traded real estate investment trust, the American Sports Medicine Institute, UAB Research Foundation and Monitor MedX. Harold O. Knight, Jr. 39 Executive Vice President and Chief Financial Officer of the Parent since November 1994. Mr. Knight was Senior Vice President of Finance and Treasurer of the Parent from August 1993 to November 1994, and from March 1993 to August 1993, Mr. Knight served as Vice President of Finance of the Parent. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most recently as Senior Manager. Mr. Knight is a member of the Alabama Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Tracy P. Thrasher 34 Chief Administrative Officer of the Parent since June 1997 and Executive Vice President of the Parent since November 1994 and Corporate Secretary since March 1994. Ms. Thrasher was Senior Vice President of Administration from March 1994 to November 1994, and from January 1993 to March 1994, she served as Corporate Comptroller and Vice President of Development. From 1990 to 1993, Ms. Thrasher was the Audit and Health Care Management Advisory Service Manager with Burton, Canady, Moore & Carr, P.C., independent public accountants. Ms. Thrasher began her career with Ernst & Young LLP in 1985, and became a certified public accountant in 1986.
None of the Parent Designees (i) is currently a director of or holds any position with the Company, (ii) has a familial relationship with any directors or executive officers of the Company, or (iii) to the best knowledge of the Subsidiary, beneficially owns any securities (or any rights to acquire such securities) of the Company. The Company has been advised by the Subsidiary that, to the best of its knowledge, none of the Parent Designees has been involved in any transactions with the Company or any of its directors, officers or affiliates which are required to be disclosed pursuant to the rules and regulations of the Commission, except as may be disclosed in this Information Statement or the Schedule 14D-9. A-3 19 CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The names of the current directors of the Company, their ages as of August 20, 1997, and certain other information about them are set forth below. As indicated above, seven of these directors are expected to resign effective immediately following the purchase of Shares pursuant to the Offer. The Board of Directors has designated Jack D. Massimino and Westcott W. Price III to serve as the Original Directors.
NAME AGE POSITION WITH THE COMPANY - - --------------------------- ---- ------------------------------------------------ Jack D. Massimino 48 President, Chief Executive Officer and Director Executive Vice President and Chief Financial Kenneth S. Ord 51 Officer Gloria L. Austin 43 Executive Vice President Becky J. Behlendorf 48 Vice President, Information Systems Jennifer M. Gutzmore, M.D. 46 Vice President, Health Care Services Regina B. Lightner 47 Vice President, Marketing Peter W. McKinley 38 Vice President, Development Walter R. Stone 46 Vice President, Finance and Treasurer Jack R. Anderson 72 Chairman and Director Richard M. Burdge, Sr. 70 Director Warner Heineman 75 Director Van B. Honeycutt 52 Director Robert W. Jamplis, M.D 77 Director Robert C. Maxson, Ed.D 61 Director Joseph F. Prevratil 59 Director Westcott W. Price III 58 Director
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 Talbert Medical Management Corporation ("TMMC") since December 1995. Mr. Massimino previously served FHP International Corporation ("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. Kenneth S. Ord has been Executive Vice President and Chief Financial Officer of the Company since May 1997. He 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. From February 1997 to May 1997, Mr. Ord served as a consultant to the Company in connection with its separation from FHP. Gloria L. Austin has been Executive Vice President of the Company since May 1997 and was formerly Senior Vice President of the Company from November 1996 to May 1997, holding the same positions with TMMC since December 1995. Ms. Austin previously served as Senior Vice President of FHP's former staff model operations from July 1995, and Senior Vice President, Health Care Delivery from February 1995. She has also served in several executive capacities in FHP's California and Utah regional operations, including Associate Vice President, Utah Region Administration and Regional Vice President, Los Angeles. Ms. Austin joined FHP in 1978. Becky J. Behlendorf has been Vice President, Information Systems of the Company since November 1996, and has held the same position with TMMC since January 1996. Ms. Behlendorf previously served as a strategic information systems consultant to Beverly Enterprises, an owner and operator of skilled nursing facilities, from July 1995 to January 1996. She was Associate Vice President of Strategic Systems of Tenet Health Care from July 1993 to July 1995. Prior to July 1993, Ms. Behlendorf spent 12 years with IBM in a A-4 20 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. Peter W. McKinley has been Vice President, Development of the Company since June 1997. Mr. McKinley previously served in a number of senior management positions at FHP's California regional operations, including Vice President, Provider Services and Network Development from June 1995 to March 1997, Associate Vice President, IPA Management from July 1993 to June 1995, Associate Vice President, Medical Center Operations from May 1990 to July 1993 and Director, Hospital Administration for FHP-owned and managed hospitals from July 1988 to May 1990. Mr. McKinley joined FHP in 1986. Walter R. Stone has been Vice President, Finance, and Treasurer of the Company since November 1996, and has held the same positions with TMMC since December 1995. Mr. Stone was previously Corporate Vice President, Finance at FHP since August 1992. He was Regional Vice President for FHP's staff model operations from 1990 to 1992, and Regional Vice President for FHP's California contracted care operations from 1988 to 1990. Mr. Stone joined FHP in 1980. Jack R. Anderson has been Chairman and a director of the Company since November 1996. Mr. Anderson was appointed a director of PacifiCare Health Systems, Inc. ("PacifiCare") in connection with the merger of FHP and PacifiCare (the "FHP Merger") and his term commenced in May 1997. He became a director of FHP in June 1994 and Chairman of the FHP Board of Directors in June 1995, and held these positions through the completion of the FHP Merger. 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 was a director of FHP from July 1994 to February 1997. 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. 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 was a director of FHP from 1990 to February 1997. 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 a director of the Archstone Foundation (formerly the FHP Foundation). A-5 21 Van B. Honeycutt has been a director of the Company since November 1996. Mr. Honeycutt serves as a member of the Audit Committee. He was a director of FHP from November 1995 to February 1997. He has been Chairman of the Board of Computer Sciences Corporation ("CSC") since March 1997 and President and Chief Executive Officer of CSC since April 1995. Mr. Honeycutt also served as President and Chief Operating Officer of CSC from 1993 to 1995. CSC 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 CSC's Industry Services Group. Robert W. Jamplis, M.D. has been a director of the Company since November 1996. Dr. Jamplis serves as a member of the Compensation Committee. He was a director of FHP from August 1995 to February 1997. 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 was a director of FHP from August 1995 to February 1997. 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. Dr. Maxson currently serves as a director of the Archstone Foundation (formerly the FHP Foundation). Joseph F. Prevratil has been a director of the Company since June of 1997 and formerly served as a director of the Company from November 1996 to February 1997. From 1989 to 1993, Mr. Prevratil was president of his own business, providing contracted consulting and management services to leisure-time industry and the Redevelopment Agency of the City of Long Beach. Since 1990, Mr. Prevratil has been President of J&P Riverside Hotel Corp., the general partner in Riverside Hotel Partners, Ltd., which owned and operated the Sheraton Riverside Hotel. In February, 1996, Riverside Hotel Partners, Ltd., a limited partnership, filed a petition under Chapter 11 of the federal bankruptcy laws. In 1993, Mr. Prevratil became President of the RMS Foundation, Inc., a nonprofit corporation operating the Queen Mary ocean liner attraction. Mr. Prevratil also serves as a director and Chief Executive Officer of the Archstone Foundation (formerly the FHP Foundation). Westcott W. Price III has been a director of the Company since November 1996. Mr. Price serves as a member of the Finance Committee. He has been a member of the Board of Directors of FHP from 1984 to 1997 and its Vice Chairman from 1986 to 1997. He became President of FHP in 1989 and Chief Executive Officer of FHP in 1990. Mr. Price held these positions with FHP until the completion of the FHP Merger. BOARD OF DIRECTOR MEETINGS AND COMMITTEES Meetings. During the year ended December 31, 1996, the Board of Directors held only one Board meeting on November 21, 1997, which was the organizational Board meeting for the Company. Seven of nine directors attended this meeting. Since January 1, 1997, the Board of Directors has held two regularly scheduled meetings and four special meetings. All but one of the directors attended 75% or more of these meetings and meetings of the Board of Directors committee(s) on which the directors served, and the other director attended 50% of such meetings. In addition, during 1996 and 1997, only the Class III directors acted by unanimous written consent on one occasion with respect to the election of one director. Committees of the Board of Directors. The Board of Directors has established a Finance Committee, an Audit Committee and a Compensation Committee. A-6 22 (i) FINANCE COMMITTEE. The Finance Committee has the responsibility to review the Company's budget, capital resources and financing needs. (ii) 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 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. (iii) 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. DIRECTOR COMPENSATION The Company's 1996 Stock Incentive Plan (the "Stock Incentive Plan") provides for initial and subsequent annual grants of nonqualified stock options to non-employee directors. See below for a summary of the Stock Incentive Plan and Exhibit 5 to the Schedule 14D-9 for the full text of such plan. In connection with the Offer and the Merger, options granted under the Stock Incentive Plan will be accelerated so that they become fully exercisable on or prior to the consummation of the Offer, and the Stock Incentive Plan will terminate as of the Effective Time. For a summary of the effect of the Offer and Merger on the Stock Incentive Plan, see Item 3(b) of the Schedule 14D-9. Except for reimbursement of expenses, directors are not otherwise compensated for attending meetings of the Board of Directors or its committees. EXECUTIVE 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, to 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. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) ----------------------------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) COMPENSATION(4) - - ----------------------------------------------- ----- -------- --------- --------------- Jack D. Massimino.............................. 1996 $350,000 $591,700 $10,267 President and Chief Executive Officer 1995 411,925(5) -- 13,560 Kenneth S. Ord................................. 1996 336,265 59,170 101,219(6) Executive Vice President and 1995 249,995 -- 12,864 Chief Financial Officer Gloria L. Austin............................... 1996 210,001 645,280 10,031 Executive Vice President..................... 1995 205,502 20,000 12,263 Walter R. Stone................................ 1996 151,382 258,833 10,611 Vice President, Finance, Treasurer and....... 1995 148,627 -- 12,074 Secretary Jennifer M. Gutzmore, M.D...................... 1996 200,273 188,578 10,108 Vice President, Health Care Services......... 1995 175,036 3,000 12,325 ----- -------- --------- ---------------
- - --------------- (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. A-7 23 (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 Employee Stock Ownership Plan (the "FHP ESOP") under Section 401(k) of the Code and (b) the FHP Deferred Compensation Plan. (3) 1995 figures include the cash value of any bonus earned by the Named Executive Officer during FHP's fiscal year ended June 30, 1995 and the cash value of any voluntary bonus reductions resulting in contributions to (a) the FHP ESOP under Section 401(k) of the Code and (b) the FHP Deferred Compensation Plan. (4) Includes the dollar value of taxable income from group term life insurance coverage in excess of $50,000 purchased by FHP as follows: Mr. Massimino: 1996--$662, 1995--$1,560; Mr. Ord: 1996--$1,968, 1995--$864; Ms. Austin: 1996--$386, 1995--$263; Mr. Stone: 1996--$966, 1995--$183; and Dr. Gutzmore: 1996--$463, 1995--$325. Also includes FHP contributions under the FHP Money Purchase Plan as follows: Mr. Massimino: 1995--$9,000; Mr. Ord: 1995--$9,000; Ms. Austin: 1995--$9,000; Mr. Stone: 1995--$8,918; and Dr. Gutzmore: 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; Mr. Ord: 1996--$3,495, 1995--$3,000; Ms. Austin: 1996--$3,495, 1995--$3,000; Mr. Stone: 1996--$3,495, 1995--$2,973; and Dr. Gutzmore: 1996--$3,495, 1995--$3,000. 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; and Dr. Gutzmore: 1996--$6,150. (5) Mr. Massimino's annual salary was reduced from $450,000 to $350,000 effective July 1, 1995. (6) Includes $95,756 of loan forgiveness by FHP. OPTION GRANTS Option Grants in Fiscal Year 1996. The following table sets forth the options granted with respect to the fiscal year ended December 31, 1996 to the Named Executive Officers. The Company has not granted any stock appreciation rights. OPTION GRANTS IN FISCAL YEAR 1996
INDIVIDUAL GRANTS -------------------------------------------------- PERCENT OF POTENTIAL REALIZABLE NUMBER OF TOTAL VALUE AT ASSUMED ANNUAL SHARES OPTIONS RATES OF STOCK PRICE UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTIONS EMPLOYEES OR BASE OPTION TERM (4) GRANTED IN FISCAL PRICE EXPIRATION ----------------------- NAME (#)(1) YEAR ($/SH) DATE 5%($) 10%($) - - ------------------------------ --------- ---------- -------- ----------- --------- ----------- Jack D. Massimino(5).......... 26,082(2) 33.9% $10.00 11/21/2006 $979,303 $1,709,683 Kenneth S. Ord(6)............. -- -- -- -- -- -- Gloria L. Austin(5)........... 5,353(2) 7.0% 10.00 11/21/2006 200,990 350,891 Walter R. Stone(5)............ 5,353(2) 7.0% 10.00 11/21/2006 200,990 350,891 Jennifer M. Gutzmore, M.D.(5)..................... 7,500(3) 9.7% 29.17 09/17/2006 137,828 347,852
- - --------------- (1) Stock options were granted under the Stock Incentive Plan. See Exhibit 4 to the Schedule 14D-9 for a description of the Stock Incentive Plan and Exhibit 5 to the Schedule 14D-9 for the full text of such Stock Incentive Plan. (2) These options are scheduled to 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, but as a result of the Offer, will become fully vested and exercisable on or prior to the consummation of the Offer. A-8 24 (3) These options are scheduled to 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, but as a result of the Offer, will become fully vested and exercisable on or prior to the consummation of the Offer. (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. (5) Mr. Massimino, Mr. Stone and Dr. Gutzmore have not been granted any additional options since December 31, 1996. On May 21, 1997, Ms. Austin was granted additional options to purchase 14,000 shares of Common Stock at an exercise price of $37.57 per Share. (6) Mr. Ord became an officer of the Company in May 1997 and therefore did not receive any options in 1996. Pursuant to a consulting agreement with Mr. Ord, the Company agreed to grant Mr. Ord options to purchase 30,000 shares of Common Stock when Mr. Ord assumed the position of Executive Vice President and Chief Financial Officer of the Company. Mr. Ord assumed such position and the Company granted him such options as of January 9, 1997 at an exercise price of $29.17 per share. The options granted to Mr. Ord are scheduled to vest at the rate of 20% on each December 15 of the years 1997 through 2000, but as a result of the Offer, will become fully vested and exercisable on or prior to consummation of the Offer. Mr. Ord's options are to expire on January 9, 2007. Option Exercises and Year-End Holdings. None of the options held by the Named Executive Officers were exercisable in 1996. The following table sets forth information regarding the number and value of options held at the end of 1996 by the Named Executive Officers. FISCAL YEAR-END 1996 OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - ------------------------------------------- ----------- ------------- ----------- ------------- Jack D. Massimino(2)....................... 0 26,082 0 $ 499,992 Kenneth S. Ord(3).......................... -- -- -- -- Gloria L. Austin(2)........................ 0 5,353 0 102,617 Walter R. Stone(2)......................... 0 5,353 0 102,617 Jennifer M. Gutzmore, M.D.(2).............. 0 7,500 0 0
- - --------------- (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. (2) Mr. Massimino, Mr. Stone and Dr. Gutzmore have not been granted any additional options since December 31, 1996. On May 21, 1997, Ms. Austin was granted additional options to purchase 14,000 shares of Common Stock at an exercise price of $37.57 per share. (3) Mr. Ord became an officer of the Company in May 1997 and therefore did not receive any options in 1996. Pursuant to a consulting agreement with Mr. Ord, the Company agreed to grant Mr. Ord options to A-9 25 purchase 30,000 shares of Common Stock when Mr. Ord assumed the position of Executive Vice President and Chief Financial Officer of the Company. Mr. Ord assumed such position and the Company granted him such options as of January 9, 1997 at an exercise price of $29.17 per share. EMPLOYMENT AGREEMENTS The Company has entered into agreements (the "Employment Agreements") providing for benefits in the event of a "Change of Control" of the Company with the following executives: Gloria L. Austin, Becky J. Behlendorf, Jennifer M. Gutzmore, M.D., Regina B. Lightner, Jack D. Massimino, Peter W. McKinley, Kenneth S. Ord, Russell D. Phillips, Jr. and Walter R. Stone. The Company has also entered into a similar letter agreement with Jim Wade providing for one year of benefits upon a "Change of Control." Copies of the Employment Agreements and Mr. Wade's letter agreement are filed as Exhibits 9-11 to the Schedule 14D-9. For the purposes of the 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 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" (as defined in the Employment Agreements), 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 annual salary and annual incentive payment through the date that is the third anniversary of a Hostile Change of Control or the second anniversary if such Change of Control was not hostile, 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 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 A-10 26 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 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. In connection with the Offer and the Merger, the Employment Agreements will be amended to permit certain of the transactions contemplated under the Merger Agreement. For a summary of the Employment Agreements, as amended in connection with the Merger, see Item 3(b) of the Schedule 14D-9. STOCK INCENTIVE PLAN The Company 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"). As of August 20, 1997, Options with respect to 166,252 Common Stock had been granted, and no other Awards had been made. The maximum number of shares of Common Stock that may be delivered pursuant to incentive stock options is 50,000 shares. The maximum number of shares of Common Stock that may be delivered as Non-Employee Director Options is 60,000. The maximum number of shares subject to Options and SARs that are granted during any calendar year to any individual is limited to 50,000. 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 will 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 A-11 27 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). The Stock Incentive Plan also 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 Named 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 of 1933, as amended, 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. Effect of the Offer and the Merger. In connection with the Offer and the Merger, options granted under the Stock Incentive Plan will be accelerated so that they become fully exercisable on or prior to the consummation of the Offer, and the Stock Incentive Plan will terminate as of the Effective Time. For a summary of the effect of the Offer and Merger on the Stock Incentive Plan, see Item 3(b) of the Schedule 14D-9. A-12 28 MANAGEMENT INCENTIVE PROGRAM In March 1997, the Company implemented an executive bonus program (the "Management Incentive Program") for the year ending December 31, 1997. Bonuses are based on the achievement of budgeted objectives for a particular region (for regional employees) or for the Company as a whole (for corporate-level employees) and improvements to the quality of services provided to members. Pursuant to the Merger Agreement and a letter agreement dated August 14, 1997 among the Parent, the Subsidiary and the Company, the Parent will cause the Company and the Surviving Corporation to pay at the time of the consummation of the Offer to each corporate-level employee currently participating in the Company's Management Incentive Program cash awards equivalent to the award that would have been received by the participants in such program if calculated as of June 30, 1997. The Named Executive Officers will receive the following amounts: (1) Jack D. Massimino: $186,560; (2) Kenneth S. Ord: $102,420; (3) Gloria L. Austin: $102,420; (4) Walter R. Stone: $68,280; and (5) Jennifer M. Gutzmore, M.D.: $68,280.). 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 ESOP provides 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 are subject to a five-year "cliff" vesting schedule. In addition, the ESOP permits 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 also provides 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, subject to the satisfaction of applicable nondiscrimination rules, equals 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, subject to the satisfaction of applicable nondiscrimination rules, equals 100% of the participant's 401(k) deferrals up to six percent of the participant's compensation. The ESOP permits participants to direct the investment of their 401(k) and employer matching accounts on a monthly basis. DEFERRED COMPENSATION PLAN The Talbert Medical Management Holdings Corporation Deferred Compensation Plan (the "Deferred Compensation Plan") is a nonqualified deferred compensation plan that permits 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 permits 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 also permits discretionary employer contributions. Amounts deferred under the Deferred Compensation Plan are credited to bookkeeping accounts established and maintained for each participant. The compensation deferral account of each participant is 100% vested. The employer contribution account of each participant is 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, among others, the following distribution options: (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 A-13 29 Sections 401(a) and 501(a) of the Code. The accounts of each participant under the Money Purchase Pension Plan are 100% vested. In general, accounts will be distributable upon a participant's termination from employment. LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS The Company's Certificate of Incorporation contains a provision eliminating or limiting director liability for monetary damages arising from a breach of fiduciary duty as a director, except for liability of a director (i) for any breach of such director's duty of loyalty to the Company or its stockholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under the Delaware statutory provision making directors personally liable, under a negligence standard, for unlawful dividends or unlawful stock purchases or redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. As a result of this provision, the ability of the Company or a stockholder thereof to successfully prosecute an action against a director for a breach of his or her duty of care is limited. However, the provision does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. In addition, the Certificate of Incorporation and the Company's Bylaws provide for mandatory indemnification rights, subject to limited exceptions, to any person who by reason of the fact that he or she is a director or officer of the Company, is involved in a legal proceeding of any nature if he or she acted in good faith and in a manner he or she reasonably believed to be in and not opposed to the best interests of the Company. If such legal proceeding is brought by or in the right of the Company, no indemnification will be made if the person is adjudged to be liable for negligence or misconduct in the performance of his duty to the Company, unless a court finds such person to be entitled to indemnity despite adjudication of liability. Such indemnification rights include reimbursement for expenses incurred by such director or officer in advance of the final disposition of such proceeding in accordance with the applicable provisions of the DGCL. For a summary of the effect of the Offer and the Merger on the provisions relating to the indemnification of directors, officers, employees and agents of the Company or its subsidiaries contained in the Company's Certificate of Incorporation and Bylaws (or other similar organizational documents), see Item 3(b) of the Schedule 14D-9. 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. For a summary of the effect of the Offer and the Merger on directors' and officers' liability insurance, see Item 3(b) of the Schedule 14D-9. 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 A-14 30 Committee or Director of the Company. Mr. Burdge serves as a director of PacifiCare. 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 in connection with the Company's separation from FHP. PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of August 20, 1997 (except as otherwise indicated) in each case by (a) each stockholder who is known to the Company to beneficially own 5% or more of the outstanding shares of Common Stock, (b) each director and Named Executive Officer of the Company, and (c) all directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP(2) --------------------------- NUMBER OF NAME OF BENEFICIAL OWNER(1) SHARES PERCENT --------------------------------------------------- --------- ------- Franklin Resources, Inc. 777 Mariners Island Boulevard San Mateo, CA 94404.............................. 264,812(3) 8.8% Joel M. Greenblatt 153 E. 53rd Street, 51st Floor New York, NY 10022............................... 227,752(4) 7.6% Jack D. Massimino.................................. 170,590(5)(6)(7) 5.7% Gloria L. Austin................................... 17,244(6)(7) * Kenneth S. Ord..................................... 4,847(6) * Walter R. Stone.................................... 9,414(6)(7) * Jennifer M. Gutzmore, M.D.......................... 113(6) * Jack R. Anderson................................... 186,462(7)(8) 6.2% Richard M. Burdge, Sr.............................. 44,514(5)(7)(9) 1.5% Warner Heineman.................................... 2,500(7) * Van B. Honeycutt................................... 1,500(7) * Robert W. Jamplis, M.D............................. 1,500(7) * Robert C. Maxson, Ed.D............................. 1,500(7) * Joseph F. Prevratil................................ 2,500(7) * Westcott W. Price III.............................. 46,046(5)(6)(7) 1.5% All executive officers and directors as a group (16 persons) ........................................ 489,652 16.3%
- - --------------- * 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 92626-1417. (2) Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each stockholder named in this table has sole voting authority and investment discretion with respect to the shares shown as beneficially owned. (3) Based on beneficial ownership of 5,370,900 shares of FHP Common Stock and 298,680 shares of FHP Preferred Stock, which stock was converted into shares of the Company's Common Stock in connection with the separation of the Company from FHP, as reported on Schedule 13F for the period ended December 31, 1996. (4) Includes 53,105 shares of Common Stock held by Alfred LLC, of which Mr. Greenblatt is a managing partner, and 62,850 shares of Common Stock held by Gotham III, of which Mr. Greenblatt is a general partner. A-15 31 (5) Includes shares held under a revocable trust controlled by the named individual. With respect to Mr. Massimino, includes shares held under an irrevocable trust, the voting rights to which Mr. Massimino has retained. (6) Includes shares held by the trustee under the FHP ESOP. As of May 21, 1997 the approximate number of shares of Common Stock allocated to the ESOP accounts of the officers and directors named above were as follows: Gloria L. Austin -- 103 shares; Jennifer M. Gutzmore -- 113 shares; Jack D. Massimino -- 158 shares; Kenneth S. Ord -- 10 shares; Westcott W. Price III -- 252 shares; and Walter R. Stone -- 202 shares. (7) Shares reported include stock options exercisable 60 days after August 20, 1997, which are reported pursuant to Rule 13-3(d)(1) under Exchange Act. (8) Includes 23,878 shares of Common Stock held by Mr. Anderson's wife and 47,200 shares of Common Stock held by trusts of which Mr. Anderson's relatives are beneficiaries. (9) Includes 4,356 shares of Common Stock held by Mr. Burdge's wife and 2,265 held by Mr. Burdge's family trust. CERTAIN TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS The matters set forth elsewhere in this Information Statement and in Item 3 of the Schedule 14D-9 are hereby incorporated by reference. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's Reporting Persons to file with the Commission initial reports of Common Stock ownership and reports of changes in such ownership. A Reporting Person must file a Form 3 -- Initial Statement of Beneficial Ownership of Securities within 10 days after such person becomes a Reporting Person. A Reporting Person must file a Form 4 -- Statement of Changes of Beneficial Ownership of Securities within 10 days after any month in which such person's beneficial ownership of securities changes, except for certain changes exempt from the reporting requirements of Form 4. Such exempt changes include stock options granted under a plan qualifying under Rule 16b-3. A Reporting Person must file a Form 5 -- Annual Statement of Beneficial Ownership of Securities within 45 days after the end of the issuer's fiscal year to report any changes in ownership during such year not reported on a Form 4, including changes exempt from the reporting requirements of Form 4. The Commission's rules require the Company's Reporting Persons to furnish the Company with copies of all Section 16(a) reports that they file. Based solely upon a review of the copies of such reports furnished to the Company, the Company believes that the Reporting Persons have complied with all applicable Section 16(a) filing requirements for 1997 on a timely basis, except for the Form 3's that were to be filed concurrently with the initial public offering of rights to purchase shares of Common Stock of the Company on April 21, 1997, which forms were filed on April 22, 1997. The Company was not subject to the reporting requirements of the Exchange Act prior to April 21, 1997. A-16 EX-1 2 OFFER TO PURCHASE 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK (TOGETHER WITH THE ASSOCIATED JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS) OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION AT $63.00 NET PER SHARE IN CASH BY TALMED MERGER CORPORATION A WHOLLY-OWNED SUBSIDIARY OF MEDPARTNERS, INC. --------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY SEPTEMBER 19, 1997, UNLESS THE OFFER IS EXTENDED. --------------------- THE BOARD OF DIRECTORS OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION (THE "COMPANY") HAS BY UNANIMOUS VOTE OF THOSE PRESENT APPROVED THE OFFER AND THE MERGER, DETERMINED THAT THE OFFER DESCRIBED HEREIN IS IN THE BEST INTEREST OF THE COMPANY'S STOCKHOLDERS AND RECOMMENDS THAT ALL STOCKHOLDERS TENDER THEIR SHARES. --------------------- THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF SHARES REPRESENTING AT LEAST FIFTY-ONE PERCENT OF THE OUTSTANDING SHARES OF THE COMPANY, ASSUMING CERTAIN EXERCISES (THE "MINIMUM CONDITION"). THE OFFER IS ALSO SUBJECT TO CERTAIN OTHER TERMS AND CONDITIONS. SEE SECTION 13. --------------------- THE OFFER IS NOT CONDITIONED UPON MEDPARTNERS OR THE SUBSIDIARY OBTAINING FINANCING. --------------------- IMPORTANT ANY STOCKHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH STOCKHOLDER'S SHARES SHOULD EITHER (I) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF) IN ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND MAIL OR DELIVER THE LETTER OF TRANSMITTAL (OR SUCH FACSIMILE) TOGETHER WITH THE CERTIFICATE(S) EVIDENCING THE TENDERED SHARES AND ANY OTHER REQUIRED DOCUMENTS TO THE DEPOSITARY, OR TENDER SUCH SHARES PURSUANT TO THE PROCEDURES FOR BOOK-ENTRY TRANSFER SET FORTH IN SECTION 3; OR (II) REQUEST SUCH STOCKHOLDER'S BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH STOCKHOLDER. A STOCKHOLDER WHOSE SHARES ARE REGISTERED IN THE NAME OF A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE MUST CONTACT SUCH BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE IF SUCH STOCKHOLDER DESIRES TO TENDER SHARES SO REGISTERED. A STOCKHOLDER WHO DESIRES TO TENDER SHARES AND WHOSE CERTIFICATES EVIDENCING SUCH SHARES ARE NOT IMMEDIATELY AVAILABLE, OR WHO CANNOT COMPLY WITH THE PROCEDURES FOR BOOK-ENTRY TRANSFER DESCRIBED IN THIS OFFER TO PURCHASE ON A TIMELY BASIS, MAY TENDER SUCH SHARES BY FOLLOWING THE PROCEDURES FOR GUARANTEED DELIVERY SET FORTH IN SECTION 3. QUESTIONS AND REQUESTS FOR ASSISTANCE, OR FOR ADDITIONAL COPIES OF THIS OFFER TO PURCHASE, THE LETTER OF TRANSMITTAL OR OTHER OFFER MATERIALS, MAY BE DIRECTED TO THE INFORMATION AGENT AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF THIS OFFER TO PURCHASE. STOCKHOLDERS MAY ALSO CONTACT BROKERS, DEALERS, COMMERCIAL BANKS OR TRUST COMPANIES FOR ASSISTANCE CONCERNING THE OFFER. AUGUST 20, 1997 2 TABLE OF CONTENTS
PAGE ---- 1 INTRODUCTION............................................................. Section 1. Terms of the Offer; Expiration Date......................... 2 Section 2. Acceptance for Payment and Payment for Shares............... 4 Section 3. Procedure for Tendering Shares.............................. 5 Section 4. Withdrawal Rights........................................... 8 Section 5. Certain U.S. Federal Income Tax Matters..................... 9 Section 6. Price Range of the Company's Common Stock; Dividends........ 9 Section 7. Certain Information Concerning the Company.................. 10 Section 8. Certain Information Concerning the Subsidiary and MedPartners................................................. 11 Section 9. Source and Amount of Funds.................................. 14 Section 10. Background of the Offer; Contacts with the Company.......... 14 Section 11. Purpose of the Offer; Merger Agreement; Plans for the Company..................................................... 16 Section 12. Effect of the Offer on the Market for the Shares, Exchange Act Registration and Margin Regulations..................... 23 Section 13. Certain Conditions to the Offer............................. 24 Section 14. Certain Legal Matters and Regulatory Approvals.............. 25 Section 15. Fees and Expenses........................................... 28 Section 16. Miscellaneous............................................... 28 Schedule I Information Concerning the Directors and Executive Officers of MedPartners and the Subsidiary........................... S-1
3 TO: THE HOLDERS OF COMMON STOCK OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION INTRODUCTION Talmed Merger Corporation (the "Subsidiary"), a Delaware corporation and a wholly-owned subsidiary of MedPartners, Inc., a Delaware corporation ("MedPartners"), hereby offers to purchase all of the outstanding shares of common stock, par value $.01 per share, together with the associated rights to purchase shares of preferred stock, par value $.01 per share, designated as "Junior Participating Preferred Stock" (the "Shares"), of Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), at a purchase price of $63.00 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any supplements or amendments, collectively constitute the "Offer"). Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the transfer and sale of Shares pursuant to the Offer. The Subsidiary will pay all fees and expenses of ChaseMellon Shareholder Services, L.L.C., as Depositary (the "Depositary") and Georgeson & Company, Inc. as Information Agent (the "Information Agent"), incurred in connection with the Offer. See Section 15. The Offer is conditioned upon, among other things, there having been validly tendered and not properly withdrawn prior to the expiration of the Offer a number of Shares which constitutes at least fifty-one percent (51%) of the Company's outstanding voting power (assuming the exercise of all outstanding options and rights to purchase shares of Common Stock) (the "Minimum Condition"). The Company has informed the Subsidiary that as of August 14, 1997, there were 3,000,758 Shares issued and outstanding, and 174,252 shares of Common Stock reserved for issuance under the Company's stock option plan, and that, except as otherwise disclosed in the Merger Agreement, no other stock of the Company is outstanding or committed to be issued. Based on this information, and assuming all outstanding options to purchase shares of Common Stock will have been accelerated so as to be fully exercisable prior to the consummation of the Offer, the Subsidiary believes that the Minimum Condition will be satisfied if the Subsidiary acquires at least 1,619,256 Shares in the Offer. MedPartners does not directly or indirectly hold any Shares. Certain other conditions to the Offer are described in Section 13. The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of August 14, 1997 (the "Merger Agreement"), by and among MedPartners, the Subsidiary and the Company. The Merger Agreement provides, among other things, that not later than the second business day after satisfaction or, waiver of all the conditions to the Merger, the Subsidiary will be merged with and into the Company (the "Merger"). Following consummation of the Merger, the Company will continue as the surviving corporation of the Merger and as a wholly-owned subsidiary of MedPartners. Thereupon, each outstanding Share (other than Shares owned directly or indirectly by the Company, MedPartners or any subsidiary of the Company or MedPartners, and other than Shares held by stockholders, if any, who have properly exercised appraisal rights) will be converted into and represent the right to receive $63.00 in cash, or any higher price that may be paid per Share in the Offer, without interest. See Section 11. THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD OF DIRECTORS" OR THE "BOARD") HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER AND HAS DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER (INCLUDING THE OFFER PRICE OF $63.00 PER SHARE IN CASH) IS IN THE BEST INTEREST OF THE COMPANY'S STOCKHOLDERS, AND RECOMMENDS THAT ALL STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. The Company has advised MedPartners that Smith Barney Inc. ("Smith Barney"), financial advisor to the Company, has delivered to the Board of Directors a written opinion dated August 14, 1997 to the effect that, as of such date and based upon and subject to certain matters stated in such opinion, the $63.00 per Share cash consideration to be received by the holders of Shares (other than MedPartners and its affiliates) 4 in the Offer and the Merger, taken together, was fair from a financial point of view to such holders. A copy of the written opinion of Smith Barney dated August 14, 1997, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Smith Barney, is attached as Exhibit 15 to the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9"), which is being mailed to stockholders concurrently herewith and should be carefully read in its entirety. Smith Barney's opinion is directed only to the fairness, from a financial point of view, of the cash consideration to be received in the Offer and the Merger by holders of the Shares (other than MedPartners and its affiliates) and is not intended to constitute, and does not constitute, a recommendation as to whether any stockholder should tender Shares pursuant to the Offer. HOLDERS OF THE SHARES ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS ENTIRETY. The Merger Agreement provides that promptly upon the purchase of Shares by the Subsidiary pursuant to the Offer, seven of the Company's nine directors will resign, and MedPartners will designate three replacements for appointment or election to the Company's Board of Directors. The Company will, upon request of the Subsidiary, use its best efforts promptly to cause MedPartners' designees to be so appointed or elected. The remaining two directors (and any successors appointed or elected before the Effective Time) are referred to as the "Original Directors." The Company will promptly take all actions required by Section 14(f) of the Exchange Act and related Rule 14f-1 as is necessary to enable MedPartners' designees to be elected to the Company's Board of Directors. MedPartners or the Subsidiary will supply the Company in writing, and be solely responsible for, any information with respect to either of them and their nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1. Once MedPartners' designees constitute a majority of the Company's Board of Directors, any amendment of the Merger Agreement, any termination of the Merger Agreement by the Company, any extension of time for performance of any of the obligations of MedPartners or the Subsidiary thereunder, any waiver of any condition or any of the Company's rights thereunder or other action by the Company thereunder may be effected only by the joint action of the Original Directors. The consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including, if required by law, the approval and adoption of the Merger Agreement by the requisite vote of the stockholders of the Company. See Section 11 and Section 13. Under the Company's Certificate of Incorporation and the General Corporation Law of the State of Delaware ("the DGCL"), the holders of Shares have one vote for each Share owned by them of record. Under the Company's Certificate of Incorporation and the DGCL, a majority vote of the then outstanding Shares is required to approve and adopt the Merger Agreement and the Merger. Consequently, if the Minimum Condition is satisfied, the Purchaser will have sufficient voting power to approve and adopt the Merger Agreement and the Merger without the vote of any other stockholder. Under the DGCL, if the Subsidiary acquires, pursuant to the Offer or otherwise, at least 90% of the then outstanding Shares, the Subsidiary will be able to consummate the Merger without a vote of the Company's stockholders. In such event, MedPartners and the Subsidiary will take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition without a meeting of the Company's stockholders. If, however, the Subsidiary does not acquire at least 90% of the then outstanding Shares pursuant to the Offer or otherwise, and a vote of the Company's stockholders is required under the DGCL, a longer period of time will be required to effect the Merger. See Section 11. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION AND SHOULD BE READ CAREFULLY AND IN THEIR ENTIRETY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. SECTION 1. TERMS OF THE OFFER; EXPIRATION DATE. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), the Subsidiary will accept for payment and pay for all Shares validly tendered on or prior to the Expiration Date and not properly withdrawn as permitted by Section 4 below. For purposes of the Offer, the term "Expiration Date" means 12:00 midnight, New York City time, on Friday, September 19, 1997, unless and until the Purchaser, in its sole discretion (subject to the terms of the Merger Agreement), 2 5 has extended the period of time during which the Offer is open, in which event the term "Expiration Date" will mean the latest time and date at which the Offer, as so extended by the Subsidiary, shall expire. The Offer is conditioned upon, among other things, satisfaction of the Minimum Condition and the expiration or termination of all waiting periods imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the "HSR Act"). The Offer is also subject to certain other conditions set forth in Section 13 below. If these or any of the other conditions referred to in Section 13 are not satisfied or any events specified in Section 13 have occurred or are determined by the Subsidiary to have occurred prior to the Expiration Date, the Subsidiary reserves the right (but is not obligated), subject to the terms of the Merger Agreement and whether or not any shares have theretofore been accepted for payment, (i) to decline to purchase any of the Shares tendered in the Offer, terminate the Offer and return all tendered Shares to the tendering stockholders, (ii) to waive or amend any or all conditions to the Offer, to the extent permitted by applicable law and the provisions of the Merger Agreement, and, subject to complying with applicable rules and regulations of the Securities and Exchange Commission (the "Commission"), purchase all Shares validly tendered, (iii) to extend the Offer and, subject to the right of stockholders to withdraw Shares until the Expiration Date, retain the Shares which have been tendered during the period or periods for which the Offer is extended or (iv) to delay acceptance for payment or payment for Shares, subject to applicable law, until satisfaction or waiver of the conditions to the Offer. In the event that the Subsidiary waives any of the conditions set forth in Section 13, the Commission may, if the waiver is deemed to constitute a material change to the information previously provided to the stockholders, require that the Offer remain open for an additional period of time and/or that the Subsidiary disseminate information concerning such waiver. The Subsidiary will, subject to the conditions specified in Section 13, accept for payment and pay for Shares which have been validly tendered and not withdrawn pursuant to the Offer as soon as it is permitted to do so under applicable law; provided that, if the number of Shares that have been validly tendered and not withdrawn represent more than 75% but less than 90% of the Company's outstanding voting power (calculated assuming the exercise of all outstanding options and rights to purchase shares of Common Stock), the Subsidiary may extend the Offer up to the tenth business day following the date on which all conditions to the Offer shall first have been satisfied or waived. If any of the conditions specified in Section 14 are not satisfied on the initial Expiration Date, the Subsidiary may extend (and re-extend) the Offer through October 20, 1997, to provide time to satisfy such conditions. During such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering stockholder to withdraw its Shares. See Section 4. The Merger Agreement provides that the Subsidiary may modify the terms of the Offer except that, without the written approval of the Company, the Subsidiary will not (i) reduce the number of Shares subject to the Offer; (ii) decrease the price per Share paid in the Offer, (iii) modify or add to the conditions set forth in Section 13 herein; (iv) allow the Offer to expire prior to September 19, 1997; (v) extend the Offer beyond October 20, 1997; (vi) change the form of consideration payable in the Offer; or (vii) make any other modifications to the Offer that are otherwise materially adverse to the holders of the Shares. Subject to the applicable regulations of the Commission, the Subsidiary also reserves the right, in its sole discretion, at any time and from time to time, (i) to delay acceptance for payment of or, regardless of whether such Shares were theretofore accepted for payment, payment for any Shares pending receipt of any regulatory approval specified in Section 14 below or in order to comply in whole or in part with any other applicable law, (ii) to terminate the Offer (whether or not any Shares have theretofore been accepted for payment) if any of the conditions referred to in Section 13 has not been satisfied or upon the occurrence of any of the events specified in Section 13 and (iii) to waive any condition or otherwise amend the Offer in any respect in any manner that is not prohibited as described above, in each case by giving oral or written notice of such delay, termination, waiver or amendment to the Depositary and by making a public announcement thereof. The Subsidiary acknowledges that (i) Rule 14e-1(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Subsidiary to pay the consideration offered or return the Shares tendered promptly after the termination or withdrawal of the Offer and (ii) the Subsidiary may not delay acceptance for payment of, or payment for (except as provided in clause (i) of the preceding sentence), any Shares upon the 3 6 occurrence of any of the conditions specified in Section 13 without extending the period of time during which the Offer is open. Any such extension, delay, termination, waiver or amendment will be followed as promptly as practicable by public announcement thereof, with such announcement in the case of an extension to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Except as provided by applicable law (including Rules 14d-4(c), 14d-6(d) and 14e-1(d) under the Exchange Act, which require that material changes be promptly disseminated to stockholders in a manner reasonably designed to inform them of such changes) and without limiting the manner in which the Subsidiary may choose to make any public announcement, the Subsidiary shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a press release to the Dow Jones News Service. If the Subsidiary makes a material change in the terms of the Offer or if it waives a material condition of the Offer, the Subsidiary will extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1(d) under the Exchange Act. The minimum period during which an offer must remain open following material changes in the terms of the offer, other than a change in price or a change in the percentage of securities sought, will depend upon the facts and circumstances, including the materiality, of the changes. With respect to a change in price or, subject to certain limitations, a change in the percentage of securities sought, a minimum ten business day period from the day of such change is generally required to allow for adequate dissemination to stockholders and investor response. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or a federal holiday and consists of the time period from 12:01 a.m. through 12:00 Midnight, New York City time. The Company has provided the Subsidiary with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares whose names appear on the Company's stockholder list and will be furnished, for subsequent transmittal to beneficial owners of Shares, to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing. SECTION 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Subsidiary will accept for payment and will pay for all Shares validly tendered and not properly withdrawn on or prior to the Expiration Date promptly after the Expiration Date provided that the conditions of the Offer set forth in Section 13, including, without limitation, the expiration or termination of the waiting period applicable to the acquisition of Shares pursuant to the Offer under the HSR Act, have been satisfied or waived prior to the Expiration Date. In addition, subject to applicable rules of the Commission, the Subsidiary expressly reserves the right to delay acceptance for payment of, or payment for, Shares pending receipt of any other regulatory approvals specified in Section 14. On August 15, 1997, MedPartners filed with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") a Premerger Notification and Report Form under the HSR Act with respect to the Offer. The waiting period under the HSR Act applicable to the Offer would expire at 11:59 p.m., New York City time, on August 30, 1997, unless prior to the expiration or termination of the waiting period the FTC or the Antitrust Division extends the waiting period by requesting additional information or documentary material from MedPartners. If such a request is made, the waiting period applicable to the Offer will expire on the tenth calendar day after the date of substantial compliance by MedPartners with such request. Thereafter, the waiting period may be extended by court order or with the consent of MedPartners. The waiting period under the HSR Act may be terminated by the FTC and the Antitrust Division prior to its expiration. See Section 14. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares (the "Share Certificates"), or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares, 4 7 if such procedure is available, into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company (each a "Book-Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facilities") pursuant to the procedures set forth in Section 3, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed with any required signature guarantees, or an Agent's Message (as defined below) in connection with a book-entry transfer, and (iii) any other documents required by the Letter of Transmittal. The term "Agent's Message" means a message from a Book-Entry Transfer Facility transmitted to, and received by, the Depositary forming a part of a Book-Entry Confirmation, which states that (i) the Book-Entry Transfer Facility has received an express acknowledgment from the participant in the Book-Entry Transfer Facility tendering the Shares that are the subject of the Book-Entry Confirmation, (ii) the participant has received and agrees to be bound by the terms of the Letter of Transmittal and (iii) the Purchaser may enforce such agreement against the participant. For purposes of the Offer, the Subsidiary will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not properly withdrawn if, as and when the Subsidiary gives oral or written notice to the Depositary of the Subsidiary's acceptance of such Shares for payment pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payments from the Subsidiary and transmitting those payments to stockholders whose Shares have been accepted for payment. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE PURCHASE PRICE FOR SHARES BE PAID, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. If for any reason whatsoever acceptance for payment of or payment for any Shares tendered pursuant to the Offer is delayed or the Subsidiary is unable to accept for payment or pay for Shares tendered pursuant to the Offer, then, without prejudice to the Subsidiary's rights set forth herein, the Depositary may nevertheless, on behalf of the Subsidiary, retain tendered Shares, and those Shares may not be withdrawn except to the extent that the tendering stockholder is entitled to exercise and duly exercises withdrawal rights as described in Section 4, subject, however, to the Subsidiary's obligation under Rule 14e-1(c) under the Exchange Act to pay for Shares tendered or return those Shares promptly after termination or withdrawal of the Offer. If any tendered Shares are not accepted for payment pursuant to the Offer for any reason or if Share Certificates are submitted for more Shares than are tendered, Share Certificates evidencing unpurchased or untendered Shares will be returned (or, in the case of Shares tendered by book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedures set forth in Section 3, such Shares will be credited to an account maintained at such Book-Entry Transfer Facility), without expense to the tendering stockholder, as promptly as practicable following the expiration, termination or withdrawal of the Offer. If, prior to the Expiration Date, the Subsidiary increases the consideration offered to stockholders pursuant to the Offer, such increased consideration will be paid to all stockholders whose Shares are purchased pursuant to the Offer, regardless of whether those Shares were tendered prior to the increase in consideration. The Subsidiary reserves the right to transfer or assign, in whole at any time or in part from time to time, to one or more of the Subsidiary's affiliates, the right to purchase all or any portion of the Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve the Subsidiary of its obligations under the Offer or prejudice the rights of tendering stockholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. SECTION 3. PROCEDURE FOR TENDERING SHARES. Valid Tender. Except as set forth below, in order for Shares to be validly tendered pursuant to the Offer, (i) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed with any required signature guarantees, or an Agent's Message in connection with a book-entry delivery of Shares, and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses 5 8 set forth on the back cover of this Offer to Purchase on or prior to the Expiration Date, and (ii) either (a) Share Certificates evidencing tendered Shares must be received by the Depositary at such address, or the Shares must be tendered pursuant to the procedure for book-entry transfer described below and a Book-Entry Confirmation must be received by the Depositary, in each case on or prior to the Expiration Date, or (b) the tendering stockholder must comply with the guaranteed delivery procedures described below. If Share Certificates are forwarded separately to the Depositary, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) must accompany each delivery. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at the Book-Entry Transfer Facilities for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the system of any Book-Entry Transfer Facility may make book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's transfer procedures. However, although delivery of Shares may be effected through book-entry transfer at a Book-Entry Transfer Facility, a Letter of Transmittal (or a facsimile thereof), properly completed and duly executed with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other documents required by the Letter of Transmittal, must in any case be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase on or prior to the Expiration Date, or the tendering stockholder must comply with the guaranteed delivery procedures described below. Delivery of documents to a Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures does not constitute delivery to the Depositary. Signature Guarantees. Signatures on Letters of Transmittal must be guaranteed by a firm which is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of a recognized Medallion Signature Guarantee Program or by any other "eligible guarantor institution," as defined in Rule 17A(b)-15 under the Exchange Act (each of the foregoing, an "Eligible Institution"), unless the Shares tendered thereby are tendered (i) by a registered holder of Shares who has not completed either the box labeled "Special Payment Instructions" or the box labeled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. See Instruction 1 of the Letter of Transmittal. If a Share Certificate is registered in the name of a person other than the person who signs the Letter of Transmittal, or if payment is to be made, or a Share Certificate not accepted for payment or not tendered is to be returned, to a person other than the registered holder(s), the Share Certificate must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appears on the Share Certificate, with the signature(s) on such Share Certificate or stock powers guaranteed as provided above. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's Share Certificates are not immediately available, time will not permit all required documents to reach the Depositary on or prior to the Expiration Date, or a stockholder cannot complete the procedure for delivery by book-entry transfer on a timely basis, then such stockholder's Shares may nevertheless be tendered, provided that all of the following conditions are satisfied: (i) the tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Purchaser herewith, is received by the Depositary as provided below on or prior to the Expiration Date; and (iii) the Share Certificates evidencing all tendered Shares, in proper form for transfer, or a Book-Entry Confirmation, together with the Letter of Transmittal (or a facsimile thereof) properly completed and duly executed with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message) and any other documents required by the Letter of Transmittal, are received by the 6 9 Depositary within three Nasdaq National Market trading days after the date of execution of the Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution and a representation that the stockholder owns the Shares tendered within the meaning of, and that the tender of the Shares effected thereby complies with, Rule 14e-4 under the Exchange Act, each in the form set forth in the Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (i) Share Certificates evidencing such Shares or a Book-Entry Confirmation of the delivery of such Shares (if available), (ii) a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) or, in the case of a book-entry transfer, an Agent's Message, and (ii) any other documents required by the Letter of Transmittal. Accordingly, payment may not be made to all tendering stockholders at the same time and will depend upon when Share Certificates are received by the Depositary or Book-Entry Confirmations of tendered Shares are received in the Depositary's account at a Book-Entry Transfer Facility. The method of delivery of Share Certificates and all other required documents, including through any Book-Entry Transfer Facility, is at the option and risk of the tendering stockholder and the delivery will be deemed made only when actually received by the Depositary. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Shares pursuant to any of the procedures described above will be determined by the Subsidiary, in its sole discretion, which determination shall be final and binding on all parties. The Subsidiary reserves the absolute right to reject any and all tenders determined by it not to be in proper form or the acceptance for payment of which may, in the opinion of its counsel, be unlawful. The Subsidiary also reserves the absolute right to waive any defect or irregularity in any tender of Shares of any particular stockholder, whether or not similar defects or irregularities are waived in the case of other stockholders. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of the Subsidiary, MedPartners, any of their affiliates or assigns, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Subsidiary's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. Appointment as Proxy. By executing a Letter of Transmittal as set forth above, a tendering stockholder irrevocably appoints the Purchaser, its officers and its designees, and each of them, as the stockholder's attorneys-in-fact and proxies, with full power of substitution, in the manner set forth in the Letter of Transmittal, to the full extent of such stockholder's rights with respect to the Shares tendered by such stockholder and accepted for payment by the Purchaser (and with respect to any and all other Shares or other securities issued or issuable in respect of the Shares on or after August 14, 1997). All such powers of attorney and proxies shall be considered irrevocable and coupled with an interest in the tendered Shares. Such appointment will be effective if, when and only to the extent that, the Purchaser accepts such Shares for payment. Upon such acceptance for payment, all prior powers of attorney and proxies given by the stockholder with respect to the Shares (and such other Shares and securities) will, without further action, be revoked, and no subsequent powers of attorney, proxies or written consents may be given or executed (and if given or executed will not be deemed effective with respect thereto by the stockholder). The Subsidiary, its officers and its designees will, with respect to the Shares (and such other Shares and securities) for which such appointment is effective, be empowered to exercise all voting and other rights of the stockholder as they in their sole discretion may deem proper at any annual or special meeting of the Company's stockholders or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. The 7 10 Subsidiary reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Subsidiary's payment for such Shares, the Subsidiary must be able to exercise full voting rights with respect to such Shares and other securities, including voting at any meeting of stockholders. Backup Federal Income Tax Withholding and Substitute Form W-9. Under the "backup withholding" provisions of federal income tax law, the Depositary may be required to withhold 31% of the amount of any payments of cash pursuant to the Offer. In order to avoid backup withholding, each stockholder surrendering Shares in the Offer to the extent not previously provided must provide the payor of such cash with the stockholder's correct taxpayer identification number ("TIN") on a Substitute Form W-9 and certify under penalties of perjury that such TIN is correct and that the stockholder is not subject to backup withholding. Certain stockholders (including, among others, all corporations and certain foreign individuals and entities) are not subject to backup withholding. If a stockholder does not provide its correct TIN or fails to provide the certifications described above, the Internal Revenue Service ("IRS") may impose a penalty on the stockholder and payment of cash to the stockholder pursuant to the Offer may be subject to backup withholding. All stockholders surrendering Shares pursuant to the Offer should complete and sign the Substitute Form W-9 included in the Letter of Transmittal to provide the information and certification necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to the Depositary). Non-corporate foreign stockholders should complete and sign a Form W-8, Certificate of Foreign Status (a copy of which may be obtained from the Depositary), in order to avoid backup withholding. See Instruction 9 of the Letter of Transmittal. Other Requirements. The Subsidiary's acceptance for payment of Shares tendered pursuant to any of the procedures described above will constitute a binding agreement between the tendering stockholder and the Subsidiary upon the terms and subject to the conditions of the Offer, including the tendering stockholder's representation and warranty that such stockholder is the owner of the Shares within the meaning of, and that the tender of the Shares complies with, Rule 14e-4 under the Exchange Act. SECTION 4. WITHDRAWAL RIGHTS. Tenders of Shares made pursuant to the Offer are irrevocable, except that Shares tendered pursuant to the Offer may be withdrawn at any time on or prior to the Expiration Date and unless already accepted for payment by the Subsidiary pursuant to the Offer, may also be withdrawn at any time after October 20, 1997. If the Subsidiary is delayed in its acceptance for payment of Shares or is unable to purchase Shares validly tendered pursuant to the Offer for any reason, then, without prejudice to the Subsidiary's rights under the Offer, tendered Shares may be retained by the Depositary on behalf of the Subsidiary, and may not be withdrawn except to the extent that tendering stockholders are entitled to withdrawal rights as set forth in this Section 4; subject, however, to the Subsidiary's obligation, pursuant to Rule 14e-1(c) under the Exchange Act, to pay for the tendered Shares or return those Shares promptly after termination or withdrawal of the Offer. Any such delay will be accompanied by an extension of the Offer to the extent required by law. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by the Subsidiary, in its sole discretion, whose determination will be final and binding. None of the Subsidiary, MedPartners, any of their affiliates or assigns, the Depositary, the Information Agent or any other 8 11 person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. Withdrawals of Shares may not be rescinded. Any Shares properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in Section 3. SECTION 5. CERTAIN U.S. FEDERAL INCOME TAX MATTERS. The summary of tax consequences set forth below is for general information only and is based on the law as currently in effect, including modifications made by the Taxpayer Relief Act of 1997. The tax treatment of each stockholder will depend in part upon such stockholder's particular situation. Special tax consequences not described herein may be applicable to particular classes of taxpayers, such as financial institutions, broker-dealers, persons who are not citizens or residents of the United States, stockholders who acquired their Shares through the exercise of an employee stock option or otherwise as compensation and persons who received payments in respect of options to acquire Shares. ALL STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE OFFER AND THE MERGER TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF THE ALTERNATIVE MINIMUM TAX AND ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS AND CHANGES IN SUCH TAX LAWS. The receipt of cash pursuant to the Offer or the Merger will be a taxable transaction for federal income tax purposes under the Internal Revenue Code of 1986, as amended, and may also be a taxable transaction under applicable state, local, foreign income or other tax laws. Generally, a tendering stockholder will recognize gain or loss in an amount equal to the difference between the cash received by the stockholder pursuant to the Offer or the Merger and the stockholder's adjusted tax basis in the Shares tendered and purchased pursuant to the Offer or the Merger. Gain or loss is computed separately for each block of Shares (Shares which were purchased at the same time and price) sold. For federal income tax purposes, such gain or loss will be a capital gain or loss if the Shares are a capital asset in the hands of the stockholder, and a long-term capital gain or loss if the stockholder meets one of the holding periods set forth below as of the date the Subsidiary accepts such Shares for payment pursuant to the Offer or the effective date of the Merger, as the case may be. There are significant limitations on the deductibility of capital losses by individuals or corporations. Capital losses can offset capital gains on a dollar-for-dollar basis and, in the case of an individual stockholder, capital losses in excess of capital gains can be deducted to the extent of $3,000 annually. An individual can carry forward unused capital losses indefinitely. A corporation can utilize capital losses only to offset capital gain income; a corporation's unused capital losses can be carried back three years and forward five years. Pursuant to the Tax Relief Act of 1997, long-term capital gains recognized after July 28, 1997, on marketable securities such as the Shares, will be taxable at a maximum rate of 20% for individuals if the individual's holding period is more than 18 months and 28% if the holding period is more than one year but not more than 18 months, and 35% for corporations. Ordinary income is taxable at a maximum rate of 39.6% for individuals and 35% for corporations. SECTION 6. PRICE RANGE OF THE COMPANY'S COMMON STOCK; DIVIDENDS. Shares of the Company's common stock are traded in the Nasdaq National Market under the symbol "TMMC." At August 18, 1997 there were 77 holders of record. The Company went public through an offering of rights to purchase the common stock. Each such right entitled the holder to purchase one share of Common Stock at a price of $21.50. The rights were traded in the Nasdaq National Market from April 21, 1997 to May 20, 1997. The rights closed at $20.50 on the initial day of trading, reached a high closing price of $20.50 and a low closing sale price of $13.63. Shares of common stock began trading in the Nasdaq National Market on May 21, 1997, and closed at a sale price of $40.94 per share. Based on information provided by the Company, the following table sets forth, for the periods indicated, the high and low closing sale price per share of 9 12 common stock subsequent to the day trading commenced. The sale prices per share of common stock set forth below are as reported in published financial sources and do not include commissions.
HIGH LOW ------ ------ Fiscal Year Ending December 31, 1997: First Quarter(1)............................................ -- -- Second Quarter(1)........................................... $48.00 $40.94 Third Quarter (through August 19, 1997)..................... $62.38 $45.00
- - --------------- (1) The Common Stock was not publicly traded prior to May 21, 1997. The Company has not paid any cash dividends since its formation. On August 13, 1997, the last full day of trading prior to the public announcement of the execution of the Merger Agreement, the reported closing sale price per Share as reported on the Nasdaq National Market was $57.00. On August 18, 1997, two trading days prior to commencement of the Offer, the reported closing sale price per share as reported on the Nasdaq was $62.25. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES. SECTION 7. CERTAIN INFORMATION CONCERNING THE COMPANY. The information concerning the Company contained in this Offer to Purchase, including financial information, has been taken from or based upon publicly available documents and records on file with the Commission and other public services. Neither MedPartners nor the Subsidiary assumes any responsibility for the accurateness or completeness of the information concerning the Company contained in such documents and records or for any failure by the Company to disclose events which may have occurred or may affect the significance or accuracy of any such information but which are unknown to MedPartners or the Subsidiary. General. The Company is a Delaware corporation with its headquarters located at 3540 Howard Way, Costa Mesa, California, 92626. The telephone number of the Company at such offices is (714) 436-4800. The Company, through its wholly-owned physician practice management subsidiary, Talbert Medical Management Corporation ("TMMC"), organizes and manages physician and dental practice groups that contract with health maintenance organizations and other payors to provide health care services to their members. Financial Information. Set forth below is certain selected financial information with respect to the Company and its subsidiaries, excerpted or derived from the information contained in the audited financial statements for the years ended December 31, 1996, 1995 and 1994 contained in the Company's Prospectus (the "Prospectus") dated April 21, 1997, as filed with the Commission under Rule 424(b) under the Securities Act of 1933, as amended, on April 18, 1997, and the unaudited financial statements for the six months ended June 30, 1997 contained in the Company's Quarterly Report on Form 10-Q filed with the Commission on August 12, 1997. 10 13 TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------------------ ENDED 1994 1995 1996 JUNE 30, 1997 -------- -------- -------- ------------- (AUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenue....................................... $455,787 $495,699 $460,546 $206,624 Loss before income tax benefit...................... (27,681) (48,362) (12,066) (19,370) Net loss............................................ (16,332) (28,608) (7,979) (17,647) PER SHARE DATA: Loss per common and common equivalent share(1)...... $ (5.45) $ (9.55) $ (2.66) $ (5.79) BALANCE SHEET DATA: Working capital..................................... $(18,742) $(18,638) $(16,110) $ 30,295 Total assets........................................ 23,087 23,178 86,699 103,370 Long-term obligations............................... -- -- -- -- Stockholders' equity (deficit)...................... (18,113) (17,886) (5,537) 44,433
- - --------------- (1) Loss per common and common equivalent share is computed based on 2,996,104 common equivalent shares for the years ended December 31, 1994, 1995 and 1996, and 3,044,555 common equivalent shares for the six months ended June 30, 1997. Available Information. The Common Stock and associated rights are registered under the Exchange Act. Accordingly, the Company is subject to the information and reporting requirements of the Exchange Act and in accordance therewith is obligated to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Information as of particular dates concerning the Company's directors and officers, their remuneration, stock options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in such proxy statements and distributed to the Company's stockholders and filed with the Commission. These reports, proxy statements and other information should be available for inspection at the public reference facilities of the Commission located in Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be available for inspection and copying at prescribed rates at the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of this material may also be obtained by mail, upon payment of the Commission's customary fees, from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. 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. In addition, such material should also be available for inspection at Talbert Medical Management Holdings Corporation, 3540 Howard Way, Costa Mesa, California, 92626. A copy of this Offer to Purchase, and certain of the agreements referred to herein, are attached to the Subsidiary's Tender Offer Statement on Schedule 14D-1, dated August 20, 1997 (the "Schedule 14D-1"), which has been filed with the Commission. The Schedule 14D-1 and the exhibits thereto, along with such other documents as may be filed by the Subsidiary with the Commission, may be examined and copied from the offices of the Commission in the manner set forth above. SECTION 8. CERTAIN INFORMATION CONCERNING THE SUBSIDIARY AND MEDPARTNERS. General. The Subsidiary, a newly incorporated Delaware corporation and a wholly-owned subsidiary of MedPartners, was organized in connection with the Offer and has not carried on any activities to date other than in connection with the Offer and the Merger Agreement. The principal executive office of the Subsidiary is located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244, and the telephone number at such office is (205) 733-8996. The principal executive office of MedPartners is located at 11 14 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244, and the telephone number at such office is (205) 733-8996. MedPartners. MedPartners is the largest physician practice management ("PPM") company in the United States, based on revenues. MedPartners develops, consolidates and manages comprehensive integrated healthcare delivery systems, consisting of primary care and specialty physicians, as well as the nation's largest group of physicians engaged in the delivery of emergency medicine and other hospital-based services. MedPartners provides services to prepaid managed care enrollees and fee-for-service patients in 34 states through its network of over 12,400 affiliated physicians. As an integral part of the PPM business, MedPartners operates one of the nation's largest independent pharmacy benefit management ("PBM") programs and provides disease management services and therapies for patients with certain chronic conditions. MedPartners affiliates with physicians who are seeking the resources necessary to function effectively in healthcare markets that are evolving from fee-for-service to managed care payor systems. MedPartners enhances clinic operations by centralizing administrative functions and introducing management tolls, such as clinical guidelines, utilization review and outcomes measurement. MedPartners provides affiliated physicians with access to capital and advanced management information systems. In addition, MedPartners contracts with health maintenance organizations and other third-party payors that compensate MedPartners and its affiliated physicians on a prepaid basis (collectively, "HMOs"), as well as hospitals and outside providers on behalf of its affiliated physicians. These relationships provide physicians with the opportunity to operate under a variety of payor arrangements and increase their patient flow. MedPartners also operates the largest hospital-based physician ("HBP") group in the country with over 2,200 physicians providing emergency medicine, radiology, anesthesiology, primary care and other hospital-based physician services. In addition, MedPartners provides comprehensive medical care for inmates at various correctional institutions and for military personnel and their dependents at facilities owned by the Department of Defense. MedPartners manages outpatient prescription drug benefit programs for clients throughout the United States, including corporations, insurance companies, unions, government employee groups and managed care organizations. MedPartners dispenses over 44,000 prescriptions daily through four mail service pharmacies and manages patients' immediate prescription needs through a network of retail pharmacies. MedPartners is in the process of integrating its PBM program with the PPM business by providing pharmaceutical services to affiliated physicians, clinics and HMOs. MedPartners' disease management services are intended to meet the healthcare needs of individuals with chronic diseases or conditions. These services include the design, development and management of comprehensive programs that comprise drug therapies, physician support and patient education. MedPartners currently provides therapies and services for individuals with such conditions as hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis. Financial Information. Set forth below is certain selected consolidated financial information relating to MedPartners and its subsidiaries for MedPartners' last five fiscal years. More comprehensive financial information (including management's discussion and analysis of financial condition and results of operations) is included in the reports and other documents filed by MedPartners with the Commission. The following financial information is qualified in its entirety by reference to such reports and other documents, including the financial statements and related notes contained therein. 12 15 MEDPARTNERS, INC. SELECTED CONSOLIDATED FINANCIAL DATA
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues....................... $1,484,027 $1,980,967 $2,909,024 $3,908,717 $5,222,019 $2,524,407 $3,028,533 Income (loss) from continuing operations....................... 25,351 55,017 63,510 32,189 (76,790) 42,393 46,445 Income (loss) from discontinued operations....................... 5,858 30,808 25,902 (136,528) (68,698) (68,698) (75,434) Net income (loss).................. 31,209 85,825 89,412 (104,339) (145,488) (26,305) (28,989) Income (loss) per share from continuing operations(1)......... 0.24 0.42 0.43 0.20 (0.44) 0.25 0.25 Income (loss) per share from discontinued operations(1)....... 0.05 0.24 0.18 (0.86) (0.39) (0.40) (0.40) Net income (loss) per share(1)..... 0.29 0.66 0.61 (0.66) (0.83) (0.15) (0.15) Number of shares used in net income (loss) per share................. 107,460 130,903 146,773 158,109 174,269 171,889 187,192
DECEMBER 31, --------------------------------------------------------------- JUNE 30, 1992 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Cash and cash equivalents...................... $ 40,249 $ 44,852 $ 101,101 $ 87,581 $ 127,397 $ 134,162 Working capital................................ 158,634 251,736 180,198 286,166 226,409 277,766 Total assets................................... 832,671 1,117,557 1,682,345 1,964,130 2,423,120 2,661,509 Long-term debt, less current portion........... 92,873 177,141 394,811 541,391 715,996 926,524 Total stockholders' equity..................... 395,441 496,455 663,974 674,442 837,408 853,061
- - --------------- (1) Income (loss) per share amounts are computed by dividing income (loss) by the number of common equivalent shares outstanding during the periods presented in accordance with the applicable rules of the Commission. All stock options issued have been considered as outstanding common equivalent shares for all periods presented, even if anti-dilutive, under the treasury stock method. Shares of Common Stock issued in February 1995 upon conversion of the then outstanding convertible preferred stock are assumed to be common equivalent shares for all periods presented. The name, citizenship, business address, principal occupation or employment and five year employment history of each of the directors and executive officers of the Subsidiary and MedPartners are set forth in Schedule I to this Offer to Purchase. None of the Subsidiary, MedPartners nor, to the best knowledge of the Subsidiary and MedPartners, any of the persons listed on Schedule I or any associate or wholly-owned or majority-owned subsidiary of the Subsidiary, MedPartners or any of the persons so listed, beneficially owns or has a right to acquire directly or indirectly any Shares. None of the Subsidiary, MedPartners nor, to the best knowledge of the Subsidiary and MedPartners, any of the persons or entities referred to above, or any of the respective executive officers, directors or subsidiaries of any of the foregoing, has effected any transactions in the Shares during the past sixty (60) days. Except as described in this Offer to Purchase, none of the Subsidiary, MedPartners or, to the best knowledge of the Subsidiary and MedPartners, any of the persons listed on Schedule I, has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including but not limited to contracts, arrangements, understandings or relationships concerning the transfer or voting of such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, none of the Subsidiary, MedPartners or, to the best knowledge of the Subsidiary and MedPartners, any of the persons listed on Schedule I, has had any business relationships or transactions with the Company or any of its executive officers, directors or affiliates that are required to be reported under the rules and 13 16 regulations of the Commission applicable to the Offer. Except as set forth in this Offer to Purchase, there have been no contacts, negotiations or transactions between any of MedPartners, the Subsidiary or, to the best knowledge of the Subsidiary and MedPartners, any of the persons listed on Schedule I, on the one hand, and the Company or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, a tender offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets. Available Information. MedPartners is subject to the information and reporting requirements of the Exchange Act and in accordance therewith is obligated to file certain information with the Commission relating to its business, financial condition and other matters. Information as of particular dates concerning MedPartners' directors and officers, their remuneration, stock options granted to them, the principal holders of MedPartners' securities and any material interests of such persons in transactions with MedPartners is contained in that information. This information may be inspected and copies may be obtained from the offices of the Commission in the same manner as set forth with respect to information about the Company in Section 7. Such information concerning MedPartners can be inspected at the offices of The New York Stock Exchange, 20 Broad Street, New York, New York 10005. SECTION 9. SOURCE AND AMOUNT OF FUNDS. The total amount of funds required by the Subsidiary and MedPartners to consummate the Offer and the Merger (including the cash out of stock options as described in Section 11) and to pay related fees and expenses (approximately $2 million) is estimated to be approximately $200 million. The Subsidiary will obtain all necessary funds through capital contributions or advances to be made by MedPartners. MedPartners has sufficient funds available to it, from cash on hand and from available credit under its existing $1.0 billion credit facility ("Credit Facility") with NationsBank, National Association, as administrative agent to a group of lenders and other sources, to fund fully all of its requirements and the Subsidiary's requirements in connection with the Offer and the Merger. MedPartners may borrow up to an aggregate amount of $1.0 billion under the Credit Facility for general corporate purposes, including transactions contemplated by the Offer. At MedPartners' option, pricing on the Credit Facility is based on either a debt to cash flow test or MedPartners' senior debt ratings. No principal is due on the facility until its maturity date of September 2001. As of June 30, 1997, there was $383 million outstanding under the facility. The Credit Facility contains affirmative and negative covenants which include requirements that MedPartners maintain certain financial ratios (including minimum net worth, minimum fixed charge coverage ratio and maximum indebtedness to cash flow), and establishes certain restrictions on investments, mergers and sales of assets. Additionally, MedPartners is required to obtain bank consent for acquisitions with an aggregate purchase price in excess of $75 million and for which more than half of the consideration is to be paid in cash. The Credit Facility is unsecured but provides a negative pledge on substantially all assets of MedPartners. As of June 30, 1997, MedPartners was in compliance with the covenants in the Credit Facility. MedPartners anticipates that any indebtedness incurred through borrowings under the Credit Facility will be repaid from a variety of sources, which may include, but may not be limited to, funds generated internally by MedPartners and its affiliates (including, following the Merger, funds generated by the Surviving Corporation). No decision has been made concerning the method MedPartners will employ to repay such indebtedness. Such decision will be made based on MedPartners' review from time to time of the advisability of particular actions, as well as on prevailing interest rates and financial and other economic conditions and such other factors as MedPartners may deem appropriate. THE OFFER IS NOT CONDITIONED UPON THE SUBSIDIARY OBTAINING FINANCING. SECTION 10. BACKGROUND OF THE OFFER; CONTACTS WITH THE COMPANY. Background. The Company was separated from FHP International Corporation ("FHP") in May 1997 in conjunction with the merger of FHP and PacifiCare Health Services, Inc. (the "FHP Merger"). In connection with MedPartners ongoing expansion of its PPM business, MedPartners management kept it 14 17 informed as to the progress of the FHP Merger and after the Company became a publicly traded company, developed an interest in a possible combination. On July 11, 1997, Larry R. House, Chairman of the Board and Chief Executive Officer of MedPartners, met with Jack D. Massimino, the Company's President and Chief Executive Officer. Mr. House and Mr. Massimino discussed generally the operations and business strategy of the two companies and the potential desirability of a combination. The pricing phase of their discussion focused on consideration of an all cash tender offer at a substantial premium to the Company's market price. On July 18, 1997 Mark L. Wagar, the President and Chief Operating Officer of MedPartners, and Kent Marquardt, the Chief Operating Officer for West Coast Operations of MedPartners, met with Mr. Massimino and Kenneth S. Ord, the Company's Executive Vice President and Chief Financial Officer. The parties discussed information concerning, among other matters, the Company's medical center locations and certain financial performance information. On July 23, 1997, the Company and MedPartners executed the Confidentiality Agreement. On July 24, 1997, representatives of MedPartners began due diligence at the offices of the Company's outside counsel. On July 25, 1997, Mr. Ord and Walter R. Stone, the Company's Vice President of Finance, met with representatives of MedPartners to discuss the Company's financial performance, and on July 26, 1997, a meeting was held in which members of the senior management of the Company answered questions from representatives of MedPartners. Informational discussions and meetings continued during the week of July 28. On July 29, 1997, Mr. Massimino and Mr. Ord met with Mr. Wagar in person and Michael S. Faulkner, Vice President of Finance, Mergers and Acquisitions, of MedPartners by telephone and discussed the potential terms of a transaction. On August 1, 1997, the Company received a non-binding letter of intent from MedPartners proposing to acquire all outstanding Shares of the Company for $63.00 per share, subject to legal and financial due diligence. On August 5, 1997, at a special meeting of the Company's Board of Directors, the directors reviewed the letter from MedPartners and reviewed with Smith Barney, the Company's financial advisor, certain matters relating to the financial aspects of the proposal from MedPartners. The Board authorized the Company's management to pursue a definitive agreement with MedPartners to present to the Board. From August 5, 1997 until August 13, 1997, due diligence continued and members of the Company's management met with MedPartners' representatives to answer questions and explain material documents. On August 4, 1997, MedPartners provided the Company and its counsel with a draft form of the Merger Agreement. Between August 8, 1997 and August 13, 1997, the Company's counsel had a series of meetings with J. Brooke Johnston, Jr., Senior Vice President and General Counsel of the Parent, to negotiate the terms of a definitive agreement. On August 12, the Company's Board of Directors met to hear reports from the management and outside counsel concerning the status of discussions with MedPartners. Counsel for MedPartners and the Company concluded negotiating the definitive agreements on August 13, 1997. That evening at a special meeting of the Board of Directors of the Company, the Board of Directors approved the Offer and the Merger by unanimous vote of the directors present. The parties executed the Merger Agreement and announced such execution prior to the opening of securities market trading on August 14, 1997. To the extent any of the foregoing background describes events to which MedPartners was not a party, it is based upon information provided by the Company. 15 18 SECTION 11. PURPOSE OF THE OFFER; MERGER AGREEMENT; PLANS FOR THE COMPANY. Purpose of the Offer. The purpose of the Offer, the Merger and the Merger Agreement is to enable MedPartners to acquire control of the entire equity interest of the Company. Upon consummation of the Merger, the Company will become a wholly-owned subsidiary of MedPartners. The Offer is being made pursuant to the Merger Agreement. Merger Agreement. The following is a summary of certain provisions of the Merger Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is incorporated herein by reference and a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1. In particular, when the term material adverse effect is used herein it has the meaning as defined in the Merger Agreement. The Merger Agreement may be examined and copies may be obtained at the place and in the manner set forth in Section 7 of this Offer to Purchase. The Offer. The Merger Agreement provides that the Subsidiary will commence the Offer not later than the fifth business day from the public announcement of the execution of the Merger Agreement. The obligation of the Subsidiary to commence the Offer and pay for any Shares tendered is subject to certain conditions. See "-- Conditions to the Offer." The Merger Agreement provides that the Subsidiary may in its sole discretion modify the terms and conditions of the Offer, or waive certain conditions to the Offer. However, without the Company's prior written consent, the Subsidiary cannot reduce the per Share amount, change the form of consideration payable in the Offer, reduce the number of Shares subject to the Offer, allow the Offer to expire before September 19, 1997, add to or modify the conditions to the Offer set forth in the Merger Agreement, or make any other modifications that are otherwise materially adverse to the holders of Shares. The Subsidiary may, without the consent of the Company, extend the term of the Offer on one or more occasions beyond the scheduled expiration date if any of the conditions to the Subsidiary's obligation to consummate the Offer have not been satisfied or waived by that date, provided that the Subsidiary may not extend the Offer for a total of more than 60 days from the commencement of the Offer. The Subsidiary may also extend the Offer for a period not to exceed ten business days, notwithstanding that all conditions to the Offer are satisfied as of that date, if the number of Shares tendered at that date equal more than 75% but less than 90% of the outstanding Shares. The Minimum Condition. One of the conditions to the Offer is that there must be validly tendered and not withdrawn at least 51% (determined on a fully diluted basis) of the outstanding Shares (the "Minimum Condition"). The Company has informed the Subsidiary that, as of August 14, 1997, there were 3,000,758 Shares issued and outstanding, of which 174,252 shares of Common Stock were reserved for future issuance pursuant to outstanding stock options, and that, except as otherwise disclosed in the Merger Agreement, no other stock of the Company is outstanding or committed to be issued. Based on this information and assuming all outstanding options to purchase shares of Common Stock will have been accelerated so as to be fully exercisable prior to the consummation of the Offer, the Subsidiary believes that the Minimum Condition will be satisfied if the Subsidiary acquires at least 1,619,256 Shares in the Offer. MedPartners does not directly or indirectly hold any Shares. 16 19 Conditions to the Offer. The Subsidiary is not required to accept for payment or (subject to any applicable rules and regulations of the Commission) to pay for Shares tendered pursuant to the Offer unless (i) the Minimum Condition is satisfied, and (ii) any applicable waiting period under the HSR Act has expired or been terminated. In addition, the Subsidiary is not obligated to consummate the Offer if, at any time on or after the date of the Merger Agreement and before the acceptance of Shares for payment, any of the following events has occurred (other than as a result of the action or inaction of MedPartners or any of its subsidiaries that constitutes a breach of the Merger Agreement): (a) any order, injunction, judgment or ruling in any legal proceeding is entered that (i) makes illegal or otherwise restrains or prohibits the acquisition by MedPartners or the Subsidiary of any Shares under the Offer or the making or consummation of the Offer or the Merger, the performance by the Company of any of its obligations under the Merger Agreement or the consummation of any purchase of Shares contemplated thereunder, (ii) prohibits or limits the ownership or operation by the Company, MedPartners or any of their respective subsidiaries of a material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or MedPartners and its subsidiaries, taken as a whole, or compels the Company or MedPartners to dispose of or hold separate any material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or MedPartners and its subsidiaries, taken as a whole, as a result of the Offer or the Merger, (iii) imposes material limitations on the ability of MedPartners or the Subsidiary to acquire or hold, or exercise full rights of ownership of, any Shares accepted for payment pursuant to the Offer including, without limitation, the right to vote such Shares on all matters properly presented to the stockholders of the Company or (iv) prohibits MedPartners or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company and its subsidiaries, taken as a whole; or (b) any law is enacted, entered, enforced or deemed applicable to the Offer or the Merger, or any other action is taken by any governmental entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that results in any of the consequences referred to in paragraph (a) above; or (c) any material adverse change to the Company occurs; or (d) (i) the Board of Directors of the Company or any committee thereof withdraws or modifies in a manner adverse to MedPartners or the Subsidiary its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approves or recommends any other acquisition proposal or (ii) the Company enters into any agreement to consummate any acquisition proposal; or (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality are not true and correct or any such representations and warranties that are not so qualified are not true and correct in any respect that is reasonably likely to have a material adverse effect, in each case at the date of the Merger Agreement and at the scheduled expiration of the Offer; or (f) the Company fails to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Merger Agreement; or (g) there has occurred and continues for three business days (i) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange (excluding any coordinated trading halt triggered solely as a result of a specified decrease in a market index), (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) commencement of a war or armed hostilities or other national or international calamity involving the United States which is reasonably expected to have a material adverse effect or to materially adversely affect the Parent's or the Subsidiary's ability to complete the Offer or the Merger or materially delay the consummation of the Offer, the Merger or both or (iv) in case of any of the foregoing existing on the date of the Merger Agreement, material acceleration or worsening thereof occurs and continues to exist for at least three business days; or 17 20 (h) the Merger Agreement terminates in accordance with its terms. For purposes of the Merger Agreement, "material adverse change" or "material adverse effect" means with reference to a party any change, effect, event or occurrence that has or is reasonably likely to have a material adverse impact on the business or financial position of such party and its subsidiaries and other controlled entities, taken as a whole. However, the meaning of "material adverse change" or "material adverse effect" excludes (i) changes in generally accepted accounting principles, (ii) changes in applicable law, (iii) changes or effects of any kind that impact the party's industry generally, or, as to the Company, Southern California, (iv) changes in Medicare reimbursement rates, (v) changes or effects arising from the announcement of the Merger Agreement or from any party's performance under the Merger Agreement, and (vi) any changes resulting from any restructuring or other similar charges or write-offs taken by the Company with the consent of MedPartners. The Merger. The Merger Agreement provides that, subject to the terms and conditions thereof, and in accordance with the DGCL, the Subsidiary will be merged with and into the Company not later than the second business day after the satisfaction or waiver of the conditions set forth in the Merger Agreement. The Merger will become effective upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware (the "Effective Time"). As a result of the Merger, the separate corporate existence of the Subsidiary will cease, and the Company will continue as the surviving corporation (the "Surviving Corporation"). In the Merger, each issued and outstanding Share (other than Shares owned directly or indirectly by MedPartners or any of its subsidiaries or by the Company as treasury stock, and other than Shares owned by stockholders who have properly exercised rights of appraisal under the DGCL) will be converted into the right to receive $63.00 per Share, without interest, and each issued and outstanding share of common stock of the Subsidiary will be converted into one fully paid and nonassessable shares of common stock of the Surviving Corporation (which will constitute the only issued and outstanding capital stock of the Surviving Corporation). The Merger Agreement provides that the Certificate of Incorporation and By-laws of the Subsidiary at the Effective Time will be the certificate of incorporation and by-laws of the Surviving Corporation until amended in accordance with applicable law. The Merger Agreement also provides that the directors and officers of the Subsidiary at the Effective Time will be the directors and officers of the Surviving Corporation. The Company's Board of Directors. The Merger Agreement provides that promptly upon the purchase of Shares by the Subsidiary pursuant to the Offer, seven of the Company's nine directors will resign, and MedPartners will designate three replacements for appointment or election to the Company's Board of Directors. The Company will, upon request of the Subsidiary, use its best efforts promptly to cause MedPartners' designees to be so appointed or elected. The remaining two directors (and any successors appointed or elected before the Effective Time) are referred to as the "Original Directors." Once MedPartners' designees constitute a majority of the Company's Board of Directors, any amendment of the Merger Agreement, any termination of the Merger Agreement by the Company, any extension of time for performance of any of the obligations of MedPartners or the Subsidiary thereunder, any waiver of any condition or any of the Company's rights thereunder or other action by the Company thereunder may be effected only by the joint action of the Original Directors. In connection with the appointment of MedPartners' designees to the Board of Directors, the Company has agreed to comply with Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. Rights Agreement. Pursuant to the Merger Agreement, the Rights Agreement was amended so that the Rights will not be distributed and do not become exercisable as a consequence of the execution, announcement or consummation of the transactions contemplated by the Merger Agreement. Recommendation. In the Merger Agreement, the Company states that its Board of Directors has, by unanimous vote of those present, (i) determined that the Offer and the Merger are fair to and in the best interests of the stockholders of the Company and (ii) resolved to recommend acceptance of the Offer and approval and adoption of the Merger Agreement and the Merger by the stockholders of the Company. 18 21 Interim Operations. In the Merger Agreement, the Company has agreed to use its commercially reasonable best efforts to preserve the business organization of the Company intact, to keep available the services of the present employees of the Company, and to preserve the goodwill of the suppliers, customers and others having business relations with the Company. In addition, other than as contemplated by the Merger Agreement and the related documents (including the schedules thereto) or without the prior written consent of MedPartners, which consent will not be unreasonably withheld, each of the Company and its subsidiaries will not (other than in the ordinary course of business and consistent with past practice or with respect to binding commitments entered into before the date of the Merger Agreement): (a) Encumber any material asset or enter into any material transactions or make any material contract or commitment relating to the properties, assets and business of the Company. (b) Enter into any employment contract which is not terminable upon notice of 30 days or less, at will, and without penalty to the Company. (c) Enter into any contract or agreement (i) which cannot be performed within three months or less, or (ii) which involves the expenditure of over $100,000. (d) Make any payment or distribution to the trustee under any bonus, pension, profit-sharing or retirement plan or incur any obligation to make any such payment or contribution which is not in accordance with the Company's usual past practice, or, except as required pursuant to the Employee Benefits and Compensation Allocation Agreement dated as of February 14, 1997 between the Company and FHP, make any payment or contributions or incur any obligation pursuant to or in respect of any other plan or contract or arrangement providing for bonuses, executive incentive compensation, pensions, deferred compensation, retirement payments, profit-sharing or the like, establish or enter into any such plan, contract or arrangement, or terminate any plan. (e) Extend credit to anyone. (f) Guarantee the obligation of any person, firm or corporation. (g) Amend its Certificate of Incorporation or By-laws. (h) Discharge or satisfy any material lien or encumbrance, or pay or satisfy any material obligation or liability (absolute, accrued, contingent or otherwise) other than (i) liabilities shown or reflected on the unaudited balance sheet dated June 30, 1997 included in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (the "Company Balance Sheet") or (ii) liabilities incurred or due since the date of the Company Balance Sheet in the ordinary course of business, which discharge or satisfaction would have a material adverse effect on the Company. (i) Increase or establish any reserve for taxes or any other liability on its books or otherwise provided therefor which would have a material adverse effect on the Company, except as may have been required due to income or operations of the Company since the date of the Company Balance Sheet. (j) Mortgage, pledge or subject to any material lien, charge or other encumbrance any of the assets, tangible or intangible, which assets are material to the business or financial condition of the Company. (k) Sell or transfer any of the assets material to the consolidated business of the Company, cancel any material debts owed to the Company or claims reflected as assets on the Company Balance Sheet, or waive any material rights, except in the ordinary course of business. (l) Grant any general or uniform increase in the rates of pay of employees or any material increase in salary payable or to become payable by the Company to any officer or employee, consultant or agent (other than normal increases consistent with past practices), or by means of any bonus or pension plan, contract or other commitment, increased in a material respect the compensation of any officer, employee, consultant or agent. 19 22 (m) Except for the Merger Agreement and any other agreement executed and delivered pursuant to the Merger Agreement, enter into any material transaction other than in the ordinary course of business or permitted under other sections of the Merger Agreement. (n) Issue any stock (other than pursuant to the Stock Incentive Plans, as defined in the Merger Agreement), bonds or other securities or any options or rights to purchase any of its securities. No Solicitation. In the Merger Agreement, the Company has agreed not to directly or indirectly furnish information and access, in response to unsolicited requests, to any third party, participate in discussions and negotiate with such third party concerning any proposal to acquire such party upon a merger, purchase of assets, purchase of or tender offer for shares of its Common Stock or similar transaction (an "Acquisition Transaction"). However, if prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors, after receiving advice from outside legal counsel to the Company, determines that a failure to act would be inconsistent with its fiduciary duties to the Company's stockholders under applicable law, the Company may (i) furnish information about and access to the Company to any third party in response to an unsolicited request pursuant to a confidentiality agreement with terms and conditions similar to the Confidentiality Agreement (as defined below), (ii) participate in discussions and negotiations regarding any potential Acquisition Transaction, and/or (iii) terminate the Merger Agreement. The Company will notify the Parent of any unsolicited request for information and access in connection with a possible Acquisition Transaction involving a third party, which notification will include the identity of the third party and the proposed material terms of the possible Acquisition Transaction. Directors' and Officers' Insurance; Indemnification. For a period of four years after the Effective Time, MedPartners has agreed to cause the Surviving Corporation to maintain in effect directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy on terms (including coverage amounts) comparable to those now applicable under the current Company policy, subject to certain prescribed limits on premiums. The Merger Agreement provides that all rights to indemnification for acts and omissions occurring prior to the Effective Time existing as of the date of the Merger Agreement in favor of the current or former directors, officers, employees and agents (the "Indemnified Parties") of the Company and its subsidiaries as provided in their respective certificates of incorporation and bylaws (or similar organizational documents) will survive the Merger and continue for at least six years after the Effective Time. Additionally, for not less than six years after the Effective Time, MedPartners will, and will cause the Subsidiary to, (i) indemnify and hold harmless the Indemnified Parties to the full extent they may be indemnified by applicable law, their respective certificates of incorporation or by-laws (or similar organizational documents) or pursuant to indemnification agreements in effect as of the date of the Merger Agreement for acts or omissions occurring prior to the Effective Time, and (ii) advance litigation expenses incurred by the Indemnified Parties in connection with defending any action arising out of such acts or omissions to the extent permitted by law or as otherwise provided by such certificates of incorporation, by-laws, similar organizational documents or indemnification agreements. Share Repurchase. The Merger Agreement provides that, after the consummation of the Offer but before the consummation of the Merger, the Company will repurchase, from any current or former director or officer of the Company who is terminated during such period, all Shares held by any such individual who desires to sell such Shares. Stock Incentive Plan. The Merger Agreement provides that the Company will take all actions to provide that each outstanding stock option to purchase shares of Common Stock (an "Option") under the Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan (the "Stock Incentive Plan") will be accelerated so as to be fully exercisable on or prior to the consummation of the Offer. Options (other than Options granted under Article 7 of the Stock Incentive Plan) therefore may be exercised, and the corresponding Common Stock tendered pursuant to this Offer, except to the extent that such tender could result in short-swing profit liability under Section 16(b) of the Exchange Act. Options granted under Article 7 of the Stock Incentive Plan (other than Options granted within six months of the termination of such Option) will be fully exercisable upon consummation of the Offer and prior to any of the resignations of the current 20 23 directors of the Company pursuant to the Merger Agreement. With respect to each Option that remains outstanding immediately after the consummation of the Offer, the Company, immediately after the consummation of the Offer, but prior to any termination or resignation of the holder of such Option pursuant to the Merger Agreement will pay to each such holder in connection with the surrender and termination or settlement of such Options an amount in cash equal to the product of (x) the number of shares of Common Stock then subject to the Option multiplied by (y) the excess of the per Share amount over the per share exercise price of the Option, less all applicable tax withholding. The Stock Incentive Plan will terminate as of the Effective Time. Management Incentive Program. In March 1997, the Company implemented an executive bonus program (the "Management Incentive Program") for the year ending December 31, 1997. Bonuses to participants are based on the achievement of budgeted objectives and improvements to the quality of services provided to members. Pursuant to the Merger Agreement and a letter agreement dated August 14, 1997 among MedPartners, the Subsidiary and the Company, MedPartners will cause the Company and the Surviving Corporation to pay at the time of the consummation of the Offer to each corporate-level employee currently participating in the Company's Management Incentive Program cash awards equivalent to the award that would have been received by the participants in such program if calculated as of June 30, 1997. A copy of such letter agreement is filed as Exhibit 6 to the Company's Schedule 14D-9 and incorporated herein by reference. Transition Bonus. Certain employees of the Company who do not participate in the Company's Management Incentive Program will receive cash bonuses in the amounts agreed to between the Company and MedPartners in another letter agreement dated August 14, 1997. A copy of such letter agreement is filed as Exhibit 7 to the Company's Schedule 14D-9 and incorporated herein by reference. The bonuses will be paid from a $923,000 contribution from MedPartners. The purpose of these cash bonuses is to reward such employees for remaining with the Company in order to facilitate the transactions contemplated by the Merger Agreement. The bonuses will be paid on January 1, 1998 to the listed employees who are then employed by the Surviving Corporation or any of its affiliates. If any listed employee is terminated before January 1, 1998 other than for cause, the employee will be paid the designated amount on the effective date of termination. Other Provisions Relating to Employee Benefits. The Merger Agreement provides that all service credited to each employee by the Company through the Effective Time will be recognized by MedPartners for all purposes, including eligibility, vesting and benefit accruals, under any employee benefit plan provided by MedPartners or the Surviving Corporation for the benefit of the employees. MedPartners further agrees not to take any action, or fail to take any action, that would cause the Surviving Corporation not to honor (without modification) and assume the employment agreements, executive termination agreements and individual benefit arrangements of the Company. Physician Warrant Agreements. In connection with the Merger, MedPartners has agreed to enter into nontransferable warrant agreements (the "Physician Warrant Agreements") with certain physicians (the "Physicians") who are employed by the medical groups managed by Talbert Medical Management Corporation ("TMMC"), a wholly-owned subsidiary of the Company. Each Physician Warrant Agreement provides that MedPartners will grant to the Physician party to such agreement warrants with respect to an aggregate of 2,000 shares of the common stock, par value $.001 per share, of MedPartners (the "Warrants"). Each Warrant entitles the Physician to purchase one share of MedPartners' common stock. The exercise price of the Warrants will be the average closing price of MedPartners' common stock for the ten trading days preceding the date which is two days before the Effective Time. A copy of the form of the Physician Warrant Agreement is filed as Exhibit 8 to the Company's Schedule 14D-9 and incorporated herein by reference. 21 24 Conditions to the Merger. The Merger Agreement provides that the respective obligations of the Company, MedPartners and the Subsidiary to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions (any of which may be waived in writing by MedPartners, the Purchaser and the Company, to the extent permitted by applicable law): (i) None of MedPartners, the Subsidiary or the Company nor any of their respective subsidiaries will be subject to any order, decree or injunction by a United States federal or state court of competent jurisdiction which prevents the consummation of the Merger. (ii) No statute, rule or regulation will have been enacted or promulgated by the government or any governmental agency of the United States or any state that prohibits the consummation of the Merger. (iii) The Subsidiary will have purchased and paid for the Shares pursuant to the Offer. (iv) Any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act will have expired or been terminated. (v) If required by law, the holders of shares of the Company's Common Stock will have approved the adoption of the Merger Agreement. Representations and Warranties. In the Merger Agreement, the Company has made customary representations and warranties to the Parent and the Subsidiary with respect to, among other things, its organization, good standing, capitalization, ownership of subsidiaries, foreign qualification, corporate power, Commission reports and financial information, contracts, properties, legal proceedings, events since June 30, 1997, accounts receivable, tax matters, employee benefit plans, compliance with laws, regulatory approvals, and commissions and fees. MedPartners and the Subsidiary have made customary representations and warranties to the Company with respect to, among other things, organization, good standing, corporate power, brokers, legal proceedings, available funds, other transactions, and ownership of Shares. Employment Agreements. The Company has entered into Change in Control Employment Agreements with Jack D. Massimino, Kenneth S. Ord, Gloria L. Austin, Becky J. Behlendorf, Jennifer M. Gutzmore, Regina B. Lightner, Peter W. McKinley, Russell D. Phillips, Jr. and Walter R. Stone (the "Employment Agreements"). In connection with the Merger, MedPartners has agreed to amend the Employment Agreements (i) to remove certain contingent provisions relating to the vesting of stock options which could have caused the vesting of a portion of the executive's outstanding stock options to be deferred under certain conditions and (ii) to revise the consideration that would be forfeited in the event the executive does not enter into an agreed form of non-compete covenant and settlement agreement. In addition, the Employment Agreements with Mr. Massimino and Ms. Austin will be further amended by adding certain contingent provisions relating to taxes, which provisions could result in certain payments by MedPartners of certain additional amounts to Mr. Massimino and Ms. Austin not to exceed $4,000,000. Termination; Fees. The Merger Agreement may be terminated at any time prior to the purchase of Shares pursuant to the Offer (i) by mutual written consent of the Company, the Subsidiary and MedPartners; (ii) by either MedPartners or the Company if a court of competent jurisdiction or governmental entity issues a nonappealable final order, decree or ruling or takes any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the Offer (or acceptance of or payment for Shares) or the Merger (provided that the party seeking to terminate the Merger Agreement has used all reasonable efforts to remove the order, decree or ruling or the taking of such action); (iii) by either MedPartners or the Company if, before the purchase of Company Shares in the Offer, there is, or is discovered, a material breach by the other party of any representation, warranty, covenant or other agreement contained in the Merger Agreement that cannot be or has not been cured within 10 days after the occurrence or discovery of such breach by the breaching party, whichever is later (a "Material Breach") (provided that the terminating party is not then in Material Breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement); (iv) by the Company if MedPartners and the Subsidiary fail to commence the Offer in accordance with the Merger Agreement, or if the Offer expires without the purchase of Shares pursuant to the Offer; or (v) by the Company in response to a proposal from a third party for an Acquisition Transaction. 22 25 If the Company terminates the Merger Agreement in response to a proposal from a third party for an Acquisition Transaction, the Company will pay to MedPartners, in immediately available funds, the sum of $8 million and will promptly reimburse upon demand (up to a maximum amount of $2 million) all documented out-of-pocket expenses incurred by MedPartners and the Subsidiary in connection with the transactions contemplated by the Merger Agreement. In the event Shares are not purchased pursuant to the Offer, MedPartners will pay to the Company, in immediately available funds, the sum of $8 million and will promptly reimburse upon demand therefore (up to a maximum amount of $2 million) all documented out-of-pocket expenses incurred by the Company in connection with the transactions contemplated by the Merger Agreement, unless such failure to purchase Shares is attributable solely to (i) a court or other governmental entity issuing an order or taking any other action permanently enjoining, restraining or otherwise prohibiting the Offer or the Merger, which order has become final and nonappealable (provided that the order or action is not the result of any action or inaction by MedPartners or the Subsidiary that constitutes a breach of the Merger Agreement and the party seeking to terminate the Merger Agreement has used all reasonable efforts to remove the order or other action), (ii) MedPartners' valid termination of the Merger Agreement by reason of the Company's breach of a representation, warranty, covenant or agreement set forth in the Merger Agreement, or (iii) a failure of a condition set forth in the Merger Agreement by reason of any act, event or circumstance that is beyond the control of MedPartners and the Subsidiary. All other costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring the expense. Plans for the Company. MedPartners intends, upon acquiring control of the Company, to continue to focus on the development of a national integrated health care delivery system and continue to grow the markets in which the Company already operates. SECTION 12. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES, EXCHANGE ACT REGISTRATION AND MARGIN REGULATIONS. Depending upon the aggregate market value and per Share price of any Shares not purchased pursuant to the Offer, following the Offer the common stock may no longer meet the standards for continued listing on the Nasdaq National Market, which requires an issuer to have at least 100,000 publicly held shares with an aggregate market value of at least $5,000,000. common stock held by directors and officers (or their immediate families) of the Company and other concentrated holdings of 10% or more of the common stock outstanding generally will not be considered to be publicly held for the purpose of the foregoing standards. In the event that the common stock were no longer quoted on the Nasdaq National Market, it is possible that the common stock could continue to trade in the over-the-counter market and that quotations would continue to be reported through other sources. The extent of the public market for the common stock and the availability of such quotations would, however, depend upon the number of stockholders remaining at such time, the interest in maintaining a market in the common stock on the part of securities firms, the possible termination of registration of the common stock under the Exchange Act, as described below, and other factors. The Shares are currently registered under the Exchange Act. Such registration of the Shares may be terminated upon application of the Company to the Commission if the Shares are not listed on a national securities exchange or quoted on Nasdaq National Market and there are fewer than 300 holders of record of the Shares. Deregistration of the Shares under the Exchange Act would reduce substantially the information required to be furnished by the Company to holders of Shares and to the Commission and would render inapplicable certain of the provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of Section 14(a) that the Company furnish stockholders with proxy materials in connection with stockholders' meetings and the requirements of Rule 13e-3 promulgated under the Exchange Act with respect to "going private" transactions. Furthermore, "affiliates" of the Company and persons holding "restricted securities" of the Company might be deprived of the ability to dispose of Shares pursuant to Rule 144 or Rule 144A promulgated under the Securities Act of 1933, as amended (the "Securities Act"). If registration of the Shares under the Exchange Act were terminated, the Shares would no longer be "margin securities." It is the current intention of MedPartners to cause the Company to deregister the Shares after the consummation of the Offer if the requirements for termination of registration are met. 23 26 The Shares currently are "margin securities" under the rules of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of the Shares. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that following the Offer, the Shares would cease to constitute "margin securities" for the purpose of the Federal Reserve Board's margin regulations and, therefore, could no longer be used as collateral for margin loans made by brokers. SECTION 13. CERTAIN CONDITIONS TO THE OFFER. The Subsidiary is not required to accept for payment or (subject to any applicable rules and regulations of the Commission) to pay for any Shares tendered pursuant to the Offer unless (i) the Minimum Condition has been satisfied, and (ii) any applicable waiting period under the HSR Act at any time prior to the Expiration Date, has not expired or been terminated. In addition, the Subsidiary is not obligated to consummate the Offer if, at any time on or after August 14, 1997 and before the acceptance of Shares for payment, any of the following events has occurred (other than as a result of any action or inaction of MedPartners or any of its subsidiaries which constitutes a breach of the Merger Agreement): (a) any order, injunction, judgment or ruling in any legal proceeding that (i) makes illegal or otherwise directly or indirectly restrains or prohibits the acquisition by MedPartners or the Subsidiary of any Shares under the Offer or the making or consummation of the Offer or the Merger, the performance by the Company of any of its obligations under the Merger Agreement or the consummation of any purchase of Shares contemplated thereunder, (ii) prohibits or limits the ownership or operation by the Company, MedPartners or any of their respective subsidiaries of a material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or MedPartners and its subsidiaries, taken as a whole, or compels the Company or MedPartners to dispose of or hold separate any material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or MedPartners and its subsidiaries, taken as a whole, as a result of the Offer or the Merger, (iii) imposes material limitations on the ability of MedPartners or the Subsidiary to acquire or hold, or exercise full rights of ownership of, any Shares accepted for payment pursuant to the Offer including, without limitation, the right to vote such Shares on all matters properly presented to the stockholders of the Company or (iv) prohibits MedPartners or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company and its subsidiaries, taken as a whole; or (b) any law is enacted, entered, enforced or deemed applicable to the Offer or the Merger, or any other action is taken by any governmental entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that results, in any of the consequences referred to in paragraph (a) above; or (c) any material adverse change to the Company occurs; or (d) (i) the Board of Directors of the Company or any committee thereof withdraws or modifies in a manner adverse to MedPartners or the Subsidiary its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approves or recommends any other acquisition proposal or (ii) the Company enters into any agreement to consummate any acquisition proposal; or (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified as to materiality are not true and correct or any such representations and warranties that are not so qualified are not true and correct in any respect that is reasonably likely to have a material adverse effect, in each case at the date of the Agreement and at the scheduled expiration of the Offer; or (f) the Company fails to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Merger Agreement; or (g) there has occurred and continues to exist for at least three business days (i) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange (excluding any coordinated trading halt triggered solely as a result of a specified decrease in a market index), (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in 24 27 the United States, (iii) commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States which in any case is reasonably expected to have a material adverse effect or to materially adversely affect MedPartners' or the Subsidiary's ability to complete the Offer or the Merger or materially delay the consummation of the Offer, the Merger or both or (iv) in case of any of the foregoing existing on the date of the Merger Agreement, material acceleration or worsening thereof; or (h) the Merger Agreement terminates in accordance with its terms. For purposes of the Offer and the Merger Agreement, "material adverse change" or "material adverse effect" means with reference to a party any change, effect, event or occurrence that has or is reasonably likely to have a material adverse impact on the business or financial position of such party and its subsidiaries and other controlled entities, taken as a whole. However, the meaning of "material adverse change" or "material adverse effect" excludes changes in generally accepted accounting principles, (ii) changes in applicable law, (iii) changes in effects of any kind that impact the party's industry generally, or, as to the Company, Southern California, (iv) changes in Medicare reimbursement rates, (v) changes or effects arising from the announcement of the Merger Agreement or from any party's performance under the Merger Agreement, and (iv) any charges resulting from any restructuring or other similar charges or write-offs taken by the Company with the consent of MedPartners. The foregoing conditions are for the sole benefit of MedPartners or may, subject to the terms of the Merger Agreement, be waived by the Subsidiary and MedPartners in whole or in part at any time and from time to time in their sole discretion. The failure by MedPartners at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. The Offer is not subject to obtaining any consents from third parties. A public announcement will be made of a material change in, or waiver of, such conditions to the extent required by Rules 14d-4(c) and 14d-6(d) under the Exchange Act, and the Offer will be extended in connection with any such change or waiver to the extent required by such rules. SECTION 14. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS. General. Except as otherwise disclosed herein, based upon an examination of publicly available information filed by the Company with the Commission, neither the Subsidiary nor MedPartners is aware of (i) any license or other regulatory permit that appears to be material to the business of the Company and its subsidiaries, taken as a whole, that might be adversely affected by the Subsidiary's acquisition of Shares (and the indirect acquisition of the stock of the Company's subsidiaries) pursuant to the Offer or the Merger, or (ii) any filings, approvals or other actions by or with any domestic (federal or state), foreign or supranational governmental authority or administrative or regulatory agency that would be required prior to the acquisition of Shares (or the indirect acquisition of the stock of the Company's subsidiaries) by the Subsidiary as contemplated herein. Should any such approval or other action be required, it is the Subsidiary's present intention to seek such approval or action. However, the Subsidiary does not presently intend to delay the purchase of Shares tendered pursuant to the Offer pending the receipt of any such approval or the taking of any such action (subject to the Subsidiary's right to delay or decline to purchase Shares if any of the conditions in Section 13 has occurred). There can be no assurance that any such approval or other action, if needed, would be obtained without substantial conditions or that adverse consequences might not result to the business of the Company, MedPartners or the Subsidiary or that certain parts of the businesses of the Company, MedPartners or the Subsidiary might not have to be disposed of or held separate or other substantial conditions complied with in order to obtain such approval or other action or, in the event that such approval was not obtained or such other action was not taken, any of which could cause the Subsidiary to elect to terminate the Offer without the purchase of the Shares thereunder. The Subsidiary's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions, including conditions relating to the legal matters discussed in this Section 14. See Section 13. 25 28 State Takeover Laws. The Company is incorporated under the laws of the State of Delaware. In general, Section 203 of the DGCL prevents an "interested stockholder" (generally a person who owns or has the right to acquire 15% or more of a corporation's outstanding voting stock, or an affiliate or associate thereof) from engaging in a "business combination" (defined to include mergers and certain other transactions) with a Delaware corporation for a period of three (3) years following the date such person became an interested stockholder unless, among other things, prior to such date the board of directors of the corporation approved either the business combination or the transaction in which the interested stockholder became an interested stockholder. In connection with the review of the proposed transaction, the Company's Board of Directors prior to the execution of the Merger Agreement (i) by unanimous vote of those present approved the Offer and the Merger and (ii) determined that the terms of the Offer and the Merger including the Offer price of $63.00 per Share in cash, are in the best interest of, the stockholders of the Company, and (iii) recommended that the stockholders of the Company accept the Offer and tender their Shares pursuant to the Offer. Accordingly, the Subsidiary and MedPartners believe that Section 203 of the DGCL is inapplicable to the Merger Agreement, the Offer and the Merger because its provisions have been satisfied. A number of other states have also adopted takeover laws and regulations which purport to varying degrees to be applicable to attempts to acquire securities of corporations which are incorporated in such states or which have or whose business operations have substantial economic effects in such states, or which have substantial assets, security holders, principal executive offices or principal places of business therein. To the extent that certain provisions of certain of these state takeover statutes purport to apply to the Offer, the Subsidiary believes that such laws conflict with federal law and constitute an unconstitutional burden on interstate commerce. In 1982, the Supreme Court of the United States, in Edgar v. MITE Corp., invalidated on constitutional grounds the Illinois Business Takeovers Act, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the Supreme Court of the United States held that the State of Indiana could, as a matter of corporate law and in particular those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining stockholders, provided that such laws were applicable only under certain conditions. Subsequently, a number of federal courts have ruled that various state takeover statutes were unconstitutional insofar as they apply to corporations incorporated outside the state of enactment. The Company, directly or through subsidiaries, conducts business in a number of states throughout the United States, some of which have enacted takeover laws. The Subsidiary does not know whether any of these laws will, by their terms, apply to the Offer or the Merger and has not taken any action to comply with any such laws. Should any person seek to apply any state takeover law, the Subsidiary will take reasonable efforts to resist such application, which may include challenging the validity or applicability of any such statute in appropriate court proceedings. In the event it is asserted that one or more state takeover laws is applicable to the Offer or the Merger, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer, the Subsidiary might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, the Subsidiary might be unable to accept for payment or pay for any Shares tendered pursuant to the Offer or be delayed in continuing or consummating the Offer and the Merger. In such case, the Subsidiary may not be obligated to accept for payment, or pay for, any Shares tendered. See Section 13. Short-Form Merger. The DGCL would permit the Merger to occur without a vote of the Company's stockholders (a "short-form merger") if the Purchaser were to acquire at least 90% of the outstanding Shares. If, however, the purchase does not acquire at least 90% of the then outstanding Shares pursuant to the Offer or otherwise, and a vote of the Company's stockholders is required under the DGCL, a longer period of time will be required to effect the Merger. Appraisal Rights. No appraisal rights are available in connection with the Offer. However, if the Merger is consummated, stockholders of the Company would have certain rights to dissent and demand appraisal of their Shares under Section 262 of the DGCL. Dissenting stockholders who comply with the requisite statutory procedures under the DGCL would be entitled to a judicial determination and payment of the "fair value" of their Shares as of the close of business on the day prior to the date of stockholder authorization of the Merger, together with interest thereon, at such rate as the court finds equitable, from the date the Merger is 26 29 consummated until the date of payment. Under the DGCL, in fixing the fair value of the Shares, a court would consider the nature of the transaction giving rise to the stockholders' right to receive payment for Shares and its effects on the Company and its stockholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of shares of a corporation engaging in a similar transaction under comparable circumstances, and all other relevant factors. The foregoing summary of the rights of objecting stockholders does not purport to be a complete statement of the procedures to be followed by stockholders desiring to exercise any available dissenters' rights. The preservation and exercise of dissenters' rights require strict adherence to the applicable provisions of the DGCL. Antitrust. Under the HSR Act and the rules that have been promulgated thereunder by the FTC, certain acquisition transactions may not be consummated unless certain information and documentation has been furnished to the Antitrust Division and the FTC and certain waiting period requirements have been satisfied. The acquisition of Shares by the Subsidiary pursuant to the Offer is subject to the HSR Act requirements. See Section 2. Under the provisions of the HSR Act applicable to the purchase of Shares pursuant to the Offer, such purchase may not be made until the expiration of a 15-calendar day waiting period following the required filing of a Pre-merger Notification and Report Form under the HSR Act by MedPartners, which MedPartners filed on August 15, 1997. The waiting period under the HSR Act will expire at 11:59 p.m., New York City time, August 30, 1997, unless early termination of the waiting period is granted or MedPartners receives a request from the Antitrust Division or the FTC for additional information or documentary material prior thereto. If such a request were made, the waiting period applicable to the Offer would expire on the tenth calendar day after the date of substantial compliance by MedPartners with such request. The waiting period under the HSR Act may be terminated by the FTC and the Antitrust Division prior to its expiration. Accordingly, pursuant to the HSR Act each of MedPartners and the Company have requested early termination of the waiting period applicable to the Offer. There can be no assurance, however, that the 15-day HSR Act waiting period will be terminated early. Shares will not be accepted for payment or paid for pursuant to the Offer until the expiration or earlier termination of the applicable waiting period under the HSR Act. See Section 2. Subject to Section 4, any extension of the waiting period will not give rise to any withdrawal rights not otherwise provided for by applicable law. If the Purchaser's acquisition of Shares is delayed due to a request by the Antitrust Division or the FTC for additional information or documentary material pursuant to the HSR Act and all other conditions to the Offer have been satisfied, the Offer may be extended (and re-extended) until at least October 20, 1997, and may, with the consent of MedPartners, the Subsidiary and the Company, be extended beyond that date. No separate HSR Act requirements with respect to the Merger or the Merger Agreement will apply if the 15-day waiting period relating to the Offer (as described above) has expired or been terminated. However, if the Offer is withdrawn or if the filing relating to the Offer is withdrawn prior to the expiration or termination of the 15-day waiting period relating to the Offer, the Merger may not be consummated until 30 calendar days after receipt by the Antitrust Division and the FTC of the Pre-merger Notification and Report Forms of both MedPartners and the Company, unless the 30-day period is earlier terminated by the Antitrust Division and the FTC. Within such 30-day period, the Antitrust Division or the FTC may request additional information or documentary materials from MedPartners and/or the Company, in which event, the acquisition of Shares pursuant to the Merger may not be consummated until 20 days after both MedPartners and the Company substantially comply with such requests. The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of Shares by the Subsidiary pursuant to the Offer. At any time before or after the purchase by the Subsidiary of Shares pursuant to the Offer, either the FTC or the Antitrust Division could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the acquisition of Shares pursuant to the Offer or seeking the divestiture of Shares purchased by the Subsidiary or the divestiture of substantial assets of MedPartners, the Company or any of their respective subsidiaries. Private parties and state attorneys general may also bring legal action under federal or state antitrust laws under certain circumstances. 27 30 Although the Subsidiary believes that the acquisition of Shares pursuant to the Offer would not violate the antitrust laws, there can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if a challenge is made, what the outcome will be. SECTION 15. FEES AND EXPENSES. Except as set forth below, neither MedPartners nor the Subsidiary will pay any fees or commissions to any broker, dealer or other person in connection with the solicitation of tenders of Shares pursuant to the Offer. The Subsidiary has also retained Georgeson & Company, Inc. to act as the Information Agent and Chase Mellon Shareholder Services, L.L.C. to act as the Depositary in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telegraph and personal interview and may request brokers, dealers and other nominee stockholders to forward the Offer materials to beneficial owners. The Information Agent and the Depositary will receive reasonable and customary compensation for their services relating to the Offer and will be reimbursed for certain out-of-pocket expenses. The Subsidiary and MedPartners have also agreed to indemnify the Information Agent and the Depositary against certain liabilities and expenses in connection with the Offer, including certain liabilities under the federal securities laws. Brokers, dealers, commercial banks and trust companies will, upon request, be reimbursed by the Subsidiary for customary mailing and handling expenses incurred by them in forwarding the Offer materials to their customers. SECTION 16. MISCELLANEOUS. The Offer is being made solely by this Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Shares. The Subsidiary is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Subsidiary becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, the Subsidiary will make a good faith effort to comply with any such state statute or seek to have such statute declared inapplicable to the Offer. If after such good faith effort, the Subsidiary cannot comply with such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Subsidiary by one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. A copy of this Offer to Purchase, and certain of the agreements referred to herein, are attached to the Schedule 14D-1, which has been filed with the Commission. The Schedule 14D-1 and the exhibits thereto, along with such other documents as may be filed by the Subsidiary and MedPartners with the Commission, may be examined and copied from the offices of the Commission in the manner set forth in Section 7. No person has been authorized to give any information or to make any representation on behalf of the Subsidiary or MedPartners not contained in this Offer to Purchase or in the Letter of Transmittal and, if given or made, such information or representation must not be relied upon as having been authorized. TALMED MERGER CORPORATION August 20, 1997 28 31 Manually signed facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder or his broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below. THE DEPOSITARY FOR THE OFFER IS: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By Mail: By Overnight Courier: By Hand: Post Office Box 3305 85 Challenger Road-Mail Drop Reorg 120 Broadway - 13(th) Floor South Hackensack, NJ 07606 Ridgefield Park, NJ 07660 New York, NY 10271 Attn: Reorganization Dept. Attention: Reorganization Dept. Attention: Reorganization Dept.
By Facsimile Transmission: 201-329-8936 Confirmation of Fax: 201-296-4860 29 32 SCHEDULE I INFORMATION REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS OF MEDPARTNERS AND THE SUBSIDIARY 1. DIRECTORS AND EXECUTIVE OFFICERS OF MEDPARTNERS. Set forth in the table and paragraphs below are the name and the present principal occupations or employment and the name, principal business and address of any corporation or other organization in which such occupation or employment is conducted, and the five-year employment history of each of the directors and executive officers of MedPartners. MedPartners owns 100% of the equity interest in the Subsidiary. Unless otherwise indicated, each person identified below is employed by MedPartners. The principal business address of MedPartners and, unless otherwise indicated, the business address of each person identified below is 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244.
NAME AGE POSITIONS WITH MEDPARTNERS - - ---- --- -------------------------- Larry R. House..................... 53 Chairman of the Board and Chief Executive Officer and Director Mark L. Wagar...................... 45 President and Chief Operating Officer John J. Gannon..................... 58 President -- Physician Practice Management H. Lynn Massingale, M.D............ 44 President -- Team Health Harold O. Knight, Jr............... 39 Executive Vice President and Chief Financial Officer Tracy P. Thrasher.................. 34 Executive Vice President and Chief Administrative Officer and Corporate Secretary Edward J. Novinski................. 38 Executive Vice President -- Managed Care John M. Deane...................... 42 Executive Vice President -- Information Services J. Brooke Johnston, Jr............. 57 Senior Vice President and General Counsel Charles C. Clark................... 47 Senior Vice President and Chief Tax Officer Peter J. Clemens, IV............... 32 Vice President of Finance and Treasurer Mark S. Weeks...................... 34 Vice President of Finance and Controller Richard M. Scrushy................. 44 Director Larry D. Striplin, Jr.(1).......... 67 Director Charles W. Newhall III(1).......... 52 Director Ted H. McCourtney(2)............... 58 Director Walter T. Mullikin, M.D............ 79 Director John S. McDonald, J.D.(1).......... 64 Director Rosalio J. Lopez, M.D.............. 44 Chief Medical Officer and Director C.A. Lance Piccolo (2)............. 56 Director Roger L. Headrick (1).............. 60 Director Harry M. Jansen Kraemer, Jr........ 42 Director
- - --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Larry R. House has been Chief Executive Officer of MedPartners since August 1993, and has been Chairman of the Board since January 1993. Mr. House also served as President from August 1993 until June 1997. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH Rehabilitation Corporation, now HEALTHSOUTH Corporation ("HEALTHSOUTH"). From 1992 to 1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr. House is a member of the Board of Directors of each of HEALTHSOUTH, Capstone Capital Corporation, a publicly traded real estate investment trust ("Capstone"), the American Sports Medicine Institute, UAB Research Foundation and Monitor MedX. Mark L. Wagar has been President and Chief Operating Officer of MedPartners since June 1997. Form January 1996 until June 1997, Mr. Wagar was President -- Western Operations of MedPartners. From January 1995 through December 1995, Mr. Wagar was Chief Operating Officer of MME, from March 1994 to December 1994, he was the President of CIGNA HealthCare of California, a healthcare plan serving S-1 33 enrollees in California, Oregon and Washington, from January 1993 through February 1994, was a Vice President of CIGNA HealthCare of California, an HMO. From November 19898 to December 1992, he was the President of Managed Care Partners, Inc., a private consulting management company specializing in managed care services. He has been involved in healthcare management for over 20 years, including 10 years in managed care companies. John J. Gannon has been President -- Physician Practice Management of MedPartners since June 1997. From July 1996 to June 1997, Mr. Gannon was President -- Eastern Operations. For 23 years, Mr. Gannon was a Partner with KPMG Peat Marwick. His most recent position with KPMG was that of National Partner-in-Charge of Strategy and Marketing, Healthcare and Life Sciences. He served as one of the firm's designated industry review specialists for healthcare financial feasibility studies. H. Lynn Massingale, M.D. has been President of Team Health since its formation in March 1994. Dr. Massingale has served as President of Southeastern Emergency Physicians, Inc., a subsidiary of Team Health, since 1981. A graduate of the University of Tennessee Center for Health Sciences in Memphis, Dr. Massingale is certified by the National Board of Medical Examiners, Tennessee Board of Medical Examiners and American Board of Emergency Medicine. Dr. Massingale's professional memberships include the Knoxville Academy of Medicine, Tennessee Medical Association, American Medical Association and American College of Emergency Physicians. Harold O. Knight, Jr. has been Executive Vice President and Chief Financial Officer of MedPartners since November 1994. Mr. Knight was Senior Vice President of Finance and Treasurer of MedPartners from August 1993 to November 1994, and from March 1993 to August 1993, Mr. Knight served as Vice President of Finance of MedPartners. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most recently as Senior Manager. Mr. Knight is a member of the Alabama Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Tracy P. Thrasher was named Chief Administrative Officer of MedPartners in June 1997 and has been Executive Vice President of MedPartners since November 1994 and Corporate Secretary since March 1994. Ms. Thrasher was Senior Vice President of Administration from March 1994 to November 1994, and from January 1993 to March 1994, she served as Corporate Comptroller and Vice President of Development. From 1990 to 1993, Ms. Thrasher was the Audit and Health Care Management Advisory Service Manager with Burton, Canady, Moore & Carr, P.C. independent public accountants. Ms. Thrasher began her career with Ernst & Young LLP in 1985, and became a certified public accountant in 1986. Edward J. Novinski has been Executive Vice President of Managed Care for MedPartners since September 1996. Prior to joining MedPartners, Mr. Novinski was most recently Vice President of Network Management for United HealthCare Corporation in their corporate office and held various positions from August 1986 to August 1996. Mr. Novinski was responsible for United HealthCare's network strategies for physician and hospital relationships with supported United HealthCare's diverse managed care product line. From 1977 to 1986, Mr. Novinski was with Lutheran General Health System in managerial and administrative positions including Director of Physician Practice Management for a large multi-specialty group. John M. Deane has been Executive Vice President, Information Services of MedPartners since January 1997. From January 1995 through December 1996, Mr. Deane was Vice President Information Services and CIO of Caremark Pharmaceutical Services Group, based in Northbrook, Illinois. Prior to 1985, Mr. Deane was Director, Information Services -- Planning and Consulting for the Whirlpool Corporation and a Senior Manager on large IS projects for Price Waterhouse's Management Consulting Services practice in the Midwest, where he led large IS engagements for various Fortune 100 companies. J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel of MedPartners since April 1996. Prior to that, Mr. Johnston was a senior principal of the law firm of Haskell Slaughter Young & Johnston, Professional Association, Birmingham, Alabama, where he practiced corporate and securities law for over seventeen years. Prior to that Mr. Johnston was engaged in the practice of law in New York, New York and at another firm in Birmingham. Mr. Johnston is a member of the Alabama State Bar and the New S-2 34 York and American Bar Associations. Mr. Johnston is a member of the Board of Directors of United Leisure Corporation, a publicly traded leisure time services company. Charles C. Clark has been Senior Vice President and Chief Tax Officer of MedPartners since January 1997. Prior to that, Mr. Clark was a Partner with KPMG Peat Marwick, having served as Tax Partner in Charge of the Birmingham, Alabama office and leader of tax services for the Health Care & Life Sciences practice in the Southeast. Mr. Clark was with KPMG Peat Marwick for 21 years. Mr. Clark is a Certified Public Accountant holding memberships in the American Institute of Certified Public Accountants and the Alabama and Mississippi Societies of Certified Public Accountants. Peter J. Clemens, IV has been Vice President of Finance and Treasurer of MedPartners since April 1995. From 1991 to 1995, Mr. Clemens worked in Corporate Banking with Wachovia Bank of Georgia, N.A. Mr. Clemens began his career with AmSouth Bank, N.A. in 1987, and received a Masters Degree in Business Administration from Vanderbilt University in 1991. Mark S. Weeks has been Vice President of Finance and Controller of MedPartners since June 1994. From 1985 to 1994, Mr. Weeks was with Ernst & Young LLP, most recently as Senior Manager. Mr. Weeks is a certified public accountant and a member of the American Institute of Certified Public Accountants. Richard M. Scrushy has been a member of MedPartners' Board of Directors since January 1993. Since 1984, Mr. Scrushy has been Chairman of the Board and Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy is also a member of the Board of Directors of Capstone. Larry D. Striplin, Jr. has been a member of MedPartners' Board of Directors since January 1993. Since December 1995, Mr. Striplin has been the Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive Officer of Clearview Properties, Inc. Until December 1995, Mr. Striplin had been Chairman of the Board and Chief Executive Officer of Circle "S" Industries, Inc., a privately owned bonding wire manufacturer. Mr. Striplin is a member of the Board of Directors of Kulicke & Suffa, Inc., a publicly traded manufacturer of electronic equipment, and of Capstone. Charles W. Newhall III has been a member of MedPartners' Board of Directors since September 1993. He has been a general partner of New Enterprise Associates, a venture capital firm, since 1978. Mr. Newhall is a member of the Board of Directors of HEALTHSOUTH, Integrated Health Services, Inc. and OPTA Food Ingredients, Inc., all publicly traded companies. He is a founder and Chairman of the Mid-Atlantic Venture Association, which was organized in 1988. Ted H. McCourtney has been a member of MedPartners' Board of Directors since August 1993. He has been a general partner of Venrock Associates, a venture capital firm, since 1970. Mr. McCourtney is a member of the Board of Directors of Cellular Communications, Inc., Cellular Communications of Puerto Rico, Inc., Cellular Communications International, Inc., International CabelTel Incorporated, SBSF, Inc. and Structural Dynamics Research Corporation, each of which is publicly traded. Walter T. Mullikin, M.D., a surgeon, has been a member of MedPartners' Board of Directors since November 1995. Dr. Mullikin was a Chairman of the Board of the general partner of MME from 1989 to 1995. He founded Pioneer Hospital and the predecessors to MME's principal professional corporation in 1957. He was also the Chairman of the Board, President and a stockholder of Mullikin Independent Practice Association ("MIPA"), until November 1995. Dr. Mullikin is a member of the Board of Directors of HealthNet, a publicly traded HMO, and was one of the founders and a past chairman of the United Medical Group Association. John S. McDonald, J.D. has been a member of MedPartners Board of Directors since November 1995. Mr. McDonald was the Chief Executive Officer of the general partner of MME from March 1994 to 1995, and he was an executive of Pioneer Hospital and their related entities since 1967. Mr. McDonald was also a director, the Secretary and a stockholder of MME's general partner. Mr. McDonald is on the Board of Directors of the Truck Insurance Exchange and is a past president of the United Medical Group Association. Rosalio J. Lopez, M.D. has been a member of MedPartners' Board of Directors since November 1995 and became Chief Medical Officer of MedPartners in June 1997. Dr. Lopez has been a director of the general S-3 35 partner of MME since 1989. Dr. Lopez joined MME's principal professional corporation in 1984 and serves as the Chairman of its Medical Council and Family Practice and Managed Care committees. He also acted as a director and a Vice President of MME's principal professional corporation. He is also a director and stockholder of MIPA. C.A. Lance Piccolo has been a member of MedPartners' Board of Directors since September 1997. From August 1992 to September 1996, he was Chairman of the Board of Directors and Chief Executive Officer of Caremark. From 1987 until November 1992, Mr. Piccolo was an Executive Vice President of Baxter and from 1988 until November 1992, he served as a director of Baxter. Mr. Piccolo also serves as a director of Crompton & Knowles Corporation ("CKC"), which is publicly traded. Roger L. Headrick has been a member of MedPartners' Board of Directors since September 1996 and has been President and Chief Executive Officer of the Minnesota Vikings Football Club since 1991. Additionally, since June 1989, Mr. Headrick has been President and Chief Executive Officer of ProtaTek International, Inc., a bio-process and biotechnology company that develops and manufactures animal vaccines. Prior to 1989, he was Executive Vice President and Chief Financial Officer of The Pillsbury Company, a food manufacturing and processing company. Mr. Headrick also serves as a director of CKC. Harry M. Jansen Kraemer, Jr. has been a member of MedPartners' Board of Directors since September 1996, and is President of Baxter, having served in that capacity since April 1997. Mr. Kraemer served as Senior Vice President and Chief Financial Officer of Baxter from November 1993 to April 1997. He was promoted to Baxter's three-member Office of the Chief Executive in June 1995, and appointed to Baxter's Board of Directors in November 1995. Mr. Kraemer has been an employee of Baxter since 1982, serving in a variety of positions, including Vice President, Group Contoller for Baxter's hospital and alternate-site businesses, president of Baxter's Hospitex Division and Vice President Finance and Operations for Baxter's global-business group. 2. DIRECTORS AND EXECUTIVE OFFICERS OF THE SUBSIDIARY. Set forth in the table and paragraphs below are the name and the present principal occupations or employment and the name, principal business and address of any corporation or other organization in which such occupation or employment is conducted, and the five-year employment history of each of the directors and executive officers of the Subsidiary. Each person identified below is employed by MedPartners and is a director of the Subsidiary. The principal business address of the Subsidiary and of each person identified below is 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244.
NAME AGE OFFICES WITH THE SUBSIDIARY ---- --- --------------------------- Larry R. House....................... 53 President Harold O. Knight, Jr................. 39 Vice President and Treasurer Tracy P. Thrasher.................... 34 Vice President and Secretary
Larry R. House has been Chief Executive Officer of MedPartners since August 1993, and has been Chairman of the Board since January 1993. Mr. House also served as President from August 1993 until June 1997. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH. From 1992 to 1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr. House is a member of the Board of Directors of each of HEALTHSOUTH, Capstone, the American Sports Medicine Institute, UAB Research Foundation and Monitor MedX. Harold O. Knight, Jr. has been Executive Vice President and Chief Financial Officer of MedPartners since November 1994. Mr. Knight was Senior Vice President of Finance and Treasurer of MedPartners from August 1993 to November 1994, and from March 1993 to August 1993, Mr. Knight served as Vice President of Finance of MedPartners. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most recently as Senior Manager. Mr. Knight is a member of the Alabama Society of Certified Public Accountants and the American Institute of Certified Public Accountants. S-4 36 Tracy P. Thrasher was named Chief Administrative Officer of MedPartners in June 1997 and has been Executive Vice President of MedPartners since November 1994 and Corporate Secretary since March 1994. Ms. Thrasher was Senior Vice President of Administration from March 1994 to November 1994, and from January 1993 to March 1994, she served as Corporate Comptroller and Vice President of Development. From 1990 to 1993, Ms. Thrasher was the Audit and Health Care Management Advisory Service Manager with Burton, Canady, Moore & Carr, P.C. independent public accountants. Ms. Thrasher began her career with Ernst & Young LLP in 1985, and became a certified public accountant in 1986. Any questions and requests for assistance or additional copies of the Offer to Purchase, the Letter of Transmittal and related materials may be directed to the Information Agent at the address and telephone number set forth below. Stockholders may also contact their broker, dealer, commercial bank or trust company for assistance concerning the Offer. THE INFORMATION AGENT FOR THE OFFER IS: [GEORGESON & COMPANY INC. LOGO] Wall Street Plaza New York, New York 10005 Banks and Brokers Call Collect: 212-440-9800 All Others Call Toll Free: 1-800-223-2064 S-5 EX-2 3 LETTER OF TRANSMITTAL 1 LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK (INCLUDING THE ASSOCIATED RIGHTS) OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED AUGUST 20, 1997 BY TALMED MERGER CORPORATION A WHOLLY-OWNED SUBSIDIARY OF MEDPARTNERS, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, SEPTEMBER 19, 1997, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By Mail: By Overnight Courier: By Hand: Post Office Box 3305 85 Challenger Road- 120 Broadway - 13(th) Floor South Hackensack, NJ 07606 Mail Drop Reorg New York, NY 10271 Attn: Reorganization Dept. Ridgefield Park, NJ 07660 Attention: Reorganization Dept. Attention: Reorganization Dept.
By Facsimile Transmission: 201-329-8936 Confirmation of Fax: 201-296-4860 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by stockholders either if certificates evidencing Shares (as defined below) are to be forwarded herewith or, unless an Agent's Message (as defined in Section 2 of the Offer to Purchase) is utilized, if tenders of Shares are to be made by book-entry transfer into the account of ChaseMellon Shareholder Services, L.L.C., as Depositary (the "Depositary"), at The Depository Trust Company or the Philadelphia Depository Trust Company (each, a "Book-Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facilities"), pursuant to the procedures set forth in Section 3 of the Offer to Purchase (as defined below). Stockholders who tender Shares by book-entry transfer are referred to herein as "Book-Entry Stockholders." Holders of Shares whose certificates evidencing such Shares (the "Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase), or who cannot complete the procedure for book-entry transfer on a timely basis, must tender their Shares according to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. See Instruction 2. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. 2 - - ---------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - - ---------------------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR ON SHARE CERTIFICATE(S) AND SHARE(S) TENDERED CERTIFICATION) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY) - - ---------------------------------------------------------------------------------------------------------------------- TOTAL NUMBER OF SHARES NUMBER SHARE CERTIFICATE REPRESENTED BY OF SHARES NUMBER(S)* CERTIFICATE(S)* TENDERED** ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ TOTAL SHARES - - ---------------------------------------------------------------------------------------------------------------------- * Need not be completed by Book-Entry Shareholders. ** Unless otherwise indicated, all Shares represented by certificates delivered to the Depositary will be deemed to have been tendered. See Instruction 4. - - ---------------------------------------------------------------------------------------------------------------------- [ ] CHECK HERE IF SHARES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER): Name of Tendering Institution: -------------------------------------------------------------------------------------------------------------------- Check box of Book-Entry Transfer Facility (check one): [ ] The Depository Trust Company Account Number: -------------------------------------------------------------------------------------------------------------------- [ ] Philadelphia Depository Trust Company Transaction Code Number: -------------------------------------------------------------------------------------------------------------------- [ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s): -------------------------------------------------------------------------------------------------------------------- Window Ticket Number (if any): -------------------------------------------------------------------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: -------------------------------------------------------------------------------------------------------------------- Name of Institution that Guaranteed Delivery: -------------------------------------------------------------------------------------------------------------------- If delivered by Book-Entry Transfer, check box of Book-Entry Transfer Facility (check one): [ ] The Depository Trust Company Account Number: -------------------------------------------------------------------------------------------------------------------- [ ] Philadelphia Depository Trust Company Transaction Code Number: --------------------------------------------------------------------------------------------------------------------
2 3 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Talmed Merger Corporation (the "Subsidiary"), a Delaware corporation and a wholly-owned subsidiary of MedPartners, Inc., a Delaware corporation ("MedPartners"), the above-described shares of common stock, par value $.01 per share, together with associated rights to purchase shares of preferred stock, par value $.01 per share, designated as "Junior Participating Preferred Stock" (the "Shares"), of Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), at a purchase price of $63.00 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated August 20, 1997 (the "Offer to Purchase") and in this Letter of Transmittal (which, together with any supplements and amendments, collectively constitute the "Offer"), receipt of which is hereby acknowledged. The undersigned understands that the Subsidiary reserves the right to transfer or assign, in whole or from time to time in part, to one or more of its affiliates, the right to purchase all or any portion of the Shares tendered pursuant to the Offer. Upon the terms and conditions of the Offer and subject to, and effective upon, acceptance for payment for the Shares tendered herewith in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Subsidiary all right, title and interest in and to all of the Shares that are being tendered hereby and any and all dividends, distributions (including additional Shares) or rights declared, paid or issued with respect to the tendered Shares on or after August 14, 1997 and payable or distributable to the undersigned on a date prior to the transfer to the name of the Subsidiary or nominee or transferee of the Subsidiary on the Company's stock transfer records of the Shares tendered herewith, and appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to (a) deliver such Share Certificates (as defined herein) or transfer ownership of such Shares on the account books maintained by a Book-Entry Transfer Facility, together in either case with all accompanying evidences of transfer and authenticity, to the Depositary for the account of the Subsidiary upon receipt by the Depositary of the purchase price, (b) present such Shares for transfer on the books of the Company and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares, all in accordance with the terms and subject to the conditions of the Offer. The undersigned irrevocably appoints the Subsidiary, its officers and its designees, and each of them, the attorneys-in-fact and proxies of the undersigned, with full power of substitution, to the full extent of such stockholder's rights with respect to the Shares tendered by such stockholder and accepted for payment by the Subsidiary and with respect to any and all other Shares or other securities issued or issuable in respect of such Shares on or after August 14, 1997. This proxy and power of attorney is coupled with an interest in the Shares tendered hereby and is irrevocable and is granted in consideration of, and is effective upon, the acceptance for payment of such Shares by the Subsidiary in accordance with the terms of the Offer. Upon such acceptance for payment, all prior proxies given by such stockholder with respect to such Shares (and such other shares and securities) will be revoked without further action, and no subsequent proxies may be given nor any subsequent written consents executed (and, if given or executed, will not be deemed effective) with respect thereto by the undersigned. The Subsidiary, its officers and its designees will, with respect to the Shares (and such other securities) tendered, be empowered to exercise all voting and other rights of such stockholder as they in their sole discretion may deem proper at any annual or special meeting of the Company's stockholders or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. The Subsidiary reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Subsidiary's payment for such Shares the Subsidiary must be able to exercise full voting rights with respect to such Shares and other securities, including voting at any meeting of stockholders. The undersigned hereby represents and warrants that (a) the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and (b) when the Shares are accepted for payment by the Subsidiary, the Subsidiary will acquire good, marketable and unencumbered title to the Shares, free and clear of all liens, restrictions, charges and encumbrances, and the same will not be subject to any adverse 3 4 claim. The undersigned, upon request, will execute and deliver any additional documents deemed by the Depositary or the Subsidiary to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby. All authority herein conferred or agreed to be conferred shall not be affected by and shall survive the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tenders of Shares made pursuant to the Offer are irrevocable, except that Shares tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date (as defined in the Offer to Purchase) and, unless theretofore accepted for payment by the Subsidiary pursuant to the Offer, may also be withdrawn at any time after October 20, 1997. See Section 4 of the Offer to Purchase. The undersigned understands that tenders of Shares pursuant to any of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto and acceptance for payment of such Shares will constitute a binding agreement between the undersigned and the Subsidiary upon the terms and subject to the conditions set forth in the Offer, including the undersigned's representation that the undersigned owns the Shares being tendered. Unless otherwise indicated herein under "Special Payment Instructions," please issue the check for the purchase price and/or issue or return any certificate(s) for Shares not tendered or not accepted for payment in the name(s) of the registered holder(s) appearing under "Description of Shares Tendered." Similarly, unless otherwise indicated herein under "Special Delivery Instructions," please mail the check for the purchase price and/or any certificate(s) for Shares not tendered or not accepted for payment (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing under "Description of Shares Tendered." In the event that both the Special Delivery Instructions and the Special Payment Instructions are completed, please issue the check for the purchase price and/or any certificate(s) for Shares not tendered or accepted for payment in the name of, and deliver such check and/or such certificates to, the person or persons so indicated. The undersigned recognizes that the Subsidiary has no obligation, pursuant to the Special Payment Instructions, to transfer any Shares from the name(s) of the registered holder(s) thereof if the Subsidiary does not accept for payment any of the Shares so tendered. 4 5 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. No signature guarantee is required on this Letter of Transmittal (a) if this Letter of Transmittal is signed by the registered holder(s) (which term, for purposes of this document, shall include any participant in a Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares) of Shares tendered herewith, unless such holder(s) has completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" above, or (b) if such Shares are tendered for the account of a firm which is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of a recognized Medallion Signature Guarantee Program (each of the foregoing being referred to as an "Eligible Institution"). In all other cases, all signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution. See Instruction 5 of this Letter of Transmittal. 2. REQUIREMENTS OF TENDER. This Letter of Transmittal is to be completed by stockholders either if certificates are to be forwarded herewith or, unless an Agent's Message is utilized, if tenders are to be made pursuant to the procedure for tender by book-entry transfer set forth in Section 3 of the Offer to Purchase. Share Certificates, or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the Depositary's account at a Book-Entry Transfer Facility, as well as this Letter of Transmittal (or a facsimile hereof), properly completed and duly executed with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the front page of this Letter of Transmittal prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase). Stockholders whose Share Certificates are not immediately available or who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares by properly completing and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Subsidiary, must be received by the Depositary prior to the Expiration Date; and (iii) the Share Certificates (or a Book-Entry Confirmation) representing all tendered Shares, in proper form for transfer, in each case together with the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed with any required signature guarantees (or, in the case of a book-entry delivery, an Agent's Message) and any other documents required by this Letter of Transmittal, must be received by the Depositary within three Nasdaq National Market trading days after the date of execution of such Notice of Guaranteed Delivery. If Share Certificates are forwarded separately to the Depositary, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted, and no fractional Shares will be purchased (unless you are tendering all of the Shares you own). All tendering stockholders, by execution of this Letter of Transmittal (or a facsimile hereof), waive any right to receive any notice of the acceptance of their Shares for payment. 5 6 3. INADEQUATE SPACE. If the space provided herein is inadequate, the certificate numbers and/or the number of Shares and any other required information should be listed on a separate signed schedule attached hereto. 4. PARTIAL TENDERS. (NOT APPLICABLE TO BOOK-ENTRY STOCKHOLDERS) If fewer than all of the Shares evidenced by any Share Certificate delivered to the Depositary are to be tendered, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such a case, new Share Certificates for the Shares that were evidenced by your old Share Certificates, but were not tendered by you, will be sent to you (unless otherwise provided in the appropriate box on this Letter of Transmittal) as soon as practicable after the Expiration Date. All Shares represented by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever. If any of the Shares tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any of the tendered Shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of certificates. If this Letter of Transmittal or any certificates or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to the Purchaser of their authority so to act must be submitted. If this Letter of Transmittal is signed by the registered holder(s) of the Shares listed and transmitted hereby, no endorsements of certificates or separate stock powers are required unless payment is to be made to or certificates for Shares not tendered or not purchased are to be issued in the name of a person other than the registered holder(s). Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the certificate(s) listed, the certificate(s) must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear on the certificate(s) for such Shares. Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. 6. STOCK TRANSFER TAXES. Except as otherwise provided in this Instruction 6, the Subsidiary will pay or cause to be paid any stock transfer taxes with respect to the transfer and sale of Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or if certificate(s) for Shares not tendered or accepted for payment are to be registered in the name of, any person other than the registered holder(s), if a transfer tax is imposed for any reason other than the sale or transfer of Shares to Subsidiary pursuant to the Offer, or if tendered certificate(s) are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder(s) or such person) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or an exemption therefrom is submitted. EXCEPT AS OTHERWISE PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATE(S) LISTED IN THIS LETTER OF TRANSMITTAL. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the check for the purchase price of any Shares purchased is to be issued in the name of, or any Shares not tendered or not purchased are to be returned to, a person other than the person(s) signing this Letter of Transmittal or if the check or any 6 7 certificates for Shares not tendered or not purchased are to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Stockholders tendering Shares by book-entry transfer may request that Shares not purchased be credited to such account at any of the Book-Entry Transfer Facilities as such stockholder may designate under "Special Payment Instructions." If no such instructions are given, any such Shares not purchased will be returned by crediting the account at the Book-Entry Transfer Facilities designated above. 8. WAIVER OF CONDITIONS. The conditions of the Offer may be waived by the Subsidiary in whole or in part at any time and from time to time in its sole discretion. 9. 31% BACKUP WITHHOLDING, SUBSTITUTE FORM W-9. Each tendering stockholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN"), generally the stockholder's social security or federal employer identification number, on Substitute Form W-9 below. Failure to provide the information on the form may subject the tendering stockholder to 31% federal income tax withholding on the payment of the purchase price. The box in Part 3 of the form may be checked if the tendering stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future. If the box in Part 3 is checked and the Depositary is not provided with a TIN by the time of payment, the Depositary will withhold 31% of all payments of the purchase price thereafter until a TIN is provided to the Depositary. Under the federal income tax law, a stockholder whose tendered Shares are accepted for purchase is required by law to provide the Depositary (as payer) with such stockholder's correct TIN on Substitute Form W-9 below. If such stockholder is an individual, the TIN is his or her social security number. If a stockholder fails to provide a TIN to the Depositary, such stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such stockholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31%. Certain stockholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, the stockholder must submit a Form W-8, signed under penalties of perjury, attesting to that individual's exempt status. A Form W-8 can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any such payments made to the stockholder or other payee. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The box in Part 3 of the Substitute Form W-9 may be checked if the tendering stockholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 3 is checked, the stockholder or other payee must also complete the Certificate of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. Notwithstanding that the box in Part 3 is checked and the Certificate of Awaiting Taxpayer Identification Number is completed, the Depositary will withhold 31% of all payments made prior to the time a properly certified TIN is provided to the Depositary. The stockholder is required to give the Depositary the social security number or employer identification number of the record owner of the Shares or of the last transferee appearing on the transfers attached to, or endorsed on, the Shares. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions or requests for assistance may be directed to the Information Agent at its address and telephone numbers set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery 7 8 may also be obtained from the Information Agent at the address and telephone number set forth below, or from brokers, dealers, commercial banks or trust companies. 11. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate evidencing Shares has been lost, destroyed or stolen, the stockholder should promptly notify the Information Agent. The stockholder will then be instructed as to the steps that must be taken in order to replace the certificate. This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificates have been followed. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), TOGETHER WITH SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER OR THE NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS, MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE. 8 9 PAYER'S NAME: CHASE MELLON SHAREHOLDERS SERVICES, L.L.C. - - ------------------------------------------------------------------------------------------------------------- Social Security Number --------------------- SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT OR FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW --------------------- Employer Identification Number ----------------------------------------------------------------------- PART 2 -- For Payees exempt from backup withholding, see the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 and complete as instructed therein. Certification -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number Department of the Treasury, (or I am waiting for a number to be issued to me) and (2) I am not Internal Revenue Service subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. ----------------------------------------------------------------------- PAYER'S REQUEST FOR TAXPAYER CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you IDENTIFICATION NUMBER (TIN) have been notified by the IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were PART 3 subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out such Item 2). (Also see instructions in the enclosed Awaiting TIN [ ] Guidelines.) SIGNATURE __________________________DATE _____________________________ - - -------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACK-UP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING YOUR TIN. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a Taxpayer Identification Number has not been issued to me, and either (1) I have mailed or delivered an application to receive a Taxpayer Identification Number to the appropriate Internal Revenue Service Center or Social Security Administration Office, or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a Taxpayer Identification Number by the time of payment, 31% of all reportable payments made to me will be withheld. , 1997 - - ------------------------------------------------------------ ---------------------------------------------------- Signature: Date:
9 10 SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if certificate(s) for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be issued in the name of someone other than the undersigned. Issue: [ ] check and/or [ ] certificates to: - - ------------------------------------------------------ NAME -- (PLEASE PRINT) - - ------------------------------------------------------ ADDRESS - - ------------------------------------------------------ (INCLUDE ZIP CODE) - - ------------------------------------------------------ (TAX IDENTIFICATION OR SOCIAL SECURITY NO.) (SEE SUBSTITUTE FORM W-9) [ ] Credit unpurchased Shares tendered by book-entry transfer to the account set forth below: Name of Account Party ------------------------------------------------------------ - - -------------------------------------------------------------------------------- Account Number at --------------------------------------------------------------- [ ] The Depository Trust Company [ ] Philadelphia Depository Trust Company SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1 AND 7) To be completed ONLY if certificate(s) for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be sent to someone other than the undersigned or to the undersigned at an address other than that appearing under "DESCRIPTION OF SHARES TENDERED." Issue: [ ] check and/or [ ] certificates to: - - ------------------------------------------------------------------------------- NAME -- (PLEASE PRINT) - - ------------------------------------------------------------------------------- ADDRESS - - ------------------------------------------------------------------------------- (INCLUDE ZIP CODE) - - ------------------------------------------------------------------------------- (TAX IDENTIFICATION OR SOCIAL SECURITY NO.) 10 11 - - -------------------------------------------------------------------------------- SIGN HERE AND COMPLETE SUBSTITUTE FORM W-9 -------------------------------------------------------------------------- -------------------------------------------------------------------------- (SIGNATURE OF HOLDER(S)) Dated: ______________________, 1997 (Must be signed by the registered holder(s) exactly as name(s) appear(s) on Share Certificate(s) or on a security position listing or by person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information and See Instruction 5.) Name(s) -------------------------------------------------------------------------- -------------------------------------------------------------------------- (PLEASE PRINT) Capacity (Full Title) -------------------------------------------------------------------------- Address -------------------------------------------------------------------------- -------------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number -------------------------------------------------------------------------- Tax Identification or Social Security No. -------------------------------------------------------------------------- (SEE SUBSTITUTE FORM W-9) GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTIONS 1 AND 5) Authorized Signature -------------------------------------------------------------------------- Name -------------------------------------------------------------------------- Name of Firm -------------------------------------------------------------------------- (PLEASE PRINT) Address -------------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number -------------------------------------------------------------------------- Dated: ------------------------, 1997 -------------------------------------------------------------------------- 12 THE INFORMATION AGENT FOR THE OFFER IS: LOGO Wall Street Plaza New York, New York 10005 Banks and Brokers Call Collect: (212) 440-9800 ALL OTHERS CALL TOLL FREE: 1-800-223-2064 August 20, 1997 EX-3 4 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 3 ================================================================================ AGREEMENT AND PLAN OF MERGER DATED AS OF AUGUST 14, 1997 AMONG MEDPARTNERS, INC., TALMED MERGER CORPORATION AND TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION ================================================================================ 2 TABLE OF CONTENTS AGREEMENT AND PLAN OF MERGER AMONG MEDPARTNERS, INC., TALMED MERGER CORPORATION AND TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
Page ---- Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Company Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 2. The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Effect of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3. Effect of the Merger on the Capital Stock of the Constituent Corporations; Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Payment of Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.3 Certificate of Incorporation of Surviving Corporation . . . . . . . . . . . . . . . . . 8 3.4 By-laws of Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.5 Directors and Officers of Surviving Corporation . . . . . . . . . . . . . . . . . . . . 8 Section 4. Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . 9 4.1 Organization, Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . 9 4.2 Company Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.4 Foreign Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.5 Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.6 SEC Filings; Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i 3 4.7 Contracts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.8 Properties and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.9 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.10 Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.11 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.12 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.13 Employee Benefit Plans; Employment Matters . . . . . . . . . . . . . . . . . . . . . . . 15 4.14 Compliance with Laws in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.15 Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.16 Commissions and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.17 No Untrue Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.18 Amendment of Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.19 14D-1 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5. Representations and Warranties of the Parent and the Subsidiary . . . . . . . . . . . . 18 5.1 Organization, Existence and Good Standing of the Parent and Subsidiary . . . . . . . . . 18 5.2 Power and Authority; Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.3 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.4 No Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.5 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.6 No Contracts or Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.7 Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.8 The Parent to Cause Subsidiary to Perform . . . . . . . . . . . . . . . . . . . . . . . 19 5.9 Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.10 14D-9 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.11 Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6. Access to Information and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.1 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.2 Return of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.3 Effect of Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7. Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.1 Preservation of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.2 Material Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.3 Exemption from State Takeover Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.4 Public Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.5 Resignation of Company Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.6 Notice of Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.7 No Solicitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.8 Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.9 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.10 Additional Agreements Regarding Benefit Plans . . . . . . . . . . . . . . . . . . . . . 23 7.11 Physician Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ii 4 7.12 Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.13 Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.14 Share Repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 8. Termination, Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.5 Procedure for Termination, Amendment, Extension or Waiver . . . . . . . . . . . . . . . 27 8.6 Termination Fee; Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 9. Conditions to the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.1 Mutual Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.1 Nonsurvival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 29 10.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.5 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.6 Material Adverse Change or Material Adverse Effect . . . . . . . . . . . . . . . . . . . 30 10.7 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.8 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.9 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.10 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.12 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.13 No Rule of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Exhibit 1.1 Conditions of the Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Exhibit 7.11 Nontransferable Warrant Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
iii 5 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of August 14, 1997 (the "Agreement"), among MEDPARTNERS, INC., a Delaware corporation (the "Parent"), TALMED MERGER CORPORATION, a Delaware corporation (the "Subsidiary"), and TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION, a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the respective Boards of Directors of the Parent, the Company and the Subsidiary have each determined that it is in the best interests of their respective stockholders for the Parent to acquire the Company upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, in furtherance of such acquisition, the Parent proposes to cause the Subsidiary to make a tender offer (as it may be amended from time to time as permitted under this Agreement, the "Offer") to purchase all the outstanding shares of Common Stock, par value $.01 per share, of the Company and associated Rights, as defined in Section 4.2 ("Company Common Stock" or "Company Shares"), at a purchase price of US$63.00 per share (such amount, or any greater amount to be paid per share of Company Common Stock in the Offer, being referred to as the "Per Share Amount"), net to the seller in cash, upon the terms and subject to the conditions set forth in this Agreement and in the Offer; and the Board of Directors of the Company has unanimously approved the Offer and is recommending that the Company's stockholders accept the Offer and tender their shares of Company Common Stock pursuant to the Offer; WHEREAS, in furtherance of such acquisition, the respective Boards of Directors of the Parent, the Company and the Subsidiary have approved the merger of the Subsidiary with and into the Company (the "Merger") upon the terms and subject to the conditions set forth in this Agreement and in accordance with the provisions of the Delaware General Corporation Law (the "DGCL"), whereby each share of Company Common Stock, other than shares owned directly or indirectly by the Parent or by the Company and other than Dissenting Shares (as defined in Section 3.1(d)), will be converted into the right to receive the Per Share Amount; and WHEREAS, each of the Parent, the Subsidiary and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Offer and also to prescribe various conditions to the Offer. NOW, THEREFORE, in consideration of the premises, and the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: 1 6 SECTION 1. THE OFFER 1.1 The Offer. (a) Subject to the provisions of this Agreement, as promptly as practicable, but in no event later than five business days after the date of the public announcement of this Agreement, the Subsidiary shall, and the Parent shall cause the Subsidiary to, commence the Offer. The obligation of the Subsidiary to, and of the Parent to cause the Subsidiary to, commence the Offer and accept for payment, and pay for, any shares of Company Common Stock tendered pursuant to the Offer shall be subject to the conditions set forth in Exhibit 1.1 (any and all of which may, except as limited by the following sentence, be waived in whole or in part by the Subsidiary in its sole discretion), and to the terms and conditions of this Agreement. The Subsidiary expressly reserves the right to modify the terms and conditions of the Offer, except that, without the prior written consent of the Company or as expressly permitted by this Agreement, the Subsidiary shall not (i) reduce the number of shares of Company Common Stock subject to the Offer, (ii) reduce the Per Share Amount, (iii) modify or add to the conditions set forth in Exhibit 1.1, (iv) allow the Offer to expire prior to September 19, 1997; (v) except as provided in the following sentence, extend the term of the Offer, (vi) change the form of consideration payable in the Offer or (vii) make any other modifications that are otherwise materially adverse to holders of Company Common Stock. Notwithstanding the foregoing, the Subsidiary may, without the consent of the Company, (A) extend the term of the Offer on one or more occasions beyond any scheduled expiration date of the Offer if, at any such scheduled expiration date, any of the conditions to the Subsidiary's obligation to accept for payment, and pay for, shares of Company Common Stock tendered pursuant to the Offer shall not have been satisfied or waived (provided, however, that the Subsidiary may not extend the Offer under this subsection (A) for a total of more than 60 days from the commencement of the Offer), (B) extend the Offer for a period not to exceed 10 business days, notwithstanding that all conditions to the Offer are satisfied as of such expiration date of the Offer, if, immediately prior to that expiration date (as it may be extended), the Company Shares validly tendered and not withdrawn pursuant to the Offer equal more than 75% but less than 90% of the outstanding Company Shares, and (C) extend the Offer for any period required by any rule, regulation, interpretation or position of the Securities and Exchange Commission (the "SEC") or the staff thereof applicable to the Offer or any other applicable law. (b) The Per Share Amount shall, subject to applicable withholding of taxes, be net to the seller in cash, upon the terms and subject to the conditions of the Offer. Subject to the terms and conditions of the Offer and this Agreement, the Subsidiary shall, and the Parent shall cause the Subsidiary to, pay for all shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer promptly after the expiration of the Offer. The Parent shall provide or cause to be provided to the Subsidiary on a timely basis the funds necessary to pay for any shares of Company Common Stock that the Subsidiary becomes obligated to accept for payment, and pay for, pursuant to the Offer or this Agreement. (c) On the date of commencement of the Offer, the Parent and the Subsidiary shall file with the SEC a Tender Offer Statement on Schedule 14D-1 with respect to the Offer, which shall contain an offer to purchase and a related letter of transmittal and summary advertisement (such Schedule 14D-1 and the documents included therein pursuant to which the Offer will be 2 7 made, together with any supplements or amendments thereto, the "Offer Documents"). The Parent and the Subsidiary agree that the Offer Documents shall comply as to form in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder and, on the date filed with the SEC and when first published, sent or given to the Company's stockholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Parent or the Subsidiary with respect to information supplied by the Company for inclusion in the Offer Documents or incorporated therein by reference to any statement, report or other document filed by or on behalf of the Company with the SEC. Each of the Parent, the Subsidiary and the Company agrees to correct promptly any information provided by it for use in the Offer Documents if and to the extent that such information shall have become false or misleading in any material respect, and each of the Parent and the Subsidiary further agrees to take all steps necessary to amend or supplement the Offer Documents and to cause the Offer Documents as so amended or supplemented to be filed with the SEC and to be disseminated to the Company's stockholders, in each case as and to the extent required by applicable federal securities laws. The Company and its counsel shall be given reasonable opportunity to review and comment upon the Offer Documents and all amendments and supplements thereto prior to their filing with the SEC or dissemination to stockholders of the Company. The Parent and the Subsidiary agree to provide the Company and its counsel any comments the Parent, the Subsidiary or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments and shall provide the Company and its counsel an opportunity to participate in the response of the Parent and/or the Subsidiary to such comments. 1.2 Company Actions. (a) The Company hereby approves of and consents to the Offer and represents that the Board of Directors of the Company, at a meeting duly called and held, has by unanimous vote of those present adopted resolutions (i) approving this Agreement, the Offer and the Merger, (ii) determining that the terms of the Offer and the Merger are fair to, and in the best interests of, the Company's stockholders, and (iii) recommending that the Company's stockholders accept the Offer, tender their shares pursuant to the Offer and approve this Agreement. Subject to the fiduciary duties of the Board under applicable law as advised by independent counsel (which may be the Company's regularly engaged outside counsel) ("Independent Counsel"), the Company hereby consents to the inclusion in the Offer Documents of the recommendation of the Board described in the immediately preceding sentence. The Company has been advised by each of its directors and executive officers that, subject to their fiduciary and contractual obligations, they intend to tender all shares of Company Common Stock beneficially owned by them to the Subsidiary pursuant to the Offer, unless to do so would potentially subject them to short-swing liability under Section 16 of the Exchange Act. (b) On the date the Offer Documents are filed with the SEC, or as soon thereafter as is practicable, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as amended from time to time, the "Schedule 14D-9") containing, subject to the fiduciary duties of the Board under 3 8 applicable law as advised by Independent Counsel, the recommendation described in Section 1.2(a) and shall mail the Schedule 14D-9 to the stockholders of the Company. The Company agrees that the Schedule 14D-9 shall comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder and, on the date filed with the SEC and when first published, sent or given to the Company's stockholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to information supplied by the Parent or the Subsidiary for inclusion in the Schedule 14D-9. Each of the Company, the Parent and the Subsidiary agrees to correct promptly any information provided by it for use in the Schedule 14D-9 if and to the extent that such information shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to amend or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or supplemented to be filed with the SEC and disseminated to the Company's stockholders, in each case as and to the extent required by applicable federal securities laws. The Parent and its counsel shall be given reasonable opportunity to review and comment upon the Schedule 14D-9 and all amendments and supplements thereto prior to their filing with the SEC or dissemination to stockholders of the Company. The Company agrees to provide the Parent and its counsel with any comments the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments and shall provide the Parent and its counsel an opportunity to participate in the response of the Company to such comments. (c) In connection with the Offer, the Company shall cause its transfer agent to furnish the Subsidiary promptly with mailing labels containing the names and addresses of the record holders of Company Common Stock as of the most recent practicable date and of those persons becoming record holders subsequent to such date, together with copies of all lists of stockholders, security position listings and computer files and all other information in the Company's possession or control regarding the beneficial owners of Company Common Stock, and shall furnish to the Subsidiary such information and assistance (including updated lists of stockholders, security position listings and computer files) as the Parent may reasonably request in communicating the Offer to the Company's stockholders. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Merger, the Parent and the Subsidiary shall hold in confidence the information contained in any such labels, listings and files, will use such information only in connection with the Offer and the Merger and, if this Agreement shall be terminated, will, upon request, deliver to the Company all copies of such information then in their possession or control. 1.3 Directors. (a) Promptly upon the purchase of Company Shares by the Subsidiary pursuant to the Offer, seven of the Company's nine directors will resign, and the Parent shall designate three replacements for appointment or election to the Company's Board of Directors. The Company shall, upon request of the Subsidiary, use its best efforts promptly to cause the Parent's designees to be so appointed or elected. The remaining two directors (and any successors appointed or elected before the Effective Time, as defined in Section 2.3 below, 4 9 which successors shall not be affiliated with the Parent) are referred to as the "Original Directors." The Company shall promptly take all actions required by Section 14(f) of the Exchange Act and related Rule 14f-1 in order to fulfill its obligations under this Section 1.3(a), including mailing to stockholders the required information (or, at the Parent's request, furnishing such information to the Parent for inclusion in the Offer Documents initially filed with the SEC and distributed to the stockholders of the Company) as is necessary to enable the Parent's designees to be elected to the Company's Board of Directors. The Parent or the Subsidiary will supply the Company in writing, and be solely responsible for, any information with respect to either of them and their nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1 as is necessary in connection with the appointment of any of the Parent's designees under Section 1.3(a). (b) Once the Parent's designees constitute a majority of the Company's Board of Directors, any amendment of this Agreement, any termination of this Agreement by the Company, any extension of time for performance of any of the obligations of the Parent or the Subsidiary hereunder, any waiver of any condition or any of the Company's rights hereunder or other action by the Company hereunder may be effected only by the joint action of the Original Directors. SECTION 2. THE MERGER 2.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, the Subsidiary shall be merged with and into the Company at the Effective Time (as defined in Section 2.3). Following the Effective Time, the separate corporate existence of the Subsidiary shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") as a business corporation incorporated under the laws of the State of Delaware under a name to be designated by the Parent and shall succeed to and assume all the rights and obligations of the Subsidiary and the Company in accordance with the DGCL. 2.2 The Closing. The closing of the Merger (the "Closing") will take place at 10:00 a.m. Central Time on a date to be specified by the parties (the "Closing Date"), which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Section 9.1, at the offices of Haskell Slaughter & Young, L.L.C., Birmingham, Alabama, unless another date or place is agreed to in writing by the parties hereto. 2.3 Effective Time. Subject to the provisions of this Agreement, the Company and the Subsidiary shall file a Certificate of Merger (the "Certificate of Merger") executed in accordance with the relevant provisions of the DGCL, and shall make all other filings or recordings required under the DGCL to effect the Merger on the Closing Date. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware, or at such other time as the Parent, the Subsidiary and the Company shall agree should be specified in the Certificate of Merger (the "Effective Time"). 5 10 2.4 Effect of the Merger. The Merger shall have the effects set forth in Section 259 of the DGCL. Without limiting the generality of the foregoing, and subject thereto and any other applicable laws, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and the Subsidiary shall vest in the Surviving Corporation, and all debts, liabilities, restrictions, disabilities and duties of the Company and the Subsidiary shall become the debts, liabilities, restrictions, disabilities and duties of the Surviving Corporation. SECTION 3. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION 3.1 Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder of the Company Shares or any shares of capital stock of the Subsidiary: (a) Subsidiary Common Stock. Each share of Common Stock, par value $.01 per share, of the Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. (b) Cancellation of Certain Shares of Company Common Stock. Each share of Company Common Stock that is owned by the Company, the Parent or by any subsidiary of the Company or the Parent shall automatically be canceled and retired and shall cease to exist, and no cash or other consideration shall be delivered in exchange therefor. (c) Conversion of the Company Shares. At the Effective Time, each Company Share (other than the Company Shares to be canceled in accordance with Section 3.1(b)) issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive the Per Share Amount (the "Merger Consideration"). Upon such conversion, all such Company Shares shall be canceled and cease to exist, and each holder thereof shall cease to have any rights with respect thereto other than the right to receive the Merger Consideration paid in exchange therefor in accordance with the terms provided herein. (d) No Conversion of Dissenting Shares. Notwithstanding Section 3.1(c), if dissenters rights are available in connection with the Merger pursuant to Section 262 of the DGCL, shares of Company Common Stock held by a holder who has not voted in favor of the Merger and who, subject to and in accordance with Section 262 of the DGCL, has demanded and perfected such holder's right to an appraisal of such holder's shares of Company Common Stock and has not effectively withdrawn or lost the right to such appraisal ("Dissenting Shares"), shall not be converted into a right to receive the Merger Consideration, unless such holder withdraws or otherwise loses the right to appraisal for such holder's shares of Company Common Stock. If after the Effective Time such holder withdraws or loses the right to appraisal for such holder's shares of Company Common Stock, such shares of Company Common Stock shall be treated as if they had been converted as of the Effective Time into the right to receive the Merger 6 11 Consideration payable in respect of such shares of Company Common Stock pursuant to Section 3.1(c). 3.2 Payment of Merger Consideration. (a) Payment Agent. Prior to the expiration date of the Offer, the Parent shall designate a bank or trust company reasonably acceptable to the Company to act as payment agent in the Merger (the "Payment Agent"), and, from time to time, prior to or after the Effective Time, the Parent shall make available, or cause the Surviving Corporation to make available, to the Payment Agent cash in amounts and at the times necessary for the payment of the Merger Consideration (the "Payment Fund") upon surrender of certificates representing Company Common Stock as part of the Merger pursuant to Section 3.1. (b) Exchange Procedure. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall cause the Payment Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates"), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Payment Agent and shall be in such form and have such other provisions as the Parent may specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Payment Agent or to such other agent or agents as may be appointed by the Parent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration, and the Certificate so surrendered shall forthwith be cancelled. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, payment may be made to a person other than the person in whose name the Certificate so surrendered is registered if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the satisfaction of the Parent that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 3.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the amount of cash, without interest, into which the shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 3.1. No interest will be paid or will accrue on the cash payable upon the surrender of any Certificate. (c) Termination of Payment Fund. If any portion of the Payment Fund remains undistributed to the holders of the Certificates for six months after the Effective Time, the Parent may require the Payment Agent to deliver such portion to the Parent, and any holders of the Certificates who have not theretofore complied with this Section 3 shall thereafter look only to the Parent for payment of the Merger Consideration. 7 12 (d) No Liability. None of the Parent, the Surviving Corporation or the Payment Agent shall be liable to any person in respect of any of the Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (e) Investment of Payment Fund. The Payment Agent shall invest such portions of the Merger Consideration as the Parent directs (it being understood that any and all interest earned on funds made available to the Payment Agent pursuant to this Agreement shall be the property of, and shall be turned over to, the Parent), provided that such investments shall be in obligations of or guaranteed by the United States of America or of any agency thereof and backed by the full faith and credit of the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Services, Inc. or Standard & Poor's Corporation, respectively, or in deposit accounts, certificates of deposit or banker's acceptances of, repurchase or reverse repurchase agreements with, or Eurodollar time deposits purchased from, commercial banks with capital, surplus and undivided profits aggregating in excess of US$100 million (based on the most recent financial statements of such bank which are then publicly available at the SEC or otherwise). The Merger Consideration shall not be used for any other purpose, except as provided in this Agreement. (f) No Further Ownership Rights in Company Common Stock. All cash paid upon the surrender of Certificates in accordance with this Section 3 shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock theretofore represented by such Certificates, and, from and after the Effective Time, there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation or the Payment Agent for any reason, they shall be cancelled and exchanged as provided in this Section 3. 3.3 Certificate of Incorporation of Surviving Corporation. The Certificate of Incorporation of the Subsidiary, effective immediately following the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation from and after the Effective Time and until thereafter amended as provided by law and such Certificate of Incorporation; provided, however, that at the Effective Time of the Merger such Certificate of Incorporation shall be amended to change the Surviving Corporation's name as contemplated by Section 2.1. 3.4 By-laws of Surviving Corporation. The By-laws of the Subsidiary shall be the By-laws of the Surviving Corporation from and after the Effective Time and until thereafter altered, amended or repealed in accordance with the DGCL, the Certificate of Incorporation of the Surviving Corporation and the said By-laws. 3.5 Directors and Officers of Surviving Corporation. The directors and officers of the Subsidiary immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation. 8 13 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Parent and the Subsidiary as follows: 4.1 Organization, Existence and Good Standing. The Company is a Delaware corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all necessary corporate power to own its properties and assets and to carry on its business as presently conducted. 4.2 Company Capital Stock. The Company's authorized capital consists of 15 million shares of Common Stock and 1.2 million shares of preferred stock, no par value (the "Preferred Stock") of which 3,000,758 shares of Common Stock and no shares of Preferred Stock are issued and outstanding as of the date of this Agreement. Pursuant to a Rights Agreement, dated as of May 21, 1997, as amended, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agreement"), the Company has issued to its stockholders certain rights (the "Rights") to purchase shares of Junior Participating Cumulative Preferred Stock of the Company, which Junior Participating Cumulative Preferred Stock is, under certain circumstances, convertible into Company Common Stock. There were 174,252 shares of Company Common Stock reserved for issuance upon exercise of outstanding Stock Options (as defined in Section 7.10) as of the date of this Agreement. All of the issued and outstanding Company Shares are duly and validly issued, fully paid and nonassessable. Except for the Rights Agreement or as set forth in Exhibit 4.2 to the Disclosure Schedule delivered to the Parent and the Subsidiary by the Company at the time of the execution and delivery of this Agreement (the "Company Disclosure Schedule"), there are no options, warrants, or similar rights granted by the Company or any other agreements to which the Company is a party providing for the issuance or sale by it of any additional securities which would remain in effect after the Effective Time. There is no liability for dividends declared or accumulated but unpaid with respect to any of the Company Shares. 4.3 Subsidiaries. (a) Exhibit 4.3 to the Company Disclosure Schedule lists all of the Company's subsidiaries (the "Company Subsidiaries") and states with respect to each Company Subsidiary, its jurisdiction of incorporation, its authorized and outstanding capital stock, and the ownership of its outstanding voting securities. Other than the Company Subsidiaries and except as described in such Exhibit 4.3, the Company does not own stock in and does not control, directly or indirectly, any other corporation, association or business organization, nor does the Company own an equity interest in, or control, directly or indirectly, any other joint venture or partnership. (b) Each Company Subsidiary is duly organized in its jurisdiction of organization, is validly existing and in good standing in that jurisdiction, and has all necessary corporate power to own its properties and assets and to carry on its business as presently conducted. (c) Except as set forth in Exhibit 4.3 to the Company Disclosure Schedule, (i) all of the issued and outstanding shares of each Company Subsidiary are duly and validly issued, fully paid and nonassessable, and held of record and beneficially by the Company, and (ii) there are 9 14 no options, warrants, or similar rights granted by the Company or any Company Subsidiary, or any other agreements to which the Company or any Company Subsidiary is a party, providing for the issuance or sale by the Company or any Company Subsidiary of any Company Subsidiary securities and which would remain in effect after the Effective Time. 4.4 Foreign Qualifications. The Company and each Company Subsidiary is qualified to do business and is in good standing in each jurisdiction where the nature or character of the property owned, leased or operated by it or the nature of the business transacted by it makes such qualification necessary, except where the failure to so qualify would not have a material adverse effect on its business or operations. 4.5 Power and Authority. Subject to the satisfaction of the conditions precedent set forth herein, the Company has the corporate power to execute, deliver and perform this Agreement and all agreements and other documents executed and delivered or to be executed and delivered by it pursuant to this Agreement, and, subject to the satisfaction of the conditions precedent set forth herein has taken all action required by its Certificate of Incorporation, By-laws or otherwise, to authorize the execution, delivery and performance of this Agreement and such related documents. Except as set forth in Exhibit 4.5 to the Company Disclosure Schedule, the execution and delivery of this Agreement does not and, subject to the receipt of required regulatory approvals (and, in the case of the Merger if less than 90% of the Company Shares are purchased in the Offer, Company stockholder approval) and any other required third-party consents or approvals, the consummation of the Offer and Merger will not, violate any provisions of the Certificate of Incorporation or By-laws of the Company or any provisions of, or result in the acceleration of any obligation under, any mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment or decree, to which the Company is a party, or by which it is bound, or violate any restrictions of any kind to which they are subject which, if violated or accelerated would have a material adverse effect on the Company. 4.6 SEC Filings; Financial Information. (a) The Company has filed with the SEC and made available to the Parent all forms, reports and documents required to be filed with the SEC (the "Company SEC Reports"). The Company SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time of filing (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Company SEC Reports was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto), and each fairly presents in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as at the respective dates thereof and the consolidated statements of income and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal 10 15 and recurring year-end adjustments. The unaudited Balance Sheet dated June 30, 1997 included in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 is referred to as the "Company Balance Sheet." 4.7 Contracts, etc. Exhibit 4.7 to the Company's Disclosure Schedule lists all of the Company's "Material Contracts," defined as all agreements to which the Company or any Company Subsidiary is a party or by which any of them is bound, and which, as of the date of this Agreement, (i) would be required to be filed as "material contracts" with the SEC pursuant to the Exchange Act, or (ii) under which the consequences of a default, nonrenewal or termination would have a material adverse effect on the Company (collectively, the "Material Contracts"). The Company has made the Material Contracts available to the Parent. Except as set forth in Exhibit 4.7 to the Company Disclosure Schedule, to the Company's knowledge: (a) All Material Contracts are (i) legally valid and binding in accordance with their terms, (ii) in full force and effect, and (iii) do not violate any federal, state or local law, rule, regulation or ordinance, and the Company has provided the Parent and the Subsidiary with copies of all such documents. All parties to the Material Contracts have complied with the provisions of the Material Contracts, except for such failures as do not, individually or in the aggregate, have a material adverse effect on the Company. No party is in default under any Material Contract, and no event has occurred which, but for the passage of time or the giving of notice or both, would constitute a default thereunder, except, in each case, where the invalidity of the Material Contract or the default or breach thereunder or thereof would not, individually or in the aggregate, have a material adverse effect on the Company. As of the date hereof, the Company has not received any notice of termination or cancellation or a request to renegotiate any Material Contract. (b) No Material Contract will, by its terms, terminate as a result of the transactions contemplated hereby or require any consent from any obligor thereto in order to remain in full force and effect immediately after the Effective Time, except for contracts or agreements which, if terminated, would not have a material adverse effect on the Company. (c) The Company has not granted any right of first refusal or similar right in favor of any third party with respect to any material portion of its properties or assets (excluding liens described in Section 4.8) or entered into any non-competition agreement or similar agreement restricting its ability to engage in any business in any location. 4.8 Properties and Assets. The Company or one of the Company Subsidiaries owns or leases all of the real and personal property included in the Company Balance Sheet (except assets recorded under capital lease obligations and such property as has been disposed of during the ordinary course of the Company's business since the date of the Company Balance Sheet), free and clear of any liens, claims, charges, exceptions or encumbrances, except for those if any, which in the aggregate are not material and which do not materially affect the continued use of such property. 11 16 4.9 Legal Proceedings. Except as listed in Exhibit 4.9 to the Company Disclosure Schedule, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against the Company, at law or in equity, relating to or affecting the Company, that would reasonably be expected to have a material adverse effect on the Company or the transactions contemplated by this Agreement. 4.10 Subsequent Events. Except as set forth in Exhibit 4.10 to the Company Disclosure Schedule or as contemplated by this Agreement, the Company has not, since the date of the Company Balance Sheet: (a) Incurred any material adverse change. (b) Discharged or satisfied any material lien or encumbrance, or paid or satisfied any material obligation or liability (absolute, accrued, contingent or otherwise) other than (i) liabilities shown or reflected on the Company Balance Sheet or (ii) liabilities incurred or due since the date of the Company Balance Sheet in the ordinary course of business, which discharge or satisfaction would have a material adverse effect on the Company. (c) Increased or established any reserve for taxes or any other liability on its books or otherwise provided therefor which would have a material adverse effect on the Company, except as may have been required due to income or operations of the Company since the date of the Company Balance Sheet. (d) Mortgaged, pledged or subjected to any material lien, charge or other encumbrance any of the assets, tangible or intangible, which assets are material to the business or financial condition of the Company. (e) Sold or transferred any of the assets material to the consolidated business of the Company, canceled any material debts owed to the Company or claims reflected as assets on the Company Balance Sheet, or waived any material rights, except in the ordinary course of business. (f) Granted any general or uniform increase in the rates of pay of employees or any material increase in salary payable or to become payable by the Company to any officer or employee, consultant or agent (other than normal increases consistent with past practices), or by means of any bonus or pension plan, contract or other commitment, increased in a material respect the compensation of any officer, employee, consultant or agent. (g) Except for this Agreement and any other agreement executed and delivered pursuant to this Agreement, entered into any material transaction other than in the ordinary course of business or permitted under other sections of this Agreement. 12 17 (h) Issued any stock (other than pursuant to the Stock Incentive Plans, as defined in Section 7.10), bonds or other securities or any options or rights to purchase any of its securities. 4.11 Accounts Receivable. Since the date of the Company Balance Sheet, the Company has not changed any principle or practice with respect to the recordation of accounts receivable or the calculation of reserves therefor, or any material collection, discount or write-off policy or procedure. The Company is in compliance with the terms and conditions of all third-party payor arrangements relating to its accounts receivable, except to the extent that such noncompliance would not have a material adverse effect on the Company. 4.12 Tax Matters. Except as set forth in Exhibit 4.12 to the Company Disclosure Schedule: (a) Prior to its separation from FHP International Corporation ("FHP") on February 14, 1997, the responsibility for filing the Tax Returns of each of the Talbert Entities (as defined below in this Section 4.12) was administered by FHP, and subsequently by PacifiCare Health Systems, Inc. ("PacifiCare"). Except for any tax periods prior to February 15, 1997, and based upon the best knowledge of the officers of the Company: (i) Each of the Talbert Entities (as defined below in this Section 4.12) has filed all Tax Returns (as defined below in this Section 4.12) that it was required to file. All such Tax Returns were materially correct and materially complete in all respects. All material Taxes (as defined below in this Section 4.12) owed by any of the Talbert Entities (whether or not shown on any Tax Return) have been paid. None of the Talbert Entities currently is the beneficiary of any extension of time within which to file any Tax Return. No material claim has ever been made by an authority in a jurisdiction where any of the Talbert Entities does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no material security interests on any of the assets of any of the Talbert Entities that arose in connection with any failure (or alleged failure) to pay any Tax. (ii) Each of the Talbert Entities has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party. (iii) There is no material dispute or claim concerning any Tax liability of any of the Talbert Entities either (A) claimed or raised by any authority in writing or (B) as to which any of the officers (and employees responsible for Tax matters) of the Talbert Entities has knowledge based upon personal contact with any agent of such authority. 13 18 (iv) None of the Talbert Entities has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (v) None of the Talbert Entities has filed a consent under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code") concerning collapsible corporations. None of the Talbert Entities has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). Except as set forth on Exhibit 4.12(a) to the Company Disclosure Schedule, none of the Talbert Entities is a party to any Tax allocation or sharing agreement. Except as set forth on such Exhibit 4.12(a), none of the Talbert Entities has any liability for the Taxes of any person (other than any of the Talbert Entities) under Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (vi) The unpaid Taxes of the Talbert Entities (A) did not, as of June 30, 1997, materially exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth in the Company Balance Sheet (or in any notes thereto) and (B) do not materially exceed that reserve as adjusted for the passage of time through the consummation of the Offer in accordance with the past custom and practice of the Talbert Entities in filing their Tax Returns. (vii) As of February 28, 1997, the Company and the Company Subsidiaries did not have any receivables from or any liabilities payable to any of the other Talbert Entities. (viii) As discussed in Section 6, the Company has made or will make available to the Parent all Tax Returns and tax records of the Talbert Entities (or copies of such returns or records) currently in possession of any of the Talbert Entities. (b) With respect to the June 30, 1996 Tax Returns filed by FHP, the officers of the Company are not aware of any failure by FHP to include the Talbert Entities in its: (i) consolidated federal income tax return as members of an affiliated group within the meaning of Code Section 1504(a), (ii) California unitary return as members of a unitary group, (iii) Arizona combined return as members of a unitary business or (iv) combined Utah return as members of a unitary group. (c) The officers of the Company are not aware of any material unrecorded liabilities for Taxes for any of the Talbert Entities nor any material 14 19 unrecorded liabilities to FHP under the Tax Allocation Agreement listed in Exhibit 4.12 to the Company Disclosure Schedule for the periods preceding February 15, 1997. (d) The officers of the Company are not aware of any Tax Returns due for the Talbert Entities for Tax periods preceding February 15, 1997 which FHP has not timely filed or caused to be filed. (e) The Company shall use its reasonable efforts to obtain copies of all Tax returns (or portions of returns related to any of the Talbert Entities) filed on behalf of the Talbert Entities that are in the possession of PacifiCare or its related entities and shall make such available to the Parent prior to the Closing Date. (f) Prior to February 14, 1997, the Company was dormant and had no material operations. (g) To the Company's knowledge, FHP has never owned of record any shares of common stock of the Company. (h) Definitions: "Talbert Entities" means the Company, Talbert Medical Management Corporation, Talbert Health Services Corporation. Robert Anderson, DDS, Inc. (CA), (dba Talbert Dental Group); James Brodahl, DDS, Inc. (CA), (dba Talbert Dental Group); Larry Kaban, DDS, Inc. (CA), (dba Talbert Dental Group); John Whitley, DDS, Inc. (CA), (dba Talbert Dental Group); Talbert Medical Group, Inc. (CA), (dba Talbert Medical Group); Talbert Medical Group, LTD. (NV); Talbert Dental Group, P.C. (AZ); Talbert Medical Group, P.C. (AZ); Talbert Dental Group, Inc. (UT); and Talbert Medical Group, Inc. (UT). "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. 4.13 Employee Benefit Plans; Employment Matters. (a) Except as set forth in Exhibit 4.13(a) to the Company Disclosure Schedule, the Company has neither established nor 15 20 maintained nor is obligated to make contributions to or under or otherwise participate in (i) any bonus or other type of incentive compensation plan, program or arrangement (whether or not set forth in a written document), (ii) any pension, profit-sharing, retirement or other plan, program or arrangement, or (iii) any other employee benefit plan, fund or program, including, but not limited to, those described in Section 3(3) of ERISA. To the Company's knowledge, all such plans listed in such Exhibit 4.13(a) (individually, a "Company Plan" and collectively, the "Company Plans") have been operated and administered in all material respects in accordance with, as applicable, ERISA, the Code, the Age Discrimination in Employment Act of 1967, as amended, and the related rules and regulations adopted by those federal agencies responsible for the administration of such laws. To the Company's knowledge, no act or failure to act by the Company has resulted in a "prohibited transaction" (as defined in ERISA) with respect to the Company Plans that is not subject to a statutory or regulatory exception and that could have a material adverse effect on the Company. No "reportable event" (as defined in ERISA, but excluding any event for which notice is waived under the ERISA regulations) has occurred with respect to any of the Company Plans which is subject to Title IV of ERISA. The Company has not previously made, is not currently making, and is not obligated in any way to make, any contributions to any multi-employer plan within the meaning of the Multi-Employer Pension Plan Amendments Act of 1980. (b) Except as set forth in Exhibit 4.13(b) to the Company Disclosure Schedule, the Company is not a party to any oral or written (i) union, guild or collective bargaining agreement which agreement covers employees in the United States (nor is it aware of any union organizing activity currently being conducted in respect to any of its employees), (ii) agreement with any executive officer or other key employee the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction of the nature contemplated by this Agreement and which provides for the payment of in excess of Twenty-Five Thousand Dollars ($25,000.00), or (iii) agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement (except as set forth in this Agreement). 4.14 Compliance with Laws in General. Except as set forth in Exhibit 4.14 to the Company Disclosure Schedule, the Company has not received any notices of, nor to the best of its knowledge, have there been any, violations of any federal, state and local laws, regulations and ordinances relating to its business and operations that would have a material adverse effect on the Company, including, without limitation, the Occupational Safety and Health Act, the Americans with Disabilities Act, the Medicare or applicable Medicaid statutes and regulations, including billing and coding, and any Environmental Laws, and no notice of any pending inspection or violation of any such law, regulation or ordinance has been received by the Company which, if it were determined that a violation had occurred, would have a material adverse effect on the Company. 16 21 4.15 Regulatory Approvals. Except as set forth in Exhibit 4.15 to the Company Disclosure Schedule, to the knowledge of the Company, the Company holds all licenses, certificates of need and other regulatory approvals required or necessary to be applied for or obtained in connection with its business as presently conducted or as proposed to be conducted, except where the failure to obtain such license, certificate of need or regulatory approval would not have a material adverse effect on the Company. All such licenses, certificates of need and other regulatory approvals relating to the business, operations and facilities of the Company are in full force and effect, except where any failure of such license, certificate of need or regulatory approval to be in full force and effect would not have a material adverse effect on the Company. Any and all past litigation concerning such licenses, certificates of need and regulatory approvals, and all claims and causes of action raised therein, has been finally adjudicated. No such license, certificate of need or regulatory approval has been revoked, conditioned (except as may be customary) or restricted, and no action (equitable, legal or administrative), arbitration or other process is pending, or to the best knowledge of the Company, threatened, which in any way challenges the validity of, or seeks to revoke, condition or restrict any such license, certificate of need, or regulatory approval. Subject to compliance with applicable securities laws and the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), the consummation of the Merger will not violate any law or restriction to which the Company is subject which, if violated, would have a material adverse effect on the Company. 4.16 Commissions and Fees. There are no valid claims for brokerage commissions or finder's or similar fees in connection with the transactions contemplated by this Agreement which may be now or hereafter asserted against the Parent or the Company resulting from any action taken by the Company or its officers, Directors or agents, or any of them, except for fees owed to Smith Barney Inc. 4.17 No Untrue Representations. No representation or warranty by the Company in this Agreement, and no Exhibit or certificate issued by the Company and furnished or to be furnished to the Parent and the Subsidiary pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact in response to the disclosure requested, or omits or will omit to state a material fact necessary to make the statements or facts contained therein in response to the disclosure requested not misleading in light of all of the circumstances then prevailing. 4.18 Amendment of Rights Agreement. The Rights Agreement has been duly and validly amended to the extent necessary to permit the Parent and the Subsidiary to perform their obligations under this Agreement and consummate the transactions contemplated hereby. 4.19 14D-1 Information. The information supplied, and to be supplied to, the Parent in writing by the Company for inclusion in the Parent's Schedule 14D-1 shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 17 22 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUBSIDIARY Each of the Parent and the Subsidiary hereby, jointly and severally, represent and warrant to the Company as follows: 5.1 Organization, Existence and Good Standing of the Parent and Subsidiary. (a) The Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Parent has all necessary corporate power and authority to own its properties and assets and to carry on its business as presently conducted. The Parent is qualified to do business and is in good standing in each jurisdiction where the nature or character of the property owned, leased or operated by it or the nature of the business transacted by it makes such qualification necessary, except where the failure to be so qualified or be in good standing would not have a material adverse effect. (b) The Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Subsidiary's authorized capital consists of 1,000 shares of Common Stock, par value $.01 per share, all of which shares are validly issued and outstanding, fully paid and registered in the name of and owned by the Parent free and clear of all liens, claims and encumbrances. The Subsidiary has all necessary corporate power and authority to own its properties and assets and to carry on its business as presently conducted. The Subsidiary is qualified to do business and is in good standing in each jurisdiction where the nature or character of the property owned, leased or operated by it or the nature of the business transacted by it makes such qualification necessary, except where the failure to be so qualified or be in good standing would not have a material adverse effect. 5.2 Power and Authority; Non-Contravention. (a) Each of the Parent and the Subsidiary has all necessary corporate power and authority to execute, deliver and perform this Agreement and all agreements and other documents executed and delivered, or to be executed and delivered, by it pursuant to this Agreement, and, subject to the satisfaction of the conditions precedent set forth herein, has taken all actions required by law, its Certificate of Incorporation, its By-laws or otherwise, to authorize the execution and delivery of this Agreement and such related documents. The Agreement has been duly and validly executed and delivered by the Parent and the Subsidiary and, assuming the due authorization, execution and delivery by the Company, constitutes the legal, valid and binding obligation of each of them, enforceable in accordance with its terms. (b) The execution and delivery of this Agreement does not and, subject to compliance with the HSR Act, the consummation of the transactions contemplated hereby will not, violate any provisions of the Certificate of Incorporation or By-laws of either the Parent or the Subsidiary, or any agreement, instrument, order, judgment or decree to which the Parent or the Subsidiary is a party or by which either is bound, violate any restrictions of any kind to which the Parent or the Subsidiary is subject, or result in the creation of any lien, charge or encumbrance upon any of the property or assets of the Subsidiary. 18 23 5.3 Brokers. There are no claims for brokerage commissions, investment bankers' fees or finder's fees in connection with the transaction contemplated by this Agreement resulting from any action taken by either the Parent or the Subsidiary or any of its officers, directors or agents, except for fees owed to NationsBanc Capital Markets, Inc. 5.4 No Subsidiaries. The Subsidiary does not own stock in, and does not control directly or indirectly, any other corporation, association or business organization. The Subsidiary is not a party to any joint venture or partnership. 5.5 Legal Proceedings. There are no actions, suits or proceedings pending or threatened against either the Parent or the Subsidiary, that could reasonably be expected to have a material adverse effect on the ability of the Parent or the Subsidiary to consummate the transactions contemplated by this Agreement. 5.6 No Contracts or Liabilities. The Subsidiary was formed solely for the purpose of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. Other than the obligations created under this Agreement, the Subsidiary has no obligations or liabilities (contingent or otherwise) under any contracts, claims, leases, loans or otherwise. 5.7 Available Funds. The Parent has funds available sufficient to consummate the Offer and the Merger on the terms contemplated by this Agreement. The Parent and the Subsidiary acknowledge, however, that they are in any case obligated to accept for payment and promptly pay for all Company Shares validly tendered pursuant to the Offer, subject to the conditions of the Offer, and to consummate the Merger as contemplated by this Agreement. 5.8 The Parent to Cause Subsidiary to Perform. The Parent shall cause the Subsidiary to fulfill the Subsidiary's covenants and obligations under this Agreement. 5.9 Other Transactions. The Parent and its affiliates are not engaged in, or intending to engage in or announce, prior to the Effective Time, any other acquisition or similar transaction in the markets served by the Company and the Company Subsidiaries. 5.10 14D-9 Information. The information supplied, and to be supplied, to the Company in writing by the Parent and the Subsidiary for inclusion in the Company's Schedule 14D-9 shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.11 Company Shares. Neither the Parent nor any of its affiliates holds as of the date of this Agreement, or shall hold at any time prior to the consummation of the Offer, any Company Shares. 19 24 SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS 6.1 Access to Information. Between the date hereof and the Closing Date, the Company will give to the Parent and its counsel, accountants and other representatives reasonable access to all the Company's properties, documents, contracts, personnel files and other records and shall furnish the Parent with copies of such documents and with such information with respect to the Company's affairs as the Parent may from time to time reasonably request. The Company will disclose and make available to the Parent and its representatives all books, contracts, accounts, personnel records, letters of intent, papers, records, communications with regulatory authorities and other documents relating to the business and operations of the Company. In addition, the Company shall make available to the Parent all such banking, investment and financial information as shall be necessary to allow for the efficient integration of the Company's banking, investment and financial arrangements with those of the Parent at the Effective Time. 6.2 Return of Records. If the transactions contemplated hereby are not consummated and this Agreement terminates, each party agrees to promptly return all documents, contracts, records or properties of the other party, all copies thereof furnished pursuant to this Section 6 or otherwise, and all copies thereof made by or for the receiving party, and agrees to promptly destroy any analyses, evaluations, compilations or other materials derived from such documents. All information disclosed by any party or any affiliate or representative of any party shall be deemed to be "Evaluation Material" under the terms of the Confidentiality Agreement, dated July 23, 1997, between the Company and the Parent (the "Confidentiality Agreement"). 6.3 Effect of Access. Nothing contained in this Section 6 shall be deemed to create any duty or responsibility on the part of either party to investigate or evaluate the value, validity or enforceability of any contract, lease or other asset included in the assets of the other party. With respect to matters as to which any party has made express representations or warranties herein, the parties shall be entitled to rely upon such express representations and warranties irrespective of any investigations made by such parties, except to the extent that such investigations result in actual knowledge of the inaccuracy or falsehood of particular representations and warranties. SECTION 7. COVENANTS 7.1 Preservation of Business. From the date of this Agreement, the Company will use its commercially reasonable best efforts to preserve the business organization of the Company intact, to keep available to the Parent and the Surviving Corporation the services of the present employees of the Company, and to preserve for the Parent and the Surviving Corporation the goodwill of the suppliers, customers and others having business relations with the Company. 7.2 Material Transactions. Prior to the Effective Time, the Company will not (other than as contemplated by the terms of this Agreement and the related documents, other than in 20 25 the ordinary course of business and consistent with prior practice, and other than with respect to transactions for which binding commitments have been entered into prior to the date hereof and transactions described in Exhibit 7.2 to the Company Disclosure Schedule which do not vary materially from the terms set forth on such Exhibit 7.2), without first obtaining the written consent of the Parent, which consent shall not be unreasonably withheld: (a) Encumber any material asset or enter into any material transaction or make any material contract or commitment relating to the properties, assets and business of the Company, other than in the ordinary course of business or as otherwise disclosed herein. (b) Enter into any employment contract which is not terminable upon notice of 30 days or less, at will, and without penalty to the Company except as provided herein. (c) Enter into any contract or agreement (i) which cannot be performed within three months or less, or (ii) which involves the expenditure of over One Hundred Thousand Dollars ($100,000). (d) Make any payment or distribution to the trustee under any bonus, pension, profit-sharing or retirement plan or incur any obligation to make any such payment or contribution which is not in accordance with the Company's usual past practice, or, except as required pursuant to the Employee Benefits and Compensation Allocation Agreement dated as of February 14, 1997 between the Company and FHP, make any payment or contributions or incur any obligation pursuant to or in respect of any other plan or contract or arrangement providing for bonuses, executive incentive compensation, pensions, deferred compensation, retirement payments, profit-sharing or the like, establish or enter into any such plan, contract or arrangement, or terminate any plan. (e) Extend credit to anyone, except in the ordinary course of business consistent with prior practices. (f) Guarantee the obligation of any person, firm or corporation other than the Talbert Entities, except in the ordinary course of business consistent with prior practices. (g) Amend its Certificate of Incorporation or By-laws. (h) Take any action described in Section 4.10(b) to 4.10(h), inclusive. 7.3 Exemption from State Takeover Laws. The Company shall take all reasonable steps necessary and within its power to exempt the Offer and the Merger from the requirements of any state takeover statute or other similar state law which would prevent or impede the consummation of the transactions contemplated hereby. 21 26 7.4 Public Disclosures. The Parent and the Company will consult with each other before issuing any press release or otherwise making any public statement with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation except as may be required by applicable law or requirements of the NYSE or NASDAQ. The parties shall issue a joint press release, mutually acceptable to the Parent and the Company, promptly upon execution and delivery of this Agreement. 7.5 Resignation of Company Directors. At the Effective Time, the Original Directors shall be deemed to have resigned. 7.6 Notice of Subsequent Events. Each party hereto shall notify the other parties of any changes, additions or events of which they have knowledge which would cause any material change in or material addition to any Exhibit to its Disclosure Schedule delivered by the notifying party under this Agreement, promptly after the occurrence of the same. If the effect of such change or addition would, individually or in the aggregate with the effect of changes or additions previously disclosed pursuant to this Section 7.6, constitute a material adverse effect on the notifying party, the non-notifying party may, within ten days after receipt of such notice and so long as Company Shares have not been purchased in the Offer, elect to terminate this Agreement. If the non-notifying party does not give written notice of such termination within such 10-day period, the non-notifying party shall be deemed to have consented to such change or addition and shall not be entitled to terminate this Agreement by reason thereof. 7.7 No Solicitations. The Company shall not, directly or indirectly, furnish information and access, in response to unsolicited requests therefor, to any corporation, partnership, person or other entity or group, participate in discussions and negotiate with such corporation, partnership, person or other entity or group concerning any proposal to acquire such party upon a merger, purchase of assets, purchase of or tender offer for shares of its Common Stock or similar transaction (an "Acquisition Transaction"). Notwithstanding the foregoing, if prior to the acceptance for payment of Company Shares pursuant to the Offer, the Board of Directors, after receiving advice from outside legal counsel to the Company, determines that a failure to act would be inconsistent with its fiduciary duties to the Company's stockholders under applicable law, the Company may (i) furnish information about and access to the Company to any third party in response to an unsolicited request pursuant to a confidentiality agreement with terms and conditions similar to the Confidentiality Agreement, (ii) participate in discussions and negotiations regarding any potential Acquisition Transaction, and/or (iii) terminate this Agreement. The Company shall notify the Parent of any unsolicited request for information and access in connection with a possible Acquisition Transaction involving such party, such notification to include the identity of such third party and the proposed material terms of such possible Acquisition Transaction. 7.8 Other Actions. Subject to the provisions of Section 7.6 hereof, none of the Company, the Parent and the Subsidiary shall knowingly or intentionally take any action, or omit to take any action, if such action or omission would, or reasonably might be expected to, result in any of its representations and warranties set forth herein being or becoming untrue in any 22 27 material respect, or in any of the conditions to the Offer set forth in this Agreement not being satisfied, or (unless such action is required by applicable law) which would materially adversely affect the ability of the Company or the Parent to obtain any consents or approvals required for the consummation of the Offer or the Merger without imposition of a condition or restriction which would have a material adverse effect on the Surviving Corporation or (unless such action is permitted by Section 7.7) which would otherwise materially impair the ability of the Company or the Parent to consummate the Offer and the Merger in accordance with the terms of this Agreement or materially delay such consummation. 7.9 Cooperation. (a) The Parent, the Subsidiary and the Company shall together, or pursuant to an allocation of responsibility agreed to between them, (i) cooperate with one another in determining whether any filings required to be made or consents required to be obtained in any jurisdiction prior to the Effective Time in connection with the consummation of the transactions contemplated hereby and cooperate in making any such filings promptly and in seeking to obtain timely any such consents, (ii) cooperate with one another in coordinating the plan devised by the Parent for the swift integration of the Company and the Company Subsidiaries with the operations of the Parent as soon as practicable after the Effective Time, (iii) use their respective best efforts to cause to be lifted any injunction prohibiting the Merger, or any part thereof, or the other transactions contemplated hereby, and (iv) furnish to one another and to one another's counsel all such information as may be required to effect the foregoing actions. (b) Subject to the terms and conditions herein provided, and unless this Agreement shall have been validly terminated as provided herein, each of the Parent, the Subsidiary and the Company shall use all reasonable efforts (i) to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements which may be imposed on such party (or any subsidiaries or affiliates of such party) with respect to this Agreement and to consummate the transactions contemplated hereby and (ii) to obtain (and to cooperate with the other party to obtain) any consent, authorization, order or approval of, or any exemption by, any governmental entity and/or any other public or private third party which is required to be obtained or made by such party or any of its subsidiaries or affiliates in connection with this Agreement and the transactions contemplated hereby. Each of the Parent, the Subsidiary and the Company will promptly cooperate with and furnish information to the other in connection with any such burden suffered by, or requirement imposed upon, either of them or any of their subsidiaries or affiliates in connection with the foregoing. 7.10 Additional Agreements Regarding Benefit Plans. (a) As soon as practicable following the date of this Agreement, the Board of Directors of the Company (or, if appropriate, any committee administering the Stock Incentive Plans (as defined below)) shall adopt such resolutions or take such other actions (if any) as are required to provide that each outstanding stock option to purchase shares of Company Common Stock (a "Stock Option") heretofore granted under any stock option or stock purchase plan, program or arrangement or other option agreement or contingent stock grant plan of the Company or any of its subsidiaries (collectively, the "Stock Incentive Plans") shall be accelerated so as to be fully exercisable on or prior to the consummation of the Offer, and the Company shall assure that (i) any Stock Options (other than 23 28 options granted under Article 7 of the Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan) may be exercised and the corresponding Company Common Stock be available to be tendered pursuant to the Offer, except to the extent that such tender could result in short-swing profit liability under Section 16 of the Exchange Act, (ii) Stock Options granted under Article 7 of the Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan, except for any Stock Option granted within six months of the termination of such Stock Option, shall be fully exercisable on consummation of the Offer and prior to any of the resignations contemplated pursuant to Section 1.3, and (iii) any Stock Options not tendered that remain outstanding immediately after the consummation of the Offer shall no later than immediately prior to the consummation of the Merger, be converted into, surrendered in exchange or otherwise settled for an amount in cash from the Company, payable at the time of such conversion, exchange or settlement, equal to the product of (x) the number of shares of Company Common Stock then subject to the Stock Option and (y) the excess of the Per Share Amount over the per share exercise price of the Stock Option, subject, in each case to any applicable withholding taxes. A listing of all outstanding Stock Options as of August 14, 1997, showing the portions of such Stock Options that are exercisable as of such date, the dates upon which such Stock Options expire and the exercise price of such Stock Options, is set forth in Exhibit 7.10 of the Company Disclosure Schedule. (b) All Stock Incentive Plans shall terminate as of the Effective Time, and the Company shall use its best efforts to ensure that following the Effective Time no holder of a Stock Option or any participant in any Stock Incentive Plan shall have any right thereunder to acquire any capital stock of the Company, the Parent or the Subsidiary. (c) All service credited to each employee by the Company through the Effective Time shall be recognized by the Parent for all purposes, including for purposes of eligibility, vesting and benefit accruals under any employee benefit plan provided by the Surviving Corporation or the Parent for the benefit of the employees; provided, however, that, to the extent necessary to avoid duplication of benefits, amounts payable under employee benefit plans provided by the Surviving Corporation or the Parent may be reduced by amounts payable under similar Company plans with respect to the same periods of service. (d) The Parent hereby agrees not to take any action, or omit to take any action, that would cause the Surviving Corporation not to honor (without modification) and assume the employment agreements, executive termination agreements and individual benefit arrangements listed in Exhibit 4.13(a) to the Company Disclosure Schedule, all as in effect on the date hereof or as amended after the date hereof with the Parent's consent pursuant to Section 7.2. (e) To provide bonuses for certain employees who do not participate in the Company's Management Incentive Program, and to reward them for staying with the Company to facilitate the transactions contemplated by this Agreement, the Parent shall contribute US $923,000 to be paid to the employees, and in the amounts, listed in the schedule attached to the letter agreement of even date herewith between the Company and the Parent. These respective amounts shall be paid on January 1, 1998 to the listed employees then employed by the Surviving Corporation or any of its affiliates. If any listed employee is terminated before 24 29 January 1, 1998, other than for cause, he or she will be paid the designated amount on the effective date of termination. (f) The Parent hereby agrees to cause the Company and the Surviving Corporation to pay, at the time of the consummation of the Offer, to each employee currently participating in the Company's Management Incentive Program cash awards in the amounts listed on the schedule attached to the letter agreement of even date herewith between the Company and the Parent. 7.11 Physician Warrants. As soon as possible following the purchase of Company Shares pursuant to the Offer, the Parent shall offer to those physicians who are employed by Talbert Medical Group, Inc. (CA) (dba Talbert Medical Group), Talbert Medical Group, Ltd. (NV), Talbert Medical Group, P.C. (AZ), or Talbert Medical Group, Inc. (UT) and who are designated by the Company before such purchase warrants to purchase the common stock of the Parent (the "Warrants"). The Warrants shall be issued pursuant to Warrant Agreements in substantially the form attached as Exhibit 7.11. Promptly following the purchase of Company Shares in the Offer, the Parent shall cause the offer and sale of the Warrants to be registered under the Securities Act of 1933. 7.12 Indemnification and Insurance. (a) The Parent and the Subsidiary agree that all rights to indemnification for acts or omissions occurring prior to the Effective Time now existing in favor of the current or former directors, officers, employees and agents (the "Indemnified Parties") of the Company and its subsidiaries as provided in their respective articles of incorporation or by-laws (or similar organizational documents) shall survive the Merger and shall continue in full force and effect in accordance with their terms for a period of not less than six years. From and after the Effective Time and for a period of not less than six years thereafter, the Parent shall, and shall cause the Surviving Corporation to, indemnify and hold harmless any and all Indemnified Parties to the full extent such persons may be indemnified under applicable law, their respective certificates of incorporation or by-laws (or similar organizational documents) or pursuant to indemnification agreements as in effect on the date of this Agreement for acts or omissions occurring at or prior to the Effective Time, and the Parent shall, or shall cause the Surviving Corporation to, advance litigation expenses incurred by such persons in connection with defending any action arising out of such acts or omissions to the extent permitted by law or as otherwise provided by the respective terms and provisions of such certificates of incorporation, by-laws, similar documents or indemnification agreements as in effect on the date hereof. (b) For not less than four years from the Effective Time, the Parent shall cause to be maintained in effect directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (a copy of which has been heretofore delivered to the Parent) on terms (including coverage amounts) comparable to those now applicable under the current Company policy; provided, however, that in no event shall the Parent be required to pay a premium in any one year in an amount in excess of 175% of the annual premium paid by the Company (which annual premium the Company represents and warrants to be approximately US$282,000); and provided further that 25 30 if the annual premiums of such insurance coverage exceed such amount, the Parent shall be obligated to obtain a policy with the greatest coverage available for a cost not exceeding such amount. (c) This Section 7.12 shall survive the consummation of the Merger, is intended to benefit the Company, the Parent, the Surviving Corporation and the Indemnified Parties, and shall be binding on all successors and assigns of the Parent and the Surviving Corporation. 7.13 Antitrust. The Parent, the Subsidiary and the Company shall take such actions as may be necessary to obtain any governmental consents, orders or approvals required for the consummation of the Offer and the Merger, or to avoid the imposition of any prohibition or the seeking of any restraining order or similar act. Such actions may include the making of filings and requests for extensions and waivers. Such actions may also include the sale or other disposition of assets. 7.14 Share Repurchase. Before the Closing Date and after the purchase of Company Shares pursuant to the Offer, the Company shall, and the Parent shall cause the Company to, purchase, for a cash consideration equal to the Per Share Amount, from any current or former director or officer of the Company whose service with the Company is terminated for any reason between the consummation of the Offer and the Closing Date, all shares of Company Common Stock held by any such individual who desires so to sell such shares, promptly upon delivery to the Company of the certificates therefor for cancellation. SECTION 8. TERMINATION, AMENDMENT AND WAIVER 8.1 Termination. This Agreement may be terminated at any time prior to the purchase of Company Shares pursuant to the Offer: (a) by mutual written consent of the Parent, the Subsidiary and the Company; (b) by either the Parent or the Company; (i) if a United States federal or state court of competent jurisdiction or other United States federal or state governmental entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Offer (or the acceptance of or payment for Company Shares) or the Merger and such order, decree, ruling or other action shall have become final and nonappealable; provided, that the party seeking to terminate this Agreement shall have used all reasonable efforts to remove such order, decree, ruling or other action; (ii) if, before the purchase of Company Shares in the Offer, there is, or is discovered, a material breach by the other party of any representation, warranty, covenant or other agreement contained in this Agreement that cannot 26 31 be or has not been cured within 10 days after the occurrence or discovery of such breach by the breaching party, whichever is later (a "Material Breach") (provided that the terminating party is not then in Material Breach of any representation, warranty, covenant or other agreement contained in this Agreement); (c) by the Company if the Parent and the Subsidiary fail to commence the Offer in accordance with this Agreement, or if the Offer expires without the purchase of Company Shares pursuant to the Offer; or (d) by the Company under the circumstances described in the second sentence of Section 7.7. 8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of any party, other than the provisions of Sections 6.2, 7.4, 8.2 and 8.6, and except to the extent that such termination results from the willful and material breach by a party of any of its representations, warranties, covenants or other agreements set forth in this Agreement. 8.3 Amendment. This Agreement may be amended by the parties at any time before or after any required approval of matters presented in connection with the Merger by the holders of the Company Shares; provided, however, that after such approval, there shall be made no amendment that pursuant to Section 251(d) of the DGCL requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. 8.4 Extension; Waiver. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 8.3, waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. 8.5 Procedure for Termination, Amendment, Extension or Waiver. A termination of this Agreement pursuant to Section 8.1, an amendment of this Agreement pursuant to Section 8.3, or an extension or waiver pursuant to Section 8.4 shall, in order to be effective, require in the case of each of the Parent, the Subsidiary and the Company, action by its Board of Directors or the duly authorized designee of the Board of Directors. Once the Subsidiary's designees are appointed or elected to the Board of Directors of the Company as provided in Section 1.3, the affirmative vote of the Original Directors shall be required for the Company to agree to any such termination, amendment, extension or waiver. 27 32 8.6 Termination Fee; Expenses. In the event of a termination of this Agreement by the Company pursuant to Section 8.1(d), the Company shall pay to the Parent, in immediately available funds, the sum of $8 million and shall promptly reimburse upon demand therefor (up to a maximum amount of $2 million) all documented out-of-pocket expenses incurred by Parent and Subsidiary in connection with the transactions contemplated by this Agreement. In the event that Company Shares are not purchased pursuant to the Offer, the Parent shall pay to the Company, in immediately available funds, the sum of $8 million and shall promptly reimburse upon demand therefor (up to a maximum amount of $2 million) all documented out-of-pocket expenses incurred by the Company in connection with the transactions contemplated by this Agreement, unless such failure to purchase Company Shares is (i) attributable solely to an event of the kind described in Section 8.1(b)(i) that is not the result of any action or inaction by the Parent or the Subsidiary which constitutes a breach of this Agreement, (ii) attributable solely to Parent's valid termination of this Agreement pursuant to Section 8.1(b)(ii) by reason of the Company's breach of a representation, warranty, covenant or agreement set forth in this Agreement, or (iii) attributable solely to a failure of a condition set forth in Exhibit 1.1 by reason of any act, event or circumstance that is beyond the control of the Parent and the Subsidiary. Notwithstanding this Section 8.2, no payment of the fee contemplated by this Section 8.6 shall relieve any party to this Agreement from liability to another for its willful and material breach of any of its representations, warranties, covenants or other agreements set forth in this Agreement. Except as otherwise required by the preceding sentences of this Section 8.6, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. SECTION 9. CONDITIONS TO THE CLOSING 9.1 Mutual Conditions. The respective obligations of each party to effect the Merger shall be subject to the satisfaction, at or prior to the Closing Date, of the following conditions (any of which may be waived in writing by the Parent, the Subsidiary and the Company, to the extent permitted by applicable law): (a) None of the Parent, the Subsidiary or the Company nor any of their respective subsidiaries shall be subject to any order, decree or injunction by a United States federal or state court of competent jurisdiction which prevents the consummation of the Merger. (b) No statute, rule or regulation shall have been enacted or promulgated by the government or any governmental agency of the United States or any state that prohibits the consummation of the Merger. (c) The Subsidiary shall have purchased and paid for Company Shares pursuant to the Offer. (d) Any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. 28 33 (e) If required by law, the holders of shares of the Company Common Stock shall have approved the adoption of this Agreement. SECTION 10. MISCELLANEOUS 10.1 Nonsurvival of Representations and Warranties. None of the Company's representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the purchase of Company Shares in the Offer. All covenants and agreements set forth in this Agreement shall survive in accordance with their terms. 10.2 Notices. Any communications required or desired to be given hereunder shall be deemed to have been properly given if sent by hand delivery or by facsimile and overnight courier to the parties hereto at the following addresses, or at such other address as a party may advise the other in writing from time to time: If to the Parent or the Subsidiary: MedPartners, Inc. 3000 Galleria Tower Suite 1000 Birmingham, Alabama 35244 Attention: President Fax: (205) 733-4154 with a copy to: Haskell Slaughter & Young, L.L.C. 1200 AmSouth/Harbert Plaza 1901 Sixth Avenue North Birmingham, Alabama 35244 Attention: Robert E.L. Garner, Esq. Fax: (205) 324-1133 If to the Company: Talbert Medical Management Holdings Corporation 3540 Howard Way Costa Mesa, California 92626 Attention: President Fax: 714-436-4860 29 34 with a copy to: O'Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071 Attention: C. James Levin, Esq. Fax: 213-669-6407 All such communications shall be deemed to have been delivered on the date of hand delivery or on the next business day following the deposit of such communications with the overnight courier. 10.3 Further Assurances. Each party hereby agrees to perform any further acts and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. 10.4 Governing Law. This Agreement shall be interpreted, construed and enforced with the laws of the State of Delaware, applied without giving effect to any conflicts-of-law principles. 10.5 Knowledge. "To the knowledge", "to the best knowledge, information and belief", or any similar phrase shall be deemed to refer to the knowledge of the Chief Executive Officer or Chief Financial Officer of a party and to include the assurance that such knowledge is based upon a reasonable investigation, unless otherwise expressly provided. 10.6 Material Adverse Change or Material Adverse Effect. "Material adverse change" or "material adverse effect" means, when used in this Agreement or Exhibit 1.1 hereto in connection with the Company or the Parent, any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on the business or financial position of such party and its subsidiaries and other controlled entities identified herein or in any Schedule or Disclosure Schedule delivered pursuant to this Agreement, including the subsidiaries and other entities, taken as a whole; provided, however, that "material adverse change" and "material adverse effect" shall be deemed to exclude the impact of (i) changes in generally accepted accounting principles, (ii) changes in applicable law, (iii) changes or effects of any kind that impact the party's industry generally or, as to the Company, Southern California, (iv) changes in Medicare reimbursement rates, (v) changes or effects that are reasonably expected to have only short-term impacts on the party, (vi) changes or effects arising from the announcement of this Agreement or from any party's performance under this Agreement, and (vii) any changes resulting from any restructuring or other similar charges or write-offs taken by the Company with the consent of the Parent. 10.7 Hazardous Materials. The term "Hazardous Materials" means any material which has been determined by any applicable governmental authority to be harmful to the health or safety of human or animal life or vegetation, regardless of whether such material is found on or below the surface of the ground, in any surface or underground water, airborne in ambient 30 35 air or in the air inside any structure built or located upon or below the surface of the ground or in building materials or in improvements of any structures, or in any personal property located or used in any such structure, including, but not limited to, all hazardous substances, imminently hazardous substances, hazardous wastes, toxic substances, infectious wastes, pollutants and contaminants from time to time defined, listed, identified, designated or classified as such under any Environmental Laws (as defined in Section 10.8 regardless of the quantity of any such material). 10.8 Environmental Laws. The term "Environmental Laws" means any federal, state or local statute, regulation, rule or ordinance, and any judicial or administrative interpretation thereof, regulating the use, generation, handling, storage, transportation, discharge, emission, spillage or other release of Hazardous Materials or relating to the protection of the environment. 10.9 Captions. The captions or headings in this Agreement are made for convenience and general reference only and shall not be construed to describe, define or limit the scope or intent of the provisions of this Agreement. 10.10 Entire Agreement. This Agreement, the Company Disclosure Schedule, the Exhibits attached hereto and the Confidentiality Agreement contain the entire agreement of the parties and supersede any and all prior or contemporaneous agreements between the parties, written or oral, with respect to the transactions contemplated hereby. 10.11 Counterparts. This Agreement may be executed in several counterparts, each of which, when so executed, shall be deemed to be an original, and such counterparts shall, together, constitute and be one and the same instrument. 10.12 Binding Effect. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto, and their respective successors and assigns, and, except as contemplated by Sections 1.3(b), 7.10, 7.11, 7.12 and 7.14, no other person shall acquire or have any right under or by virtue of this Agreement. No party may assign any right or obligation hereunder without the prior written consent of the other parties. 10.13 No Rule of Construction. The parties agree that, because all parties participated in negotiating and drafting this Agreement, no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting this Agreement. 31 36 IN WITNESS WHEREOF, the Parent, the Subsidiary and the Company have caused this Agreement to be executed by their respective duly authorized officers, all as of the day and year first above written. MEDPARTNERS, INC. By /s/ LARRY R. HOUSE --------------------------------------- Larry R. House Chairman and Chief Executive Officer TALMED MERGER CORPORATION By /s/ LARRY R. HOUSE --------------------------------------- Larry R. House Chairman of the Board TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION By /s/ JACK D. MASSIMINO --------------------------------------- Jack D. Massimino President and CEO 32 37 EXHIBIT 1.1 CONDITIONS OF THE OFFER Notwithstanding any other term of the Offer or the Agreement, the Subsidiary shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to the Subsidiary's obligation to pay for or return tendered shares of Company Common Stock after the termination or withdrawal of the Offer), to pay for any shares of Company Common Stock tendered pursuant to the Offer unless (i) there shall have been validly tendered and not withdrawn prior to the expiration of the Offer such number of shares of Company Common Stock which would constitute not less than 51% (determined on a fully diluted basis) of the outstanding shares of Company Common Stock (the "Minimum Condition"), and (ii) any waiting period under the HSR Act applicable to the purchase of shares of Company Common Stock pursuant to the Offer shall have expired or been terminated. Furthermore, notwithstanding any other terms of the Offer or the Agreement, the Subsidiary shall not be required to accept for payment or, subject as aforesaid, to pay for any shares of Company Common Stock not theretofore accepted for payment or paid for, and may terminate the Offer if, at any time on or after the date of the Agreement and before the acceptance of such shares for payment, any of the following events shall occur (other than as a result of any action or inaction of the Parent or any of its subsidiaries which constitutes a breach of the Agreement): (a) there shall have been entered any order, preliminary or permanent injunction, decree, judgment or ruling in any suit, action or proceeding that (i) makes illegal or otherwise directly or indirectly restrains or prohibits the acquisition by the Parent or the Subsidiary of any shares of Company Common Stock under the Offer or the making or consummation of the Offer or the Merger, the performance by the Company of any of its obligations under this Agreement or the consummation of any purchase of Company Common Stock contemplated hereby, (ii) prohibits or limits the ownership or operation by the Company, the Parent or any of their respective subsidiaries of a material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or the Parent and its subsidiaries, taken as a whole, or compels the Company or the Parent to dispose of or hold separate any material portion of the business or assets of the Company and its subsidiaries, taken as a whole, or the Parent and its subsidiaries, taken as a whole, as a result of the Offer or the Merger, (iii) imposes material limitations on the ability of the Parent or the Subsidiary to acquire or hold, or exercise full rights of ownership of, any shares of Company Common Stock accepted for payment pursuant to the Offer including, without limitation, the right to vote such Company Common Stock on all matters properly presented to the stockholders of the Company or (iv) prohibits the Parent or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company and its subsidiaries, taken as a whole; or A-1 38 (b) there shall be any law enacted, entered, enforced, promulgated or deemed applicable to the Offer or the Merger, or any other action shall be taken by any governmental entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that results, directly or indirectly, in any of the consequences referred to in clauses (i) through (iv) of paragraph (a) above; or (c) there shall have occurred any material adverse change to the Company; or (d) (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified in a manner adverse to the Parent or the Subsidiary its approval or recommendation of the Offer, the Merger or this Agreement, or approved or recommended any other acquisition proposal or (ii) the Company shall have entered into any agreement to consummate any acquisition proposal; or (e) any of the representations and warranties of the Company set forth in the Agreement that are qualified as to materiality shall not be true and correct or any such representations and warranties that are not so qualified shall not be true and correct in any respect that is reasonably likely to have a material adverse effect, in each case at the date of the Agreement and at the scheduled expiration of the Offer; or (f) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under this Agreement; or (g) there shall have occurred and be continuing to exist for at least three business days (i) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange (excluding any coordinated trading halt triggered solely as a result of a specified decrease in a market index), (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States which in any case is reasonably expected to have a material adverse effect or to materially adversely affect the Parent's or the Subsidiary's ability to complete the Offer or the Merger or materially delay the consummation of the Offer, the Merger or both or (iv) in case of any of the foregoing existing on the date of this Agreement, material acceleration or worsening thereof; or (h) the Agreement shall have been terminated in accordance with its terms. A-2 39 Subject to the provisions of the Agreement, the foregoing conditions are for the sole benefit of the Parent and may, subject to the terms of the Agreement, be waived by the Subsidiary and the Parent in whole or in part at any time and from time to time in their sole discretion. The failure by the Parent at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. Terms used but not defined herein shall have the meanings assigned to such terms in the Agreement to which this Exhibit 1.1 is a part. A-3 EX-4 5 RELEVANT PORTIONS FROM THE PROSPECTUS 1 Exhibit 4 TRANSACTION 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:
Name Number of Shares --- ---------------- Jack D. Massimino . . . . . . . . . . . . . . 150,000(1) Wescott 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 =======
- - ------------ (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 Financial Date." 2 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." 2 EX-5 6 TALBERT MED. MGMT. HLDGS. CORP. 1996 STOCK INCEN. 1 EXHIBIT 5 TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION 1996 STOCK INCENTIVE PLAN 2 TABLE OF CONTENTS
Page ---- 1. THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Administration and Authorization; Power and Procedure . . . . . . . . . . . . . . . . . 1 1.3 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.4 Shares Available for Awards; Share Limits . . . . . . . . . . . . . . . . . . . . . . . 3 1.5 Grant of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.6 Award Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.7 Limitations on Exercise and Vesting of Awards . . . . . . . . . . . . . . . . . . . . . 4 1.8 No Transferability; Limited Exception to Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.3 Limitations on Grant and Terms of Incentive Stock Options . . . . . . . . . . . . . . . 6 2.4 Limits on 10% Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.5 Cancellation and Regrant/Waiver of Restrictions . . . . . . . . . . . . . . . . . . . . 7 2.6 Options and Rights in Substitution for Stock Options Granted by Other Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 Exercise of Stock Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4. RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1 Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.2 Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.3 Return to the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES . . . . . . . . . . . . . . . . . . . . . . . 10 5.1 Grants of Performance Share Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.2 Special Performance-Based Share Awards . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.3 Grants of Stock Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.4 Deferred Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
i 3 6. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.1 Rights of Eligible Persons, Participants and Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.2 Adjustments; Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.3 Effect of Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.4 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.5 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.6 Plan Amendment, Termination and Suspension . . . . . . . . . . . . . . . . . . . . . . . 16 6.7 Privileges of Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.8 Effective Date of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.9 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.10 Governing Law/Construction/Severability . . . . . . . . . . . . . . . . . . . . . . . . 17 6.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.12 Effect of Change of Subsidiary Status . . . . . . . . . . . . . . . . . . . . . . . . . 18 7. NON-EMPLOYEE DIRECTOR OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.2 Annual Option Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.3 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.4 Option Period and Exercisability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.5 Termination of Directorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.6 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.7 Acceleration Upon a Change in Control Event . . . . . . . . . . . . . . . . . . . . . . 21 8. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ii 4 TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION 1996 STOCK INCENTIVE PLAN 1. THE PLAN. 1.1 Purpose. The purpose of this Plan is to promote the success of the Company by providing an additional means through the grant of Awards to attract, motivate, retain and reward key employees, including officers, whether or not directors, of the Company with awards and incentives for high levels of individual performance and improved financial performance of the Company and to attract, motivate and retain experienced and knowledgeable independent directors through the benefits provided under Article 7. "Corporation" means Talbert Medical Management Holdings Corporation, and "Company" means the Corporation and its Subsidiaries, collectively. These terms and other capitalized terms are defined in Article 8. 1.2 Administration and Authorization; Power and Procedure. (a) Committee. This Plan shall be administered by and all Awards to Eligible Persons shall be authorized by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or by unanimous written consent of its members. (b) Plan Awards; Interpretation; Powers of Committee. Subject to the express provisions of this Plan, the Committee shall have the authority: (i) to determine from among those persons eligible the particular Eligible Persons who will receive any Awards; (ii) to grant Awards to Eligible Persons, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards shall become exercisable or shall vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; (iii) to approve the forms of Award Agreements (which need not be identical either as to type of award or among Participants); 5 (iv) to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Participants who are granted Awards under Articles 2, 3, 4 or 5 of this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (v) to cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Persons, subject to any required consent under Section 6.6; (vi) to accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards under Section 1.6; and (vii) to make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. Notwithstanding the foregoing, the provisions of Article 7 relating to Non-Employee Director Awards shall be automatic and, to the maximum extent possible, self-effectuating. (c) Binding Determinations. Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. No member of the Board or Committee, or officer of the Corporation or any Subsidiary, shall be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their absolute discretion in matters within their authority related to this Plan. (d) Reliance on Experts. In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director, officer or agent of the Company shall be liable for any such action or determination taken or made or omitted in good faith. (e) Delegation. The Committee may delegate ministerial, non-discretionary functions to a third-party administrator or to individuals who are officers or employees of the Company. 2 6 1.3 Participation. Awards may be granted by the Committee only to those persons that the Committee determines to be Eligible Persons. An Eligible Person who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. 1.4 Shares Available for Awards; Share Limits. (a) Shares Available. Subject to the provisions of Section 6.2, the capital stock that may be delivered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock and any shares of its Common Stock held as treasury shares. The shares may be delivered for any lawful consideration. (b) Share Limits. The maximum number of shares of Common Stock that may be delivered pursuant to all Awards granted under this Plan shall not exceed 180,000 shares (the "Share Limit"). The maximum number of shares of Common Stock that may be delivered pursuant to Options qualified as Incentive Stock Options granted under Article 2 of this Plan is 50,000 shares. The maximum number of shares of Common Stock that may be delivered to Non-Employee Directors under the provisions of Article 7 shall not exceed 60,000 shares. The maximum number of shares subject to Options and Stock Appreciation Rights that are granted during any calendar year to any individual shall be limited to 50,000. Each of the four foregoing numerical limits shall be subject to adjustment as contemplated by this Section 1.4 and Section 6.2. (c) Share Reservation; Replenishment and Reissue of Unvested Awards. No Award may be granted under this Plan unless, on the date of grant, the sum of (i) the maximum number of shares issuable at any time pursuant to such Award, plus (ii) the number of shares that have previously been issued pursuant to Awards granted under this Plan, other than reacquired shares available for reissue consistent with any applicable legal limitations, plus (iii) the maximum number of shares that may be issued at any time after such date of grant pursuant to Awards that are outstanding on such date, does not exceed the Share Limit. Shares that are subject to or underlie Awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under this Plan, as well as reacquired shares, shall again, except to the extent prohibited by law, be available for subsequent Awards under the Plan. Except as limited by law, if an Award is or may be settled only in cash, such Award need not be counted against any of the limits under this Section 1.4. 3 7 1.5 Grant of Awards. Subject to the express provisions of this Plan, the Committee shall determine the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award and, in the case of Performance Share Awards, in addition to matters addressed in Section 1.2(b), the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the Performance Share Award. Each Award shall be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. The Award Agreement shall set forth the material terms and conditions of the Award established by the Committee consistent with the specific provisions of this Plan. 1.6 Award Period. Each Award and all executory rights or obligations under the related Award Agreement shall expire on such date (if any) as shall be determined by the Committee, but in the case of Options or other rights to acquire Common Stock not later than ten (10) years after the Award Date. 1.7 Limitations on Exercise and Vesting of Awards. (a) Provisions for Exercise. Unless the Committee otherwise expressly provides, no Award shall be exercisable or shall vest until at least 12 months after the initial Award Date, and once exercisable an Award shall remain exercisable until the expiration or earlier termination of the Award. (b) Procedure. Any exercisable Award shall be deemed to be exercised when the Secretary of the Corporation receives written notice of such exercise from the Participant, together with any required payment made in accordance with Section 2.2(a) or 7.4, as the case may be. (c) Fractional Shares/Minimum Issue. Fractional share interests shall be disregarded, but may be accumulated. The Committee, however, may determine in the case of Eligible Persons that cash, other securities, or other property will be paid or transferred in lieu of any fractional share interests. No fewer than 100 shares may be purchased on exercise of any Award at one time unless the number purchased is the total number at the time available for purchase under the Award. 4 8 1.8 No Transferability; Limited Exception to Transfer Restrictions. (a) Limit on Exercise and Transfer. Unless otherwise expressly provided in (or pursuant to) this Section 1.8, by applicable law and by the Award Agreement, as the same may be amended, (i) all Awards are non-transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; Awards shall be exercised only by the Participant; and (ii) amounts payable or shares issuable pursuant to an Award shall be delivered only to (or for the account of) the Participant. (b) Exceptions. The Committee may permit Awards to be exercised by and paid to certain persons or entities related to the Participant pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes or a gratuitous or donative basis and without consideration (other than nominal consideration). Notwithstanding the foregoing, Incentive Stock Options and Restricted Stock Awards shall be subject to any and all applicable transfer restrictions under the Code. (c) Further Exceptions to Limits On Transfer. The exercise and transfer restrictions in Section 1.8(a) shall not apply to: (i) transfers to the Corporation, (ii) the designation of a beneficiary to receive benefits in the event of the Participant's death or, if the Participant has died, transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (iii) transfers pursuant to a QDRO order, (iv) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by his or her legal representative, or (v) the authorization by the Committee of "cashless exercise" procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. Notwithstanding the foregoing, Incentive Stock Options and Restricted Stock Awards shall be subject to all applicable transfer restrictions under the Code. 5 9 2. OPTIONS. 2.1 Grants. One or more Options may be granted under this Article to any Eligible Person. Each Option granted shall be designated in the applicable Award Agreement by the Committee as either an Incentive Stock Option subject to Section 2.3, or a Non-Qualified Stock Option. 2.2 Option Price. (a) Pricing Limits. The purchase price per share of the Common Stock covered by each Option shall be determined by the Committee at the time of the Award, but in the case of Incentive Stock Options shall not be less than 100% (110% in the case of a Participant described in Section 2.4) of the Fair Market Value of the Common Stock on the date of grant. (b) Payment Provisions. The purchase price of any shares purchased on exercise of an Option granted under this Article shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) by notice and third party payment in such manner as may be authorized by the Committee; or (iv) by the delivery of shares of Common Stock of the Corporation already owned by the Participant, provided, however, that the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by delivering such shares. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. 2.3 Limitations on Grant and Terms of Incentive Stock Options. (a) $100,000 Limit. To the extent that the aggregate Fair Market Value of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company or any parent corporation, such options shall be treated as Nonqualified Stock Options. For this purpose, the Fair Market Value of the stock subject to options shall be determined as of the date the options were awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. 6 10 (b) Option Period. Each Option and all rights thereunder shall expire no later than ten years after the Award Date. (c) Other Code Limits. Incentive Stock Options may only be granted to Eligible Employees who are actually employed by the Corporation or a Subsidiary and that satisfy the other eligibility requirements of the Code. There shall be imposed in any Award Agreement relating to Incentive Stock Options such other terms and conditions as from time to time are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. 2.4 Limits on 10% Holders. No Incentive Stock Option may be granted to any person who, at the time the Option is granted, owns (or is deemed to own under Section 424(d) of the Code) shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.5 Cancellation and Regrant/Waiver of Restrictions. Subject to Section 1.4 and Section 6.6 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Person any adjustment in the exercise or purchase price, the vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Article by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result among other changes in an exercise or purchase price which is higher or lower than the exercise or purchase price of the original Award or prior Award, provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. 2.6 Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted to Eligible Persons under this Plan in substitution for employee stock options granted by other entities to persons who are or who will become Eligible Persons in respect of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the other entity. 7 11 3. STOCK APPRECIATION RIGHTS. 3.1 Grants. In its discretion, the Committee may grant a Stock Appreciation Right to any Eligible Person either concurrently with the grant of another Award or in respect of an outstanding Award, in whole or in part, or independently of any other Award. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder, unless the holder otherwise agrees. 3.2 Exercise of Stock Appreciation Rights. (a) Exercisability. Unless the Award Agreement or the Committee otherwise provides, a Stock Appreciation Right related to another Award shall be exercisable at such time or times, and to the extent, that the related Award shall be exercisable. (b) Effect on Available Shares. To the extent that a Stock Appreciation Right is exercised, the number of underlying shares of Common Stock theretofore subject to a related Award shall be charged against the maximum amount of Common Stock that may be delivered pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall be reduced by the number of underlying shares as to which the exercise related, unless the Award Agreement otherwise provides. (c) Stand-Alone SARs. A Stock Appreciation Right granted independently of any other Award shall be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.3 Payment. (a) Amount. Unless the Committee otherwise provides, upon exercise of a Stock Appreciation Right and the attendant surrender of an exercisable portion of any related Award, the Participant shall be entitled to receive payment of an amount determined by multiplying (i) the difference obtained by subtracting the exercise price per share of Common Stock under the related Award (if applicable) or the initial share value specified in the Award from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by 8 12 (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) Form of Payment. The Committee, in its sole discretion, shall determine the form in which payment shall be made of the amount determined under paragraph (a) above, either solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. If the Committee permits the Participant to elect to receive cash or shares (or a combination thereof) on such exercise, any such election shall be subject to such conditions as the Committee may impose. 4. RESTRICTED STOCK AWARDS. 4.1 Grants. The Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Person. Each Restricted Stock Award Agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the consideration for such shares (but not less than the minimum lawful consideration under applicable state law) by the Participant, the extent to which the Participant shall be entitled to dividends, voting and other rights in respect of the shares prior to vesting and the restrictions imposed on such shares and the conditions of release or lapse of such restrictions. Such restrictions shall not lapse earlier than 12 months after the Award Date, except to the extent the Committee may otherwise provide. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions ("restricted shares") shall bear a legend making appropriate reference to the restrictions imposed hereunder and shall be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares shall have lapsed and the shares shall have vested in accordance with the provisions of the Award and Section 1.7. Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 Restrictions. (a) Pre-Vesting Restraints. Except as provided in Section 4.1 and 1.8, restricted shares comprising any Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until the restrictions on such shares have lapsed and the shares have become vested. 9 13 (b) Dividend and Voting Rights. Unless otherwise provided in the applicable Award Agreement, a Participant receiving a Restricted Stock Award shall be entitled to cash dividend and voting rights for all shares issued even though they are not vested, provided that such rights shall terminate immediately as to any restricted shares which cease to be eligible for vesting. (c) Cash Payments. If the Participant shall have paid or received cash (including any dividends) in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash shall be returned (with or without an earnings factor) as to any restricted shares which cease to be eligible for vesting. 4.3 Return to the Corporation. Unless the Committee otherwise expressly provides, restricted shares that remain subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that have not been satisfied by the time specified in the applicable Award Agreement shall not vest and shall be returned to the Corporation in such manner and on such terms as the Committee shall therein provide. 5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES. 5.1 Grants of Performance Share Awards. The Committee may, in its discretion, grant Performance Share Awards to Eligible Persons based upon such factors as the Committee shall deem relevant in light of the specific type and terms of the award. An Award Agreement shall specify the maximum number of shares of Common Stock (if any) subject to the Performance Share Award, the consideration (but not less than the minimum lawful consideration) to be paid for any such shares as may be issuable to the Participant, the duration of the Award and the conditions upon which delivery of any shares or cash to the Participant shall be based. The amount of cash or shares or other property that may be deliverable pursuant to such Award shall be based upon the degree of attainment over a specified period (a "performance cycle") as may be established by the Committee of such measure(s) of the performance of the Company (or any part thereof) or the Participant as may be established by the Committee. The Committee may provide for full or partial credit, prior to completion of such performance cycle or the attainment of the performance achievement specified in the Award, in the event of the Participant's death, or Total Disability, a Change in Control Event or in such other circumstances as the Committee consistent with Section 6.10(c)(2), if applicable, may determine. 10 14 5.2 Special Performance-Based Share Awards. Without limiting the generality of the foregoing, and in addition to Options and Stock Appreciation Rights granted under other provisions of this Plan which are intended to satisfy the exception for "performance-based compensation" under Section 162(m) of the Code (with such Awards hereinafter referred to as a "Qualifying Option" or a "Qualifying Stock Appreciation Right," respectively), other performance-based awards within the meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether in the form of restricted stock, performance stock, phantom stock, Cash-Based Awards, or other rights, the grant, vesting, exercisability or payment of which depends on the degree of achievement of the Performance Goals relative to preestablished targeted levels for the Corporation or the Corporation and one or more of its Subsidiaries, may be granted under this Plan. Any Qualifying Option or Qualifying Stock Appreciation Right shall be subject only to the requirements of subsections (a) and (c) below in order for such Awards to satisfy the requirements for Performance-Based Awards under this Section 5.2. With the exception of any Qualifying Option or Qualifying Stock Appreciation Right, an Award that is intended to satisfy the requirements of this Section 5.2 shall be designated as a Performance-Based Award at the time of grant. (a) Eligible Class. The eligible class of persons for Performance-Based Awards under this Section shall be the executive officers of the Corporation. (b) Performance Goal Alternatives. The specific performance goals for Performance-Based Awards granted under this Section (other than Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on an absolute or relative basis, one or more of the Performance Goals, as selected by the Committee in its sole discretion. The Committee shall establish in the applicable Award Agreement the specific performance target(s) relative to the Performance Goal(s) which must be attained before the compensation under the Performance-Based Award becomes payable. The specific targets shall be determined within the time period permitted under Section 162(m) of the Code (and any regulations issued thereunder) so that such targets are considered to be preestablished and so that the attainment of such targets is substantially uncertain at the time of their establishment. The applicable performance measurement period may not be less than one nor more than 10 years. (c) Maximum Performance-Based Award. Notwithstanding any other provision of the Plan to the contrary, the maximum number of shares of Common Stock which may be delivered pursuant to options, stock appreciation rights, restricted stock or other share-based awards that are granted as Performance-Based Awards to any Participant in any calendar year shall not exceed 100,000 shares, either individually or in the aggregate, subject to 11 15 adjustment as provided in Section 6.2. Awards that are cancelled during the year shall be counted against this limit to the extent required by Section 162(m) of the Code. In addition, the aggregate amount of compensation to be paid to any Participant in respect of any Cash-Based Awards that are granted during any calendar year as Performance-Based Awards shall not exceed $1,000,000. (d) Committee Certification. Before any Performance-Based Award under this Section 5.2 (other than Qualifying Options or Qualifying Stock Appreciation Rights) is paid, the Committee must certify in writing that the Performance Goal(s) and any other material terms of the Performance-Based Award were satisfied; provided, however, that a Performance-Based Award may be paid without regard to the satisfaction of the applicable Performance Goal in the event of a Change in Control Event in accordance with Section 6.2(d). (e) Terms and Conditions of Awards. The Committee will have the discretion to determine the restrictions or other limitations of the individual Awards granted under this Section 5.2 including the authority to reduce Awards, payouts or vesting or to pay no Awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise. (f) Adjustments for Changes in Capitalization and other Material Changes. In the event of a change in corporate capitalization, such as a stock split or stock dividend, or a corporate transaction, such as a merger, consolidation, spinoff, reorganization or similar event, or any partial or complete liquidation of the Corporation, or any similar event consistent with regulations issued under Section 162(m) of the Code including, without limitation, any material change in accounting policies or practices affecting the Corporation and/or the Performance Goals or targets, then the Committee may make adjustments to the Performance Goals and targets relating to outstanding Performance-Based Awards to the extent such adjustments are made to reflect the occurrence of such an event; provided, however, that adjustments described in this subsection may be made only to the extent that the occurrence of an event described herein was unforeseen at the time the targets for a Performance-Based Award were established by the Committee. 5.3 Grants of Stock Bonuses. The Committee may grant a Stock Bonus to any Eligible Person to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Committee. The number of shares so awarded shall be determined by the Committee. The Award may be granted independently or in lieu of a cash bonus. 12 16 5.4 Deferred Payments. The Committee may authorize for the benefit of any Eligible Person the deferral of any payment of cash or shares that may become due or of cash otherwise payable under this Plan, and provide for accredited benefits thereon based upon such deferment, at the election or at the request of such Participant, subject to the other terms of this Plan. Such deferral shall be subject to such further conditions, restrictions or requirements as the Committee may impose, subject to any then vested rights of Participants. 6. OTHER PROVISIONS. 6.1 Rights of Eligible Persons, Participants and Beneficiaries. (a) Employment Status. Status as an Eligible Person shall not be construed as a commitment that any Award will be made under this Plan to an Eligible Person or to Eligible Persons generally. (b) No Employment Contract. Nothing contained in this Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Eligible Person or other Participant any right to continue in the employ or other service of the Company or constitute any contract or agreement of employment or other service, nor shall interfere in any way with the right of the Company to change such person's compensation or other benefits or to terminate the employment of such person, with or without cause, but nothing contained in this Plan or any document related hereto shall adversely affect any independent contractual right of such person without his or her consent thereto. (c) Plan Not Funded. Awards payable under this Plan shall be payable in shares or from the general assets of the Corporation, and no special or separate reserve, fund or deposit shall be made to assure payment of such Awards. No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock, except as expressly otherwise provided) of the Company by reason of any Award hereunder. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive payment pursuant to any Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 13 17 6.2 Adjustments; Acceleration. (a) Adjustments. If there shall occur any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash, Common Stock, other securities, or other property), or any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, reorganization, merger, combination, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Corporation, or there shall occur any other like corporate transaction or event in respect of the Common Stock or a sale of substantially all the assets of the Corporation as an entirety, then the Committee shall, in such manner and to such extent (if any) as it deems appropriate and equitable (1) proportionately adjust any or all of (i) the number and type of shares of Common Stock (or other securities) which thereafter may be made the subject of Awards (including the specific numbers of shares set forth elsewhere in this Plan), (ii) the number, amount and type of shares of Common Stock (or other securities or property) subject to any or all outstanding Awards, (iii) the grant, purchase, or exercise price of any or all outstanding Awards, (iv) the securities, cash or other property deliverable upon exercise of any outstanding Awards, or (v) the performance standards appropriate to any outstanding Awards, or (2) in the case of an extraordinary dividend or other distribution, recapitalization, reclassification, merger, reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a cash payment or for the substitution or exchange of any or all outstanding Awards or the cash, securities or property deliverable to the holder of any or all outstanding Awards based upon the distribution or consideration payable to holders of the Common Stock of the Corporation upon or in respect of such event; provided, however, in each case, that with respect to Awards of Incentive Stock Options, no such adjustment shall be made which would cause the Plan to violate Section 424(a) of the Code or any successor provisions thereto without the written consent of holders materially adversely affected thereby. In any of such events, the Committee may take such action sufficiently prior to such event if necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is available to shareholders generally. (b) Acceleration of Awards Upon Change in Control. As to any Participant, unless prior to a Change in Control Event the Committee determines that, upon its occurrence, there shall be no acceleration of benefits under Awards or determines that only certain or limited benefits under Awards shall be accelerated and the extent to which they shall be accelerated, and/or establishes a different time in respect of such Change in Control Event for such acceleration, then upon the occurrence of a Change in Control Event (i) each Option and Stock Appreciation Right shall become immediately exercisable, (ii) Restricted Stock shall immediately vest free of restrictions, and (iii) each Performance Share Award shall become payable to the Participant; provided, however, that in no 14 18 event shall any Award be accelerated as to any Section 16 Person to a date less than six months after the Award Date of such Award. The Committee may override the limitations on acceleration in this Section 6.2(b) by express provision in the Award Agreement and may accord any Eligible Person a right to refuse any acceleration, whether pursuant to the Award Agreement or otherwise, in such circumstances as the Committee may approve. Any acceleration of Awards shall comply with applicable regulatory requirements, including without limitation Section 422 of the Code. (c) Possible Early Termination of Accelerated Awards. If any Option or other right to acquire Common Stock under this Plan (other than under Article 7) has been fully accelerated as permitted by Section 6.2(b) but is not exercised prior to (i) a dissolution of the Corporation, or (ii) an event described in Section 6.2(a) that the Corporation does not survive, or (iii) the consummation of an event described in Section 6.2(a) that results in a Change in Control Event approved by the Board, such Option or right shall thereupon terminate, subject to any provision that has been expressly made by the Committee for the survival, substitution, exchange or other settlement of such Option or right. 6.3 Effect of Termination of Employment. The Committee shall establish in respect of each Award granted to an Eligible Person the effect of a termination of employment on the rights and benefits thereunder and in so doing may make distinctions based upon the cause of termination. In addition, in the event of, or in anticipation of, a termination of employment with the Company for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, or, subject to the provisions of Section 1.6, extend the exercisability period upon such terms as the Committee shall determine and expressly set forth in or by amendment to the Award Agreement. 6.4 Compliance with Laws. This Plan, the granting and vesting of Awards under this Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under Awards granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Corporation, provide such assurances and representations to the 15 19 Corporation as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. 6.5 Tax Withholding. Upon any exercise, vesting, or payment of any Award or upon the disposition of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, the Company shall have the right at its option to (i) require the Participant (or Personal Representative or Beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes which the Company may be required to withhold with respect to such Award event or payment or (ii) deduct from any amount payable in cash the amount of any taxes which the Company may be required to withhold with respect to such cash payment. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may in its sole discretion grant (either at the time of the Award or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then Fair Market Value, to satisfy such withholding obligation. 6.6 Plan Amendment, Termination and Suspension. (a) Board Authorization. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan, in whole or in part. No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee shall retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. (b) Shareholder Approval. Any amendment that would (i) materially increase the benefits accruing to Participants under this Plan, (ii) materially increase the aggregate number of securities that may be issued under this Plan, or (iii) materially modify the requirements as to eligibility for participation in this Plan, shall be subject to stockholder approval only to the extent then required by Section 425 of the Code or applicable law, or deemed necessary or advisable by the Board. (c) Amendments to Awards. Without limiting any other express authority of the Committee under but subject to the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Eligible Persons that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner 16 20 materially adverse to the Participant, his or her rights and benefits under an Award. (d) Limitations on Amendments to Plan and Awards. No amendment, suspension or termination of the Plan or change of or affecting any outstanding Award shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Corporation under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 shall not be deemed to constitute changes or amendments for purposes of this Section 6.6. 6.7 Privileges of Stock Ownership. Except as otherwise expressly authorized by the Committee or this Plan, a Participant shall not be entitled to any privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by him or her. No adjustment will be made for dividends or other rights as shareholders for which a record date is prior to such date of delivery. 6.8 Effective Date of the Plan. This Plan shall be effective as of November 21, 1996, the date of Board approval, subject to shareholder approval within 12 months thereafter. 6.9 Term of the Plan. No Award shall be granted more than ten years after the effective date of this Plan (the "termination date"). Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the termination date may extend beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, shall continue during any suspension of this Plan and in respect of outstanding Awards on the termination date. 6.10 Governing Law/Construction/Severability. (a) Choice of Law. This Plan, the Awards, all documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with the laws of the state of incorporation of the Corporation. (b) Severability. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue in effect. 17 21 (c) Plan Construction. (1) Rule 16b-3. It is the intent of the Corporation that transactions in and affecting Awards in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfy any then applicable requirements of Rule 16b-3 so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act in respect of these transactions and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted so as to avoid such conflict. If the conflict remains irreconcilable, the Committee may disregard the provision if it concludes that to do so furthers the interest of the Corporation and is consistent with the purposes of this Plan as to such persons in the circumstances. (2) Section 162(m). It is the further intent of the Company that Options or Stock Appreciation Rights with an exercise or base price not less than Fair Market Value on the date of grant and Performance Share Awards under Section 5.2 of this Plan that are granted to or held by a Section 16 Person shall qualify as performance-based compensation under Section 162(m) of the Code, and this Plan shall be interpreted consistent with such intent. 6.11 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. 6.12 Effect of Change of Subsidiary Status. For purposes of this Plan and any Award hereunder, if an entity ceases to be a Subsidiary a termination of employment and service shall be deemed to have occurred with respect to each Eligible Person in respect of such Subsidiary who does not continue as an Eligible Person in respect of another entity within the Company. 6.13 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 18 22 7. NON-EMPLOYEE DIRECTOR OPTIONS. 7.1 Participation. Awards under this Article 7 shall be made only to Non-Employee Directors and shall be evidenced by Award Agreements substantially in the form of Exhibit A hereto. 7.2 Annual Option Grants. (a) Time of Initial Award. Subject to approval by the stockholders of the Corporation, (i) the Chairman of the Board at the date of the Plan's adoption on November 21, 1996 shall be granted without further action a Nonqualified Stock Option dated as of September 17, 1996 to purchase 6,000 shares of Common Stock; (ii) each person who is the chairman of the Audit Committee, Finance Committee or Compensation Committee of the Board at the date of the Plan's adoption on November 21, 1996 shall be granted without further action a Nonqualified Stock Option dated as of September 17, 1996 to purchase 5,000 shares of Common Stock and (iii) each person who is a Non-Employee Director in office on November 21, 1996 and who is not described in clause (i) or (ii) shall be granted without further action a Nonqualified Stock Option dated as of September 17, 1996 to purchase 3,000 shares of Common Stock. After approval of this Plan by the stockholders of the Corporation on November 21, 1996, if any person who is not then an officer or employee of the Company shall become a director of the Corporation, there shall be granted automatically to such person (without any action by the Board or Committee) a Nonqualified Stock Option (the Award Date of which shall be the date such person takes office) to purchase 3,000 shares of Common Stock. (b) Subsequent Annual Awards. With respect to each Non-Employee Director, as of each anniversary of the date of his or her initial option grant under Section 7.2(a), there shall be granted automatically (without any action by the Committee or the Board) a Nonqualified Stock Option (the Award Date of which shall be such anniversary date) to purchase 1,000 shares of Common Stock provided that the Non-Employee Director continues to serve in office on such date. (c) Maximum Number of Shares. Annual grants that would otherwise exceed the maximum number of shares under Section 1.4(a) shall be prorated within such limitation. A Non-Employee Director shall not receive more than one Nonqualified Stock Option under this Section 7.2 in any calendar year. 19 23 7.3 Option Price. The purchase price per share of the Common Stock covered by each Option granted pursuant to Section 7.2 hereof shall be 100 percent of the Fair Market Value of the Common Stock on the Award Date. The exercise price of any Option granted under this Article shall be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, provided that any such shares used in payment shall have been owned by the Participant at least six months prior to the date of exercise. 7.4 Option Period and Exercisability. Each Option granted under this Article 7 and all rights or obligations thereunder shall expire ten years after the Award Date and shall be subject to earlier termination as provided below. Each Option granted under the first sentence of Section 7.2(a) shall become exercisable as follows: (i) at the rate of 25% on the later of 90 days after the Award Date or 60 days after the date of commencement of trading of the Common Stock on a national securities exchange (the "Initial Award Date") and (ii) at the rate of 25% per annum commencing on the first anniversary of the Initial Award Date and each of the next two anniversaries thereof. Each other Option granted under Section 7.2 shall become exercisable at the rate of 25% per annum commencing on the first anniversary of the Award Date and each of the next three anniversaries thereof. 7.5 Termination of Directorship. If a Non-Employee Director's services as a member of the Board of Directors terminate by reason of death or Total Disability, an Option granted pursuant to this Article held by such Participant shall immediately become and shall remain exercisable for two years after the date of such termination or until the expiration of the stated term of such Option, whichever first occurs. If a Non-Employee Director fails to be renominated or re-elected to the Board of Directors, the Options granted pursuant to this Article shall immediately become vested and shall remain exercisable for ninety (90) days from the date such Non-Employee Director ceases to be renominated or re-elected as a member of the Board of Directors. If a Non-Employee Director who has unvested Options ceases to be a member of the Board by reason of resignation and such Non-Employee Director is re-elected to the Board during the 180-day period following his termination from service, the Non-Employee Director's Options will continue to vest on the same schedule and with the same pricing that existed prior to the Non-Employee Director's resignation. If a Non-Employee Director's services as a member of the Board of Directors terminate for any other reason, any portion of an Option granted pursuant to this Article which is not then exercisable shall terminate and any portion of such Option which is then exercisable may be 20 24 exercised for ninety (90) days after the date of such termination or until the expiration of the stated term whichever first occurs. 7.6 Adjustments. Options granted under this Article 7 shall be subject to adjustment as provided in Section 6.2, but only to the extent that (a) such adjustment and the Committee's actions in respect thereof satisfy any applicable criteria under Rule 16, (b) such adjustment in the case of a Change in Control Event is effected pursuant to the terms of a reorganization agreement approved by shareholders of the Corporation, and (c) such adjustment is consistent with adjustments to Options held by persons other than executive officers or directors of the Corporation. 7.7 Acceleration Upon a Change in Control Event. Upon the occurrence of a Change in Control Event, each Option granted under Section 7.2 hereof shall become immediately exercisable in full; provided, however, that none of the Options granted under Section 7.2 shall be accelerated to a date less than six months after the Award Date of such Option. To the extent that any Option granted under this Article 7 is not exercised prior to (i) a dissolution of the Corporation or (ii) a merger or other corporate event that the Corporation does not survive, and no provision is (or consistent with the provisions of Section 7.7 can be) made for the assumption, conversion, substitution or exchange of the Option, the Option shall terminate upon the occurrence of such event. 8. DEFINITIONS. 8.1 Definitions. (a) "Award" shall mean an award of any Option, Stock Appreciation Right, Restricted Stock, Stock Bonus, Performance Share Award, Performance-Based Award, Cash-Based Award, dividend equivalent or deferred payment right or other right or security that would constitute a "derivative security" under Rule 16a-1(c) of the Exchange Act, or any combination thereof, whether alternative or cumulative, authorized by and granted under this Plan. (b) "Award Agreement" shall mean any writing setting forth the terms of an Award that has been authorized by the Committee. (c) "Award Date" shall mean the date upon which the Committee took the action granting an Award or such later date as the Committee designates 21 25 as the Award Date at the time of the Award or, in the case of Awards under Article 7, the applicable dates set forth therein. (d) "Award Period" shall mean the period beginning on an Award Date and ending on the expiration date of such Award. (e) "Beneficiary" shall mean the person, persons, trust or trusts designated by a Participant or, in the absence of a designation, entitled by will or the laws of descent and distribution, to receive the benefits specified in the Award Agreement and under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. (f) "Board" shall mean the Board of Directors of the Corporation. (g) "Cash-Based Awards" shall mean Awards that, if paid, must be paid in cash and that are neither denominated in nor have a value derived from the value of, nor an exercise or conversion privilege at a price related to, shares of Common Stock. (h) "Cash Flow" shall mean cash and cash equivalents derived from either (i) net cash flow from operations or (ii) net cash flow from operations, financings and investing activities, as determined by the Committee at the time an Award is granted. (i) "Change in Control Event" shall mean any of the following: (1) Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; (2) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection (2), the following acquisitions shall not constitute a Change in Control Event: (i) any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any entity controlled by the Corporation or (iv) any acquisition by any 22 26 corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (4) below; or (3) Individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (4) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. 23 27 (j) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (k) "Commission" shall mean the Securities and Exchange Commission. (l) "Committee" shall mean the Board or a committee appointed by the Board to administer this Plan, which committee shall be comprised only of two or more directors or such greater number of directors as may be required under applicable law, each of whom, in respect of any decision at a time when the Participant affected by the decision may be subject to Section 162(m) of the Code, shall be an "outside" director within the meaning of Section 162(m) of the Code. (m) "Common Stock" shall mean the Common Stock of the Corporation and such other securities or property as may become the subject of Awards, or become subject to Awards, pursuant to an adjustment made under Section 6.2 of this Plan. (n) "Company" shall mean, collectively, the Corporation and its Subsidiaries. (o) "Corporation" shall mean Talbert Medical Management Holdings Corporation, a Delaware corporation, and its successors. (p) "Disinterested" shall mean disinterested within the meaning of any applicable regulatory requirements, including Rule 16b-3. (q) "Eligible Employee" shall mean an officer (whether or not a director) or key employee of the Company, or, prior to the time that the Corporation's Common Stock is registered on a Registration Statement on Form S-8, any person who has agreed to commence serving in any such capacity within 120 days of the date of grant. (r) "Eligible Person" means an Eligible Employee, or any Other Eligible Person, as determined by the Committee in its discretion. (s) "EPS" shall mean earnings per common share on a fully diluted basis determined by dividing (i) net earnings, less dividends on preferred stock of the Corporation by (ii) the weighted average number of common shares and common shares equivalents outstanding. (t) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 24 28 (u) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (v) "Fair Market Value" on any date shall mean (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD or a similar organization; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the value as established by the Committee at such time for purposes of this Plan. (w) "Incentive Stock Option" shall mean an Option which is intended, as evidenced by its designation, as an incentive stock option within the meaning of Section 422 of the Code, the award of which contains such provisions (including but not limited to the receipt of shareholder approval of this Plan, if the Award is made prior to such approval) and is made under such circumstances and to such persons as may be necessary to comply with that section. (x) "Nonqualified Stock Option" shall mean an Option that is designated as a Nonqualified Stock Option and shall include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. Any Option granted hereunder that is not designated as an incentive stock option shall be deemed to be designated a nonqualified stock option under this Plan and not an incentive stock option under the Code. (y) "Non-Employee Director" shall mean a member of the Board of Directors of the Corporation who is not an officer or employee of the Company. (z) "Non-Employee Director Participant" shall mean a Non-Employee Director who holds an outstanding Award under the provisions of Article 7. 25 29 (aa) "Option" shall mean an option to purchase Common Stock granted under this Plan. The Committee shall designate any Option granted to an Eligible Person as a Nonqualified Stock Option or an Incentive Stock Option. Options granted under Article 8 shall be Nonqualified Stock Options. (ab) "Other Eligible Person" shall mean any Non-Employee Director or any individual consultant or advisor who renders or has rendered bona fide services (other than services in connection with the offering or sale of securities of the Company in a capital raising transaction) to the Company, and who is selected to participate in this Plan by the Committee. A non-employee agent providing bona fide services to the Company (other than as an eligible advisor or consultant) may also be selected as an Other Eligible Person if such agent's participation in this Plan would not adversely affect (i) the Corporation's eligibility to use Form S-8 to register under the Securities Act of 1933, as amended, the offering of shares issuable under this Plan by the Company or (ii) the Corporation's compliance with any other applicable laws. (ac) "Participant" shall mean an Eligible Person who has been granted an Award under this Plan and a Non-Employee Director who has received an Award under Article 7 of this Plan. (ad) "Performance-Based Award" shall mean an Award of a right to receive shares of Common Stock or other compensation (including cash) under Section 5.2, the issuance or payment of which is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. (ae) "Performance Goals" shall mean EPS or ROE or Cash Flow or Total Stockholder Return, and "Performance Goals" means any combination thereof. (af) "Performance Share Award" shall mean an Award of a right to receive shares of Common Stock made in accordance with Section 5.1, the issuance or payment of which is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. (ag) "Personal Representative" shall mean the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Plan and who shall have become the legal representative of the Participant. (ah) "Plan" shall mean this 1996 Stock Incentive Plan. (ai) "QDRO" shall mean a qualified domestic relations order as defined in Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA (to 26 30 the same extent as if this Plan were subject thereto), or the applicable rules thereunder. (aj) "Restricted Stock Award" shall mean an award of a fixed number of shares of Common Stock to the Participant subject, however, to payment of such consideration, if any, and such forfeiture provisions, as are set forth in the Award Agreement. (ak) "Restricted Stock" shall mean shares of Common Stock awarded to a Participant under this Plan, subject to payment of such consideration, if any, and such conditions on vesting and such transfer and other restrictions as are established in or pursuant to this Plan, for so long as such shares remain unvested under the terms of the applicable Award Agreement. (al) "ROE" shall mean consolidated net income of the Corporation (less preferred dividends), divided by the average consolidated common shareholders equity. (am) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act, as amended from time to time. (an) "Section 16 Person" shall mean a person subject to Section 16(a) of the Exchange Act. (ao) "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. (ap) "Stock Appreciation Right" shall mean a right to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, the aggregate amount or value of which is determined by reference to a change in the Fair Market Value of the Common Stock that is authorized under this Plan. (aq) "Stock Bonus" shall mean an Award of shares of Common Stock granted under this Plan for no consideration other than past services and without restriction other than such transfer or other restrictions as the Committee may deem advisable to assure compliance with law. (ar) "Subsidiary" shall mean any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (as) "Total Disability" shall mean a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and (except in the 27 31 case of a Non-Employee Director) such other disabilities, infirmities, afflictions or conditions as the Committee by rule may include. (at) "Total Stockholder Return" shall mean with respect to the Corporation or other entities (if measures on a relative basis), the (i) change in the market price of its common stock (as quoted in the principal market on which it is traded as of the beginning and ending of the period) plus dividends and other distributions paid, divided by (ii) the beginning quoted market price, all of which is adjusted for any changes in equity structure, including but not limited to stock splits and stock dividends. 28 32 EXHIBIT A TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION ELIGIBLE DIRECTOR NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT dated as of the _____ day of _____________, 19__, between Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Corporation"), and ________________ (the "Director"). W I T N E S S E T H WHEREAS, the Corporation has adopted and the shareholders of the Corporation have approved a Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan (the "Plan"). WHEREAS, pursuant to Article 7 of the Plan, the Corporation has granted an option (the "Option") to the Director upon the terms and conditions evidenced hereby, as required by the Plan, which Option is not intended as and shall not be deemed to be an incentive stock option within the meaning of Section 422 of the Code. NOW, THEREFORE, in consideration of the services rendered and to be rendered by the Director, the Corporation and the Director agree to the terms and conditions set forth herein as required by the terms of the Plan. 1. Option Grant. This Agreement evidences the grant to the Director, as of ___________, ____ (the "Option Date"), of an Option to purchase an aggregate of _____ shares of Common Stock, par value _____ per share, under Article 7 of the Plan, subject to the terms and conditions and to adjustment as set forth herein or in pursuant to the Plan. 2. Exercise Price. The Option entitles the Director to purchase (subject to the terms of Sections 3 through 5 below) all or any part of the Option shares at a price per share of $_______, which amount represents the Fair Market Value of the shares on the Option Date. 3. Option Exercisability and Term. Subject to adjustment pursuant to Section 7.6 of the Plan, the Option shall first become and remain exercisable as to ______________ of the shares on ___________________ and as to an additional _________ shares on each of the following dates: ______________, A-1 33 199_, __________, 199_ and _____________, 199_, in each case subject to adjustments under Section ____ of the Plan and acceleration under Section 7.7 of the Plan. The Option shall terminate on ____________, 19__,* unless earlier terminated in accordance with the terms of Sections 7.7 of the Plan. 4. Service and Effect of Termination of Service. The Director agrees to serve as a director in accordance with the provisions of the Corporation's Articles of Incorporation, bylaws and applicable law. If the Director's services as a member of the Board shall terminate, this Option shall terminate at the times and to the extent set forth in Section 7.5 of the Plan. 5. General Terms. The Option and this Agreement are subject to, and the Corporation and the Director agree to be bound by, the provisions of the Plan that apply to the Option. Such provisions are incorporated herein by this reference. The Director acknowledges receiving a copy of the Plan and reading its applicable provisions. Capitalized terms not otherwise defined herein shall have the meaning assigned to such terms in the Plan. 6. Nontransferability. The grant of the Option is intended to constitute an exempt transaction under Rule 16b-3. In furtherance thereof, the Option shall be non-transferable to the fullest extent required by Rule 16b-3(a)(2) as in effect on the date of adoption of this Plan or during the transition period by former Rule 16b-3(d)(1)(ii), incorporated herein by this reference. ______________ *insert day before tenth anniversary of date of grant. A-2 34 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION (a Delaware corporation) By: ------------------------------------- Title: ------------------------------------- Optionee Director --------------------------------------------- (Signature) --------------------------------------------- (Print Name) --------------------------------------------- (Address) --------------------------------------------- (City, State, Zip Code) In consideration of the execution of the foregoing Stock Option Agreement by Talbert Medical Management Holdings Corporation, I, _________________, the spouse of the Director therein named, do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: , 19 . --------------- -- --------------------------------------------- Signature of Spouse A-3 EX-6 7 LTR. AGREEMENT RE. MGMT. INCEN. PROGRAM BONUS 1 EXHIBIT 6 August 14th 1 9 9 7 Talbert Medical Management Holdings Corporation 3540 Howard Way Costa Mesa, California 95656 Re: Cash Awards Ladies and Gentlemen: Pursuant to Section 7.10(f) of the Agreement and Plan of Merger, dated as of August 13, 1997, among the undersigned and you (the "Merger Agreement"), we hereby agree with you that we will, at the time of consummation of the Offer, pay, or cause the Surviving Corporation to pay, cash awards to the persons, and in the amounts, specified on the attached schedule. We represent and warrant that the execution, delivery and performance of this letter has been duly authorized by each of the undersigned and that this letter constitutes the legally binding agreement of each of the undersigned, enforceable against each of the undersigned in accordance with its terms. All capitalized terms used but not defined in this letter agreement shall have the meanings given to them by the Merger Agreement. Very truly yours, MEDPARTNERS, INC. By: /s/ J. BROOKE JOHNSTON, JR. ------------------------------- Its: Senior VP and General Counsel ------------------------------- 2 Page 2 - Talbert Medical Management - August 14, 1997 Holdings Corporation TALMED MERGER CORPORATION By: /s/ J. BROOKE JOHNSTON, JR. ------------------------------- Its: Senior Vice President ------------------------------- Accepted and Agreed as of August 14, 1997: Talbert Medical Management Holdings Corporation By: /s/ JACK D. MASSIMINO ----------------------------------- Its: President and CEO ----------------------------------- EX-7 8 LETTER AGREEMNT. RE. TRANSITION BONUS 1 EXHIBIT 7 August 14th 1 9 9 7 Talbert Medical Management Holdings Corporation 3540 Howard Way Costa Mesa, California 95656 Re: Stay Bonuses Ladies and Gentlemen: Pursuant to Section 7.10(e) of the Agreement and Plan of Merger, dated as of August 14, 1997, among the undersigned and you (the "Merger Agreement"), we hereby agree with you that we will, at the time or times specified in that section, pay, or cause the Surviving Corporation to pay, cash stay bonuses to the persons, and in the amounts, specified on the attached schedule. We represent and warrant that the execution, delivery and performance of this letter has been duly authorized by each of the undersigned and that this letter constitutes the legally binding agreement of each of the undersigned, enforceable against each of the undersigned in accordance with its terms. All capitalized terms used but not defined in this letter agreement shall have the meanings given to them by the Merger Agreement. Very truly yours, MEDPARTNERS, INC. By: /s/ J. BROOKE JOHNSTON, JR. ------------------------------- Its: Senior VP and General Counsel ------------------------------- 2 Page 2 - Talbert Medical Management - August 14, 1997 Holdings Corporation TALMED MERGER CORPORATION By: /s/ J. BROOKE JOHNSTON, JR. ------------------------------- Its: Senior Vice President ------------------------------- Accepted and Agreed as of August 14, 1997: Talbert Medical Management Holdings Corporation By: /s/ JACK D. MASSIMINO ----------------------------------- Its: President and CEO ----------------------------------- EX-8 9 FORM OF PHYSICIAN WARRANT AGREEMENT 1 EXHIBIT 8 - - -------------------------------------------------------------------------------- MEDPARTNERS, INC. NONTRANSFERABLE WARRANT AGREEMENT TALBERT MEDICAL GROUP PHYSICIANS Dated as of __________, 1997 - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Sections Page(s) SECTION 1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 3. Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 4. Term of Warrants; Exercise of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.1. Term of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.2. Exercise of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 5. Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 6. Nontransferability; Limited Exceptions to Transfer Restrictions . . . . . . . . . . . . . . 4 6.1. Limits on Exercise and Transfer . . . . . . . . . . . . . . . . . . . . . 4 6.2. Exceptions to Limits on Transfer . . . . . . . . . . . . . . . . . . . . . 4 SECTION 7. Effect of Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.1. Forfeiture after Certain Events . . . . . . . . . . . . . . . . . . . . . 5 7.2. Return of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.3. Termination Without Cause Following Change in Control Event . . . . . . . 5 SECTION 8. Effect of Death, Total Disability or Retirement . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 9. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 10. Reservation of Warrant Shares; Purchase and Cancellation of Warrants . . . . . . . . . . . 6 10.1. Reservation of Warrant Shares . . . . . . . . . . . . . . . . . . . . . . 6 10.2. Governmental Approvals and Listings . . . . . . . . . . . . . . . . . . . 6 SECTION 11. Adjustment of Exercise Price and Number of Warrant Shares . . . . . . . . . . . . . . . . . 7 11.1. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (a) Stock Dividends, Splits, etc. . . . . . . . . . . . . . . . . . . . 7 (b) Distributions of Assets . . . . . . . . . . . . . . . . . . . . . . 7 (c) Computation of Market Price . . . . . . . . . . . . . . . . . . . . 8 (d) Minimum Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . 8 (e) Warrant Share Adjustment . . . . . . . . . . . . . . . . . . . . . . 9 (f) Notice of Adjustment . . . . . . . . . . . . . . . . . . . . . . . . 9 (g) Definition of Common Stock . . . . . . . . . . . . . . . . . . . . . 9
i 3 (h) Company May Reduce Exercise Price or Increase Number of Warrant Shares Purchasable . . . . . . . . . . . . . . . . . . . 9 11.2. No Adjustment for Dividends . . . . . . . . . . . . . . . . . . . . . . . 9 11.3. Preservation of Purchase Rights and Adjustment of Exercise Price upon Merger, Consolidation, etc. . . . . . . . . . . . . . . . . . . 9 11.4. No Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 12. No Rights as Stockholders; Notices to Warrant Holders . . . . . . . . . . . . . . . . . . . 10 SECTION 13. Purchase Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 15. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 16. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 17. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 PURCHASE FORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
ii 4 THIS NONTRANSFERABLE WARRANT AGREEMENT dated as of the _____ day of __________, 1997, is between MEDPARTNERS, INC., a Delaware corporation (the "Company"), and _________________, an individual (the "Physician"). W I T N E S S E T H WHEREAS, pursuant to the Agreement and Plan of Merger (the "Merger Agreement") dated as of August 12, 1997 among the Company, Talmed Merger Corporation, a Delaware corporation (the "Subsidiary"), and Talbert Medical Management Holdings Corporation, a Delaware corporation ("Talbert"), the Company has proposed to cause the Subsidiary to make a tender offer to purchase all the outstanding shares of common stock of Talbert, together with their associated rights (the "Offer"), and subsequently to merge the Subsidiary with and into Talbert (the "Merger"). WHEREAS, the Physician is employed by one of the Talbert Medical Groups affiliated with Talbert Medical Management Corporation, a Delaware corporation ("TMMC"), which is a subsidiary of Talbert. WHEREAS, the Merger Agreement provides that the Company will issue to certain physicians employed by the Talbert Medical Groups and designated by Talbert warrants to purchase its Common Stock, par value $.001 per share (the "Common Stock"); and WHEREAS, the Company wishes to issue to the Physician, effective as of the Effective Time (as defined in the Merger Agreement), such warrants upon the terms and conditions set forth herein. NOW THEREFORE, in consideration the foregoing and the mutual promises made herein and the mutual benefits to be derived therefrom, the parties agree as follows: SECTION 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Merger Agreement. For the purposes of this Agreement, the following terms shall have the meanings set forth below. "Beneficiary" means the person, persons, trust or trusts designated by the Physician or, in the absence of a designation, entitled by will or the laws of descent and distribution, to receive the benefits of this Agreement in the event of the Physician's death, and shall mean the Physician's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. "Change in Control Event" means any of the following: (1) Approval by the stockholders of the Company of the dissolution or liquidation of the Company; 5 (2) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the 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 (2), the following acquisitions shall not constitute a Change in Control Event: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (4) below; or (3) Individuals who, as of the effective date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (4) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the 2 6 members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. "Personal Representative" means the person or persons who, upon the disability or incompetence of a Physician, shall have acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Agreement and who shall have become the legal representative of the Physician. "QDRO" means a qualified domestic relations order as defined in Section 414(p) of the Internal Revenue Code of 1986 or Title I, Section 206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended, or the applicable rules thereunder. "Subsidiary" means any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company, or any professional corporation or other legal entity operating as a medical group and affiliated within the Company or one of its subsidiaries. "Total Disability" means a "permanent and total disability" within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986 and such other disabilities, infirmities, afflictions or conditions as the Company may include. SECTION 2. GRANT. Subject to the terms of this Agreement, the Company grants to the Physician warrants with respect to an aggregate of 2,000 shares of Common Stock, par value $.001 per share (the "Warrants"). Each Warrant entitles the Physician to purchase one share of Common Stock (each share of Common Stock purchasable upon the exercise of a Warrant being referred to herein as a "Warrant Share"). SECTION 3. EXERCISE PRICE. The price per share at which Warrant Shares shall be purchasable upon exercise of each Warrant (the "Exercise Price") shall be the Market Price (as defined in subsection 11.1(c)) of the Common Stock at the date of the Effective Time, subject to adjustment pursuant to Section 11 hereof. SECTION 4. TERM OF WARRANTS; EXERCISE OF WARRANTS. 4.1. Term of Warrants. With respect to those Warrants that have vested and subject to the terms of this Agreement, the Physician shall have the right until 5:00 P.M., New York time, on __________, 2007 (the tenth anniversary of the Effective Time) (the "Expiration Date"), to purchase from the Company the number of fully paid and nonassessable Warrant Shares which the Physician may at the time be entitled to purchase on exercise of such vested Warrants. 4.2. Exercise of Warrants. Warrant Shares may be purchased upon delivery to the Company at its principal office of the form attached hereto as Exhibit A (the "Purchase Form") of election to purchase duly filled in and signed for the number of 3 7 Warrant Shares in respect of which such Warrants are then being exercised. Payment of the aggregate Exercise Price shall be made by certified or cashier's check, or by any combination thereof. Upon such delivery of the Purchase Form and payment of the Exercise Price, the Company shall issue and cause to be delivered, with all reasonable dispatch, to or upon the written order of the Physician and in such name or names as the Physician may designate, a certificate or certificates for the number of Warrant Shares so purchased upon the exercise of such Warrants. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the delivery of the Purchase Form and payment of the Exercise Price; provided, however, that if such Purchase Form is surrendered, and the Exercise Price is paid, on a Saturday, Sunday or other day on which banking institutions in the City of New York are authorized or obligated by law or executive order to close, or on a day when the Common Stock transfer books of the Company are closed, the certificates for the Warrant Shares in respect of which such Warrants are then exercised shall be issuable as of the next succeeding Monday, Tuesday, Wednesday, Thursday or Friday on which such banking institutions are not so authorized or obligated to close (whether before or after the Expiration Date) and which is a day on which the Common Stock transfer books of the Company are open. The rights of purchase represented by the Warrants shall be exercisable, at the election of the Physician, either in full or from time to time in part. SECTION 5. VESTING. The Warrants shall vest and will be exercisable with respect to one-fifth of the total number of Warrant Shares (subject to adjustment as set forth in Section 11 below) on each of the first, second, third, fourth and fifth anniversaries of the Effective Time, so that Warrants with respect to the total number of Warrant Shares shall have vested by __________, 2003. SECTION 6. NONTRANSFERABILITY; LIMITED EXCEPTIONS TO TRANSFER RESTRICTIONS. 6.1. Limits on Exercise and Transfer. Unless otherwise expressly provided by applicable law (i) all Warrants are nontransferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; (ii) Warrants shall be exercised only by the Physician; and (iii) amounts payable or shares issuable pursuant to the exercise of a Warrant shall be delivered only to (or for the account of) the Physician. 6.2. Exceptions to Limits on Transfer. The exercise and transfer restrictions in subsection 6.1 shall not apply to: (i) transfers to the Company, 4 8 (ii) the designation of a Beneficiary to receive benefits in the event of the Physician's death or, if the Physician has died, transfers to or exercise by the Physician's Beneficiary, or, in the absence of a validly designated Beneficiary, transfers by will or the laws of descent and distribution, (iii) transfers pursuant to a QDRO order, or (iv) if the Physician has suffered a Total Disability, permitted transfers or exercises on behalf of the Physician by his or her Personal Representative. SECTION 7. EFFECT OF TERMINATION OF EMPLOYMENT. 7.1. Forfeiture after Certain Events. Except as provided in subsection 7.3 and Section 8, the Warrants shall be forfeited to the extent such Warrants have not become vested upon the date the Physician's employment with the Company or one of its Subsidiaries is terminated for Cause or by reason of the termination of the Physician's employment by the Physician upon retirement or otherwise. If the Physician's employment with the Company is terminated without Cause, the Warrants shall not be forfeited, but shall vest and be exercisable as described in Section 5, and the Physician shall retain all other rights under this Agreement as if such termination had not occurred. For purposes of this Agreement, "Cause" shall mean that the Company, acting in good faith based upon the information then known to it, determines that the Physician has: (a) failed to perform in a material respect the duties associated with his or her position without proper cause, (b) been convicted of a felony, (c) committed a material act of fraud, dishonesty or gross misconduct that is materially injurious to the Company, or (d) not maintained in good standing the necessary professional licenses or certifications required by state and federal law in connection with the Physician's practice of medicine. "Retirement" shall mean termination of the Physician's employment by the Physician (i) with the consent of the Company, (ii) after age 55 with 10 years of service, or (iii) after age 65. 7.2. Return of Warrants. Upon the occurrence of any forfeiture of Warrants hereunder, such unvested, forfeited Warrants shall, without payment of any consideration by the Company for such transfer, be automatically transferred to the Company, without any other action by the Physician. The Company may take any action necessary or advisable to evidence such transfer. The Physician shall deliver any additional documents of transfer that the Company may request to confirm the transfer of such unvested, forfeited Warrants to the Company. 7.3. Termination Without Cause Following Change in Control Event. If following a Change in Control Event, the Physician's employment with the Company is terminated other than for Cause, then any Warrants that have not previously vested shall thereupon vest. SECTION 8. EFFECT OF DEATH, TOTAL DISABILITY OR RETIREMENT. If the Physician dies while employed by the Company, then any Warrants that have not previously 5 9 vested shall thereupon vest. If the Physician incurs a Total Disability while employed by the Company, the Warrants shall not be forfeited, but shall vest and be exercisable as described in Section 5, and the Physician shall retain all other rights under this Agreement as if such Total Disability had not occurred. If the Physician retires from employment by the Company, the Company may, on a case-by-case basis and in its sole discretion, provide for partial or complete vesting prior to retirement of the Warrants that have not previously vested. SECTION 9. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the issuance of certificates for Warrant Shares issuable upon the exercise of Warrants; provided, however, that the Company shall not be required to pay, and the Physician shall pay, any tax or taxes that may be payable in respect of any transfer involved in the issue or delivery of any certificates for Warrant Shares in a name other than that of the Physician and the Company shall not be required to issue or deliver such certificates for Warrant Shares unless or until the persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 10. RESERVATION OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 10.1. Reservation of Warrant Shares. There have been reserved, and the Company shall at all times keep reserved out of its authorized Common Stock, a number of shares of Common Stock sufficient to provide for the exercise of the right of purchase represented by the outstanding Warrants. The Company covenants that all Warrant Shares will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable. Before taking any action that would cause an adjustment reducing the Exercise Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock, at such adjusted Exercise Price. The transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with the transfer agent for the Common Stock and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. 10.2. Governmental Approvals and Listings. The Company will as promptly as practicable take all action which may be necessary to obtain and keep effective (a) any and all permits, consents and approvals of governmental agencies and authorities, and will make any and all filings under federal and state securities laws, necessary in connection with the issuance and distribution of the Warrants to the Physician, the exercise of the Warrants by the Physician, and the issuance, sale, transfer and delivery of Warrant Shares and (b) if any 6 10 of the Warrant Shares have been listed on any securities exchange, the listing of the Warrant Shares on any securities exchange on which the Common Stock may be listed (it being understood that the Company has no obligation to list any Warrant Shares with any securities exchange). SECTION 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. 11.1. Adjustments. The number and kind of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment as follows: (a) Stock Dividends, Splits, etc. In case the Company shall at any time after the date of this Agreement (w) pay a dividend or make a distribution on its Common Stock, which is paid or made (A) in Common Stock or other shares of the Company's capital stock or (B) in rights to purchase Common Stock or other capital stock of the Company if such rights are not exercisable, or separable from the Common Stock except upon the occurrence of a contingency, (x) subdivide its outstanding Common Stock into a greater number of shares of Common Stock, (y) combine its outstanding shares into a smaller number of shares of Common Stock or (z) issue by reclassification of its Common Stock other securities of the Company, then, in any such event the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Physician shall be entitled to receive upon exercise of such Warrant the kind and number of shares of the Company and rights to purchase Common Stock or other securities of the Company (or, in the event of the redemption of any such rights, any cash paid in respect of such redemption) that he or she would have owned or have been entitled to receive after the happening of any of the events described above had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the opening of business on the next business day following the record date in the case of dividends or other distributions and shall become effective immediately after the opening of business on the next business day following the effective date in the case of a subdivision or combination. (b) Distributions of Assets. In case the Company shall at any time after the date of this Agreement distribute to all holders of its Common Stock evidences of indebtedness of the Company or assets of the Company (including cash dividends or distributions out of retained earnings other than cash dividends or distributions made on a quarterly or other periodic basis) or warrants to subscribe for securities of the Company (excluding those referred to in paragraph (a) above), then in each case the Exercise Price shall be adjusted to a price determined by multiplying the Exercise Price in effect immediately prior to such distribution by a fraction, of which the numerator shall be the then current market price per share of Common Stock (as defined in paragraph (c) below) on the record date for determination of stockholders entitled to receive such distribution, less the then fair value (as determined in good 7 11 faith by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants which are applicable to one share of Common Stock, and of which the denominator shall be such market price per share of Common Stock; provided, however, that if the then current market price per share of Common Stock on the record date for determination of stockholders entitled to receive such distribution is less than the then fair value of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants which are applicable to one share of Common Stock, the foregoing adjustment of the Exercise Price shall not be made and in lieu thereof the Physician shall be entitled to receive upon exercise of such Warrant in addition to the Common Stock the kind and number of assets, evidences of indebtedness, subscription rights and warrants (or, in the event of the redemption of any such evidences of indebtedness, subscription rights and warrants, any cash paid in respect of such redemption) that he or she would have owned or have been entitled to receive after the happening of such distribution had such Warrant been exercised immediately prior to the record date for such distribution. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. (c) Computation of Market Price. For the purpose of any computation under this Agreement, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily Market Price (as defined below) per share for the 10 consecutive Trading Days (as defined below) immediately prior to the date which is 2 days before the date in question. "Market Price" is defined as the closing sale price (or, if no closing sale price is reported, the closing bid price) for the Common Stock on the New York Stock Exchange. If Market Price cannot be established as described above, Market Price shall be the fair market value of the Common Stock as determined in good faith by the Board of Directors. "Trading Day" shall mean a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the City of Los Angeles and the State of California or New York, New York, are not authorized or obligated by law or executive order to close or, if the Common Stock is listed or admitted to trading on a national securities exchange, a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business. (d) Minimum Adjustment. No adjustment in the number of Warrant Shares purchasable hereunder or the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least one per cent (1%) in the number of Warrant Shares purchasable upon the exercise of each Warrant, or the Exercise Price, as the case may be; provided, however, that any adjustments which by reason of this paragraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or the nearest ten-thousandth of a share, as the case may be 8 12 (e) Warrant Share Adjustment. Upon each adjustment of the Exercise Price as a result of the calculations made in paragraph (a) or (b) above, each Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares (calculated to the nearest ten-thousandth) obtained by (i) multiplying (x) the number of shares covered by a Warrant immediately prior to such adjustment of the Exercise Price by (y) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (f) Notice of Adjustment. Whenever the number of Warrant Shares purchasable upon the exercise of Warrants or the Exercise Price of such Warrant Shares is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to the Physician notice of such adjustment or adjustments. (g) Definition of Common Stock. For the purpose of this subsection 11.1, the term "Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Agreement or (ii) any other class of stock resulting from successive changes or reclassifications of such shares consisting solely of changes in par value, or from par value to no par value or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to paragraph (a) above, the Physician shall become entitled to purchase any securities of the Company other than Common Stock, thereafter the number of such other securities so purchasable upon exercise of each Warrant and the Exercise Price of such securities shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this subsection 11.1 and subsections 11.2 and 11.3, inclusive, with respect to the Warrant Shares, shall apply on like terms to any such other securities. (h) Company May Reduce Exercise Price or Increase Number of Warrant Shares Purchasable. The Company may, at its sole option, at any time during the term of the Warrants, reduce the then current Exercise Price, or increase the number of Common Shares purchasable upon exercise of each Warrant, to any amount deemed appropriate by the Board of Directors of the Company. 11.2. No Adjustment for Dividends. Except as provided in subsection 11.1, no adjustment in respect of any dividends made on a quarterly or other periodic basis out of retained earnings shall be made during the term of a Warrant or upon the exercise of a Warrant. 11.3. Preservation of Purchase Rights and Adjustment of Exercise Price upon Merger, Consolidation, etc. In case the Company shall consolidate or merge with or into any other corporation (other than a consolidation or merger in which the Company is the surviving corporation and each share of Common Stock outstanding immediately prior to 9 13 such consolidation or merger is to remain outstanding immediately after such consolidation or merger and no cash, securities or other property is distributed with respect to such shares) or shall sell or transfer all or substantially all of its assets to any corporation, the Company or such successor or purchasing corporation, as the case may be (collectively, the "acquiring corporation"), the Physician shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of each Warrant the kind and amount of shares and other securities, cash and other property that he or she would have owned or have been entitled to receive after the happening of such consolidation, merger or sale had such Warrant been exercised immediately prior to such action (assuming that such Physician, as a holder of Common Stock prior to such action, would not have exercised any rights of election as a holder of Common Stock as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger or sale; provided, that if the kind or amount of securities, cash or other property receivable upon such consolidation, merger or sale is not the same for each non-electing share of Common Stock, then the kind and amount of securities, cash or other property receivable shall be deemed to be the kind and amount so receivable by a plurality of the non-electing shares). The Company shall mail by first-class mail, postage prepaid, to the Physician, notice of the execution of any agreement with an acquiring corporation as provided in the first sentence of this subsection 11.3. In addition to any adjustments required by this subsection 11.3, such agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 11. The provisions of this subsection 11.3 shall similarly apply to successive consolidations, mergers, sales or conveyances. 11.4. No Fractional Shares. The Company will not issue fractions of Warrant Shares. In lieu of such fractional Warrant Shares, the Company will pay to the Physician to whom such fractional Warrant Shares would otherwise be issuable an amount in cash equal to the product of such fraction of a Warrant Share multiplied by the current Market Price per share of Common Stock. SECTION 12. NO RIGHTS AS STOCKHOLDERS; NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement or in any of the Warrants shall be construed as conferring upon the Physician the right to vote or to receive dividends or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. If prior to the expiration of the Warrants: (a) the Company shall declare a dividend or other distribution on its Common Shares, other than (i) in cash as described in subsection 11.2, (ii) in other shares of Common Stock, or (iii) in rights to purchase shares of Common Stock or other securities of the Company of the character described in paragraph (a) of subsection 11.1; or 10 14 (b) the Company shall authorize the issuance to all holders of its Common Stock of rights or warrants entitling them to subscribe for or purchase any Common Stock or any other subscription rights or warrants (other than rights of the character described in paragraph (a) of subsection 11.1); or (c) there shall occur a reclassification of the capital stock of the Company (other than a subdivision or combination of its outstanding Common Stock); or (d) the Company shall propose to effect any consolidation or merger into or with, or to effect any sale or other transfer requiring an adjustment pursuant to subsection 11.3; or (e) the Company shall take an action ("Adjustment Action") which would cause an adjustment pursuant to Section 11 hereof of the number or kind of Common Stock (or other securities) purchasable upon the exercise of each Warrant or of the Exercise Price that would have the effect of reducing the price payable for a share of the Company's capital stock by the Physician upon exercise of a Warrant to an amount which is less than the current value of such share; or (f) a voluntary or involuntary dissolution, liquidation or winding up of the Company shall be proposed; then, in any such event, the Company shall cause to be mailed to the Physician in the manner provided in Section 14 hereof, at least 20 days prior to the applicable record or effective date hereinafter specified, a notice stating (i) the date as of which the holders of record of Common Stock to be entitled to such dividend, distribution, rights or warrants are to be determined, or (ii) the date on which such reclassification, Adjustment Action, consolidation, merger, sale, transfer, dissolution, liquidation, or winding up is expected to become effective, and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares of securities or other property, if any, deliverable upon such reclassification, Adjustment Action, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Such notice shall also state whether such transaction will result in any adjustment of the number or kind of Common Stock (or other securities) purchasable upon the exercise of a Warrant or of the Exercise Price and, if so, shall set forth the nature thereof and the date upon which it will become effective. In the event the Company gives notice to the holders of its Common Stock of the declaration or distribution of rights to purchase Common Stock or other securities of the Company of the character described in paragraph (a) of subsection 11.1, the Company will give concurrently a similar notice to the Holders in the manner provided in Section 14 hereof. The failure to give the notices required by this Section 12, or any defect therein, shall not affect the legality or validity of any such dividend, distribution, right, warrant, reclassification, Adjustment Action, dissolution, liquidation or winding up or other action, or the vote on any action authorizing the same. 11 15 SECTION 13. PURCHASE RIGHTS. If at any time or from time to time on or after the date of the Agreement, the Corporation shall give notice (a "Purchase Rights Notice") pursuant to paragraph (b) of Section 12 of an issuance of rights or warrants, (the "Purchase Rights") to all record holders of Common Stock, such issuance shall not result in an adjustment of the Exercise Price or the number of Warrants under Section 11 hereof to the extent that the Physician is granted the right to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Physician could have acquired if he or she had held the number of shares of Common Stock acquirable upon exercise of the Warrants immediately before the record date for the grant, issuance, or sale of such Purchase Rights. The Purchase Rights Notice shall describe the Purchase Rights and their availability to the Physician. SECTION 14. NOTICES. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Company at its principal office located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama, to the attention of the Corporate Secretary and to the Physician at the address given beneath the Physician's signature hereto. Each party hereto may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in writing to the other party. SECTION 15. APPLICABLE LAW. This Agreement and each Warrant issued hereunder shall be deemed to be a contract made under the internal laws of the State of New York (without reference to conflicts of law principles) and for all purposes shall be construed in accordance with the laws of said State. SECTION 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. SECTION 17. CAPTIONS. The captions of the Sections and subsections of this Agreement have been inserted for convenience only and shall have no substantive effect. 12 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. MEDPARTNERS, INC. By ------------------------------------- Name: Title: PHYSICIAN By ------------------------------------- (Signature) ------------------------------------- (Print name) ------------------------------------- (Address) ------------------------------------- (City, State, Zip Code) Instruction: Sign and complete two copies of this Agreement and return one in the enclosed, addressed envelope to the Company. S-1 17 CONSENT OF SPOUSE In consideration of the execution of the foregoing Nontransferable Warrant Agreement by MedPartners, Inc., I, __________________, the spouse of the Physician therein named, do hereby join with my spouse in executing the foregoing Nontransferable Warrant Agreement and do hereby agree to be bound by all of the terms and provisions thereof. Dated: , 1997. --------------- ------------------------------------- Signature of Spouse 18 MEDPARTNERS, INC. PURCHASE FORM The undersigned hereby irrevocably elects to exercise the right of purchase granted under the Agreement with respect to ______ shares of Common Stock and requests that certificates for such shares of Common Stock be issued in the name of: Name: ------------------------------------------------------------------- Address: ------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Social Security or Taxpayer's Identification Number: ------------------------------------------------------- ------------------------------------- (Signature) ------------------------------------- (Print name) ------------------------------------- (Address) ------------------------------------- (City, State, Zip Code) A-1 EX-9 10 FORM OF CHG. IN CNTRL. EMPLMT. AGRMT. (MASS/AUS) 1 EXHIBIT 9 FORM OF EMPLOYMENT AGREEMENT (MASSAMINO AND AUSTIN) AGREEMENT by and between Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), and ____________________ (the "Executive"), dated as of the 7th day of January, 1997. For all purposes of this Agreement, employment with the Company shall include employment with any of its affiliated companies. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof. (c) A "Hostile Change in Control" shall mean a change of control that results from an unsolicited proposal that is not approved by a majority of the Continuing Directors (as defined below) prior to disclosure of such proposal for a Change in Control or if such disclosure is made without the prior approval of a majority of the disinterested directors. Any reference in this Agreement to a Change in Control includes any Hostile Change in Control unless specifically noted otherwise. (d) A "Continuing Director" shall mean any member of the Board of Directors of the Company (while such Person is a member of the Board) who (i) is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of 2 an Acquiring Person or of any such Affiliate or Associate, and (ii) either (A) was a member of the Board of Directors prior to the time any person became an Acquiring Person, or (B) became a member of the Board of Directors subsequent to the time any person became an Acquiring Person, if such person's nomination for election, or re-election, to the Board was recommended, or approved, by a majority of the Continuing Directors then in office. (e) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (as defined below), as in effect as of the date hereof. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (an "Acquiring Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (v) any acquisition by FHP International Corporation ("FHP") as a result of the rights offering to purchase the Company's Common Stock being made in connection with PacifiCare Health Systems, Inc.'s acquisition of FHP and more fully described in the Form S-1 Registration Statement filed with the Securities and Exchange Commission on December 11, 1996, (the "Rights Offering"), or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or 2 3 (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on either (i) the third anniversary of such date if such Effective Date is triggered by a Hostile Change of Control or (ii) the second anniversary of such date if such Effective Date is triggered by a Change in Control that is not hostile (the "Employment Period"). 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day 3 4 period immediately preceding the Effective Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. To the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) OTHER BENEFITS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings, retirement, welfare benefit, vacation and sick leave plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies. 4 5 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive 5 6 is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in material diminution in such position, authority, duties or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (iv) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 5(c), any controversy or claim arising out of or relating to any determination of "Good Reason" made by the Executive shall be settled by arbitration in Orange County, California, in accordance with the following: (v) Each party shall appoint its own arbitrator and the two arbitrators shall choose a third, impartial arbitrator as umpire before the date set for the hearing. If a party fails to appoint its arbitrator within 30 days after having either received or given the notice requesting arbitration, the other shall appoint the second arbitrator. If the two arbitrators fail to appoint the umpire within 30 days after their appointments, either party may apply to the Orange County Superior Court of the State of California to appoint an impartial umpire. The umpire shall promptly notify all parties to the arbitration of his selection. (vi) The arbitration shall be conducted pursuant to the provisions of the California Code of Civil Procedure, including the rules pertaining to 6 7 discovery. (vii) Within a reasonable time after completion of the arbitration, the arbitrators shall prepare a written opinion, a copy of which shall be provided to each party. (viii) The parties shall share equally the expenses of arbitration, including the arbitrator's fee, provided, however, that the arbitrators, in their discretion, may award costs to the prevailing party. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (iii) if the Executive's employment is terminated by reason of Death or Disability, the Date of Termination shall be the date of Death of the Executive or the Disability Effective Date, as the case may be. 6. OBLIGATIONS OF THE COMPANY OR EXECUTIVE UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, Death or Disability or the Executive shall terminate employment for Good Reason, such termination, for purposes of this Section 6(a), shall constitute separation from, and cessation of duties for, the Company as of the Date of 7 8 Termination. Under such circumstances, the Company shall pay to the Executive the following payments and benefits: (i) Bi-weekly salary continuation at the Executive's Annual Base Salary as if the Executive had remained employed through the end of the Employment Period; and (ii) Medical and Dental Coverage continuation as if the Executive had remained employed through the end of the Employment Period at the Executive's benefit level as of the Date of Termination; (iii) Life Insurance Coverage continuation through the end of the Employment Period at the Executive's current benefit level as of the Date of Termination; (iv) Outplacement services consistent with the Company's outplacement policy for a person at the Executive's job classification and/or grade level; (v) A payment on the last day of the Employment Period in an amount equal to the sum of (A) the additional contributions that would have been allocated to Executive's accounts under the Talbert Medical Management Holdings Corporation Employee Stock Ownership Plan (the "ESOP") and the Talbert Medical Management Holdings Corporation Money Purchase Pension Plan if the Executive had remained employed through the end of the Employment Period and deferred the maximum pretax deferral allowed under the terms of the ESOP (after the application of the limitations on deferrals set forth in the ESOP) and (B) the amount of any benefits under the ESOP which were forfeited upon termination of employment but which would have become vested if the Executive had remained employed through the end of the Employment Period; (vi) Payment within 30 days of the Date of Termination of all accrued vacation, holiday and personal leave days as of the Date of Termination; and (vii) Payment of any incentive compensation that Executive would have earned if Executive had remained employed through the end of the Employment Period under, and in accordance with the terms of, any applicable incentive compensation plan. The Company reserves the right to deduct from any applicable sum those amounts required by law. Any monies owed to the Company by Executive may be deducted 8 9 from the Amounts payable pursuant to this Section 6(a). All accruals of vacation, holiday and personal leave days shall end effective the Date of Termination. The payments called for in this Section 6(a) shall be in lieu of and discharge any obligations of Company to Executive for compensation, accrued vacation, accrued personal leave days, accrued holidays, incentive compensation, car allowances or any other expectations of remuneration or benefit on the part of the Executive. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of accrued obligations and the timely payment or provision of other benefits under any plan, program, policy or practice of the Company in accordance with the terms of such plan, program, policy or practice (the "Other Benefits"). Accrued obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of accrued obligations and the timely payment or provision of Other Benefits. Accrued obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for accrued obligations and the timely payment or provision of Other Benefits. In such case, all accrued obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (e) ACCELERATION OF OPTIONS. The Board of Directors has determined that the events described in Section 2 hereof will constitute a "Change of Control of the Company" for purposes of Section 6.2(b) of the Incentive Plan (as defined below). Therefore, if the Executive's employment is terminated other than voluntarily or for Cause, Death or Disability prior to the end of the Employment Period, then, subject to Section 11 of this Agreement, all of the Executive's outstanding Options under, and as defined in, the Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan (the "Incentive Plan") which have not otherwise become exercisable shall become immediately exercisable in full on the Date of Termination, and all substantial risks of forfeiture and restrictions on transfer relating to any of the Executive's shares of Restricted Stock under, 9 10 and as defined in, the Incentive Plan shall be terminated on the Date of Termination. For purposes of this provision, any termination of the Executive's employment other than voluntarily or for Cause, Death or Disability shall be deemed to be a termination for the convenience of the Board; accordingly, any Option granted to the Executive which are or become exercisable as of the Date of Termination shall terminate 90 days after the Date of Termination. (f) DUTY TO COOPERATE. During the Employment Period and thereafter, Executive agrees to cooperate with and assist the Company, upon reasonable notice, in the defense of any litigation or governmental investigation arising from events which occurred while Executive was employed by the Company. Such cooperation and assistance shall include, but not be limited to, Executive's full participation in locating, producing, collecting, analyzing and preparing documents and other informational materials; in preparing for and participating in depositions, hearings and trials; and in responding to document production requests, interrogatories, and other discovery. If it becomes necessary for Executive to testify in any judicial or administrative proceedings, the Company shall reimburse Executive for any reasonable travel expenses (including transportation, food and lodging) which are incurred (or are to be incurred) in connection with such testimony (including preparation therefor). The Company shall not be required to pay Executive any additional consideration, including, but not limited to, consulting or witness fees, in connection with any cooperation, assistance or testimony required of or provided by Executive pursuant to this Agreement. In addition, from the Date of Termination to the end of the Employment Period, the Executive shall devote a reasonable amount of time cooperating with and assisting the Company in maintaining and improving its relationships with its customers. 7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT. Except as stated herein, the Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other 10 11 action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. CERTAIN PAYMENTS BY THE COMPANY (a) Notwithstanding anything to the contrary in this Agreement, in the event that any payment, grant of securities or distribution by Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 11) ("Payment") is determined to be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code (the "Code") (or any similar provision) and/or any taxes incurred in connection with delivering documents contemplated by Section 11(e) (such excise and other tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise and Other Tax"), then the Company shall 11 12 pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise and Other Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise and Other Tax imposed upon the Payments. (b) Subject to later additional adjustment pursuant to Section 11(c), all determinations required to be made under this Section 11, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte and Touche or such other certified public accounting firm as may be designated by Executive and which is satisfactory to the Company (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of request from Executive or the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 11(b), shall be paid by the Company to Executive within five days of the receipt of the Accounting Firm's determination. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 11(c) and Executive thereafter is required to make a payment of any Excise and Other Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim, (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, 12 13 without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) Cooperate with the Company in good faith in order to contest such claim effectively, and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however, the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise and Other Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 11(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise and Other Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 11(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 11(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 11(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such 13 14 advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding anything to the contrary in this Section 11, if any payment made to Executive pursuant to this Agreement or otherwise would constitute an excess parachute payment within the meaning of Section 280(G) of the Code, Executive shall forfeit (to the extent necessary to avoid such excess parachute payment) (i) first, cash receivable hereunder under Sections 6(a)(i) and 6(a)(v), (ii) next, shares of Common Stock of the Company received under that certain Stock Purchase Agreement dated as of March 15, 1996, between Executive, certain other individuals, Talbert Medical Management Corporation and FHP International Corporation, as amended (the "Purchase Agreement") that are subject to restrictions under paragraphs 5.3.(c) thereof and that are not yet free of restrictions on the sale thereof that are applicable until July 1, 1998, and (iii) lastly, shares of Common Stock of the Company received under the Purchase Agreement that are not yet free of restrictions on the sale thereof that are applicable until July 1, 1999; provided, however, that none of the foregoing forfeitures shall take place if Executive, within 30 days after the Date of Termination shall have executed and delivered to the Company (i) a Covenant Not to Compete in substantially the form of "EXHIBIT A" hereto (as amended to provide that such Covenant Not to Compete shall terminate on September 18, 1999 and the references to Section 11(c) are revised to Section 11(e)), and (ii) a Settlement and Release Agreement in substantially the form of "EXHIBIT B" hereto. (f) Notwithstanding anything to the contrary in this Section 11, the Company's obligation to pay a Gross Up Payment shall not exceed $4,000,000, when taken together with its obligations to pay Gross Up Payments to [insert name of other Key Executive]. 12. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 14 15 IF TO THE EXECUTIVE: ------------------------- ------------------------- ------------------------- IF TO THE COMPANY: Talbert Medical Management Holdings Corporation 3540 Howard Way Costa Mesa, California 92626 Attention: President or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) As stated, the Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(iv) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. (g) From and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof entered into prior to the date hereof. 15 16 (h) This Agreement shall be void and without further force and effect unless executed and delivered by the Executive to Russell D. Phillips, Jr., Assistant Secretary of the Company, at least 48 hours prior to the Effective Time of the merger contemplated by the Amended and Restated Agreement and Plan of Reorganization among PacifiCare Health Systems, Inc., N-T Holdings, Inc., Neptune Merger Corp., Tree Acquisition Corp., and FHP, dated as of November 11, 1996. (i) This Agreement shall be void and without further force and effect if FHP holds in excess of 50% of the Company's Common Stock as a result of the Rights Offering. (j) In the event that as a result of the Rights Offering, FHP holds less than 50% of the Company's Common Stock, then in consideration of: (a) the Company, a majority-owned subsidiary of FHP, approving this Agreement; and (b) FHP authorizing this Agreement, Executive hereby releases FHP from all its duties and obligations under the Employment Agreement between the Executive and FHP dated as of February 1, 1996 (the "FHP Agreement"). However, in the event that as a result of the Rights Offering, FHP holds in excess of 50% of the Company's Common Stock, the FHP Agreement shall remain in full force and effect. 16 17 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION ---------------------------------------------- By: Jack D. Massimino Its: President and Chief Executive Officer ---------------------------------------------- Executive 17 18 COVENANT NOT TO COMPETE This COVENANT NOT TO COMPETE, is entered into as of ____________, 1997 (the "Agreement"), is made by and between Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), and _____________________ ("Executive") pursuant to the Employment Agreement between them dated as of the 7th day of January, 1997 (the "Employment Agreement"). Defined terms not defined herein shall have the meanings assigned to them in the Employment Agreement. WHEREAS, the Company desires the benefits of the continued services of the Executive, and the Executive is willing to render such services, pursuant and subject to the terms and conditions of the Employment Agreement; and WHEREAS, Executive desires the benefits of Section 11(c) of the Employment Agreement and in consideration thereof desires to execute and deliver this Agreement in accordance therewith. NOW, THEREFORE, in consideration of the promises and the covenants and agreements contained herein, the parties hereto agree as follows: 1. COVENANT NOT TO COMPETE. Until the earlier of the expiration of the Employment Period or the expiration of 30 days following Executive's Date of Termination without execution and delivery by Executive of a Settlement and Release Agreement as provided in Section 11(c) of the Employment Agreement, Executive shall not, directly or indirectly, as principal, employee, agent, independent contractor, proprietor, partner, or otherwise, operate, own, manage, control, or participate in conducting the same business in the same cities and counties as carried on by the Company in the State of California at the Effective Date, if in so doing Executive personally carries on activities substantially the same in all material respects as the activities carried on by Executive as an officer and employee of the Company at the Effective Date. 2. REASONABLENESS OF COVENANT. Executive has carefully considered the nature and extent of the restrictions upon Executive and the rights and remedies conferred upon Company under this Agreement, and hereby acknowledges and agrees that such covenants are reasonable, are designed to prevent irreparable damage to Company, are required to protect Company's legitimate interests, and do not confer a benefit upon Company disproportionate to the detriment of Executive. 3. NO WAIVER. No waiver of any of the provisions herein shall be valid unless in writing signed by the party against whom such claimed waiver is sought to be enforced, nor shall a failure to enforce any right hereunder constitute a continuing waiver of 18 19 the notice or a waiver of any other right hereunder. The failure of the Company at any time or from time to time to require performance of any of Executive's obligations hereunder shall in no manner affect the Company's right to enforce any provision of this Agreement at a subsequent time. 4. SEVERABILITY. In the event that any provision or portion of this Agreement be found by a court of competent jurisdiction to be invalid or unenforceable, this Agreement shall be deemed to be amended so as to delete only the invalid or unenforceable provision, or the invalid or unenforceable portion thereof, and the remaining provisions hereof shall remain in full force and effect. 5. SUCCESSORS. This Agreement shall inure to the benefit of, and be binding upon the parties, their heirs, executors, administrators, successors and assigns. 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of California, without reference to principles of conflicts of laws. 7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one instrument. 19 20 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above mentioned. TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION ---------------------------------------------- By: Jack D. Massimino Its: President and Chief Executive Officer ---------------------------------------------- Executive 20 21 SETTLEMENT AGREEMENT AND RELEASE This SETTLEMENT AGREEMENT AND RELEASE ("Agreement") is entered into by and between ____________________ ("Executive") and Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), pursuant to the EMPLOYMENT AGREEMENT between them dated as of the 7th day of January, 1997 (the "Employment Agreement"). WHEREAS, the employment of Executive by the Company terminated __________________ (the "Termination Date"); and WHEREAS, Executive desires the benefits of Section 11(c) of the Employment Agreement and in consideration thereof desires to execute and deliver this Agreement in accordance therewith. NOW, THEREFORE, in consideration of the promises and the covenants and agreements contained herein, the parties hereto agree as follows: 1. RELEASE. In consideration of the above, the sufficiency of which Executive hereby acknowledges, and subject to the proviso hereinafter set forth, Executive hereby agrees not to sue and fully, finally, completely and generally releases, absolves and discharges the Company, its predecessors, successors, subsidiaries, parents, related companies and business concerns, affiliates, partners, trustees, directors, officers, agents, attorneys, servants, representatives and employees, past and present, and each of them (hereinafter collectively referred to as "Releasees") from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, grievances, arbitrations, unfair labor practice charges, wages, vacation payments, severance payments, obligations, commissions, overtime payments, Workers' Compensation claims, debts, profit sharing or bonus claims, expenses, damages, judgments, orders and/or liabilities of whatever kind or nature in law, equity or otherwise, whether known or unknown to Executive, which Executive now owns or holds or has at any time owned or held as against Releasees, or any of them ("Claims"), including specifically but not exclusively and without limiting the generality of the foregoing, any and all Claims arising out of or in any way connected to Executive's employment with or separation of employment from Executive including any Claims based on contract, tort, wrongful discharge, fraud, breach of fiduciary duty, attorneys' fees and costs, discrimination in employment, any and all acts or omissions in contravention of any federal or state laws or statutes (including but not limited to federal or state securities laws and the Racketeer Influenced and Corrupt Organizations Act), and any right to recovery based on state or federal age, sex, pregnancy, race, color, national origin, marital status, religion, veteran status, disability, sexual orientation, medical condition, union affiliation or other anti-discrimination laws, including, without limitation, Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the National Labor Relations Act, and the California Fair Employment and Housing Act, all as amended, 21 22 whether such claim be based upon an action filed by Executive or by a governmental agency; PROVIDED, HOWEVER, the foregoing release shall not affect or diminish any rights of Executive under the Employment Agreement or in respect of vested employee benefits. "Vested employee benefits" means any and all rights of Executive under or in respect of (i) any employee benefit plan of the Company or any corporation or other entity which controlling, controlled by or under common control with the Company or that is a Releasee ("Affiliated Company"), (ii) any option or other agreement relating to any right or interest of Executive in any stock or other securities of the Company or any Affiliated Company, (iii) salary or wages payable for services rendered before the Termination Date, (iv) reimbursement for business expenses or other amounts for which Executive is entitled to reimbursement by the Company immediately before the Termination Date, or (v) indemnification as an agent. (a) Executive acknowledges and agrees that neither anything in this Agreement or the offer, execution, delivery, or acceptance thereof shall be construed as an admission of any kind by the Company, and this Agreement shall not be admissible as evidence in any proceeding except to enforce this Agreement. (b) It is the intention of Executive in executing this instrument that it shall be effective as a bar to each and every claim, demand, grievance and cause of action hereinabove specified as being released. In furtherance of this intention, Executive hereby expressly consents that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demand and causes of action hereinabove specified, and elects to assume all risks for claims that now exist in Executive's favor, known or unknown, that are released under this Agreement. Executive acknowledges that Executive may hereafter discover facts different from, or in addition to, those Executive now knows or believes to be true with respect to the claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, wages, obligations, debts, expenses, damages, judgments, orders and liabilities herein released, and agrees the release herein shall be and remain in effect in all respects as a complete and general release as to all matters released herein, notwithstanding any such different or additional facts. (c) If any provision of this Agreement or application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provision or application. To this end, the provisions of this Agreement are severable. (d) Executive represents and warrants that Executive has not heretofore assigned or transferred or purported to assign or transfer to any person, firm or corporation any claim, demand, right, damage, liability, debt, account, action, cause of action, or any other matter herein released. 22 23 (e) NOTICE TO EXECUTIVE: The law requires that Executive be advised and the Company hereby advises Executive to consult with an attorney and discuss this Agreement before executing it. Executive acknowledges that the Company has provided to Executive at least 21 days within which to review and consider this Agreement before signing it. If Executive decides not to use the full 21 days, then Executive knowingly and voluntarily waives any claims that Executive was not in fact given that period of time or did not use the entire 21 days to consult an attorney and/or consider this Agreement. Executive acknowledges that Executive may revoke this Agreement for up to seven calendar days following Executive's execution of this Agreement and that it shall not become effective or enforceable until the revocation period has expired. Executive further acknowledges and agrees that such revocation must be in writing addressed to the Company as follows: Talbert Medical Management Holdings Corporation, 3540 Howard Way, Costa Mesa, California 92626-1417, Attn: President, and received by the Company as so addressed not later than midnight on the seventh day following execution of this Agreement by Executive. If Executive so revokes this Agreement, the Agreement shall not be effective or enforceable and Executive will not receive the benefits described above. If Executive does not revoke this Agreement in the time frame specified above, the Agreement shall become effective at 12:00:01 on the eighth day after it is signed by Executive. (f) Executive represents that Executive has read and understood the foregoing Agreement, has been advised to and has had the opportunity to discuss it with anyone he or she desires, including an attorney of his or her own choice, and Executive accepts and agrees to the terms of this Agreement, acknowledges receipt of a copy of the same and the sufficiency of the benefits described above, and hereby executes this Agreement voluntarily and with full understanding of its consequences. 23 24 PLEASE READ CAREFULLY. THIS AGREEMENT CONTAINS A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. Date:_______________, 199__ Executive: ---------------------------------- Date:_______________, 199__ Talbert Medical Management Holdings Corporation By: ---------------------------------------- Its: ---------------------------------------- 24 EX-10 11 FORM OF CHG. IN CNTRL. EMPLMT. AGRMT.(OTHERS) 1 EXHIBIT 10 FORM OF EMPLOYMENT AGREEMENT (OTHERS) AGREEMENT by and between Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), and ____________________ (the "Executive"), dated as of the 7th day of January, 1997. For all purposes of this Agreement, employment with the Company shall include employment with any of its affiliated companies. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof. (c) A "Hostile Change in Control" shall mean a change of control that results from an unsolicited proposal that is not approved by a majority of the Continuing Directors (as defined below) prior to disclosure of such proposal for a Change in Control or if such disclosure is made without the prior approval of a majority of the disinterested directors. Any reference in this Agreement to a Change in Control includes any Hostile Change in Control unless specifically noted otherwise. (d) A "Continuing Director" shall mean any member of the Board of Directors of the Company (while such Person is a member of the Board) who (i) is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of 2 an Acquiring Person or of any such Affiliate or Associate, and (ii) either (A) was a member of the Board of Directors prior to the time any person became an Acquiring Person, or (B) became a member of the Board of Directors subsequent to the time any person became an Acquiring Person, if such person's nomination for election, or re-election, to the Board was recommended, or approved, by a majority of the Continuing Directors then in office. (e) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (as defined below), as in effect as of the date hereof. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (an "Acquiring Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (v) any acquisition by FHP International Corporation ("FHP") as a result of the rights offering to purchase the Company's Common Stock being made in connection with PacifiCare Health Systems, Inc.'s acquisition of FHP and more fully described in the Form S-1 Registration Statement filed with the Securities and Exchange Commission on December 11, 1996, (the "Rights Offering"), or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or 2 3 (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on either (i) the third anniversary of such date if such Effective Date is triggered by a Hostile Change of Control or (ii) the second anniversary of such date if such Effective Date is triggered by a Change in Control that is not hostile (the "Employment Period"). 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day 3 4 period immediately preceding the Effective Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. To the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) OTHER BENEFITS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings, retirement, welfare benefit, vacation and sick leave plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies. 4 5 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive 5 6 is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in material diminution in such position, authority, duties or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (iv) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 5(c), any controversy or claim arising out of or relating to any determination of "Good Reason" made by the Executive shall be settled by arbitration in Orange County, California, in accordance with the following: (v) Each party shall appoint its own arbitrator and the two arbitrators shall choose a third, impartial arbitrator as umpire before the date set for the hearing. If a party fails to appoint its arbitrator within 30 days after having either received or given the notice requesting arbitration, the other shall appoint the second arbitrator. If the two arbitrators fail to appoint the umpire within 30 days after their appointments, either party may apply to the Orange County Superior Court of the State of California to appoint an impartial umpire. The umpire shall promptly notify all parties to the arbitration of his selection. (vi) The arbitration shall be conducted pursuant to the provisions of the California Code of Civil Procedure, including the rules pertaining to 6 7 discovery. (vii) Within a reasonable time after completion of the arbitration, the arbitrators shall prepare a written opinion, a copy of which shall be provided to each party. (viii) The parties shall share equally the expenses of arbitration, including the arbitrator's fee, provided, however, that the arbitrators, in their discretion, may award costs to the prevailing party. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (iii) if the Executive's employment is terminated by reason of Death or Disability, the Date of Termination shall be the date of Death of the Executive or the Disability Effective Date, as the case may be. 6. OBLIGATIONS OF THE COMPANY OR EXECUTIVE UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, Death or Disability or the Executive shall terminate employment for Good Reason, such termination, for purposes of this Section 6(a), shall constitute separation from, and cessation of duties for, the Company as of the Date of 7 8 Termination. Under such circumstances, the Company shall pay to the Executive the following payments and benefits: (i) Bi-weekly salary continuation at the Executive's Annual Base Salary as if the Executive had remained employed through the end of the Employment Period; and (ii) Medical and Dental Coverage continuation as if the Executive had remained employed through the end of the Employment Period at the Executive's benefit level as of the Date of Termination; (iii) Life Insurance Coverage continuation through the end of the Employment Period at the Executive's current benefit level as of the Date of Termination; (iv) Outplacement services consistent with the Company's outplacement policy for a person at the Executive's job classification and/or grade level; (v) A payment on the last day of the Employment Period in an amount equal to the sum of (A) the additional contributions that would have been allocated to Executive's accounts under the Talbert Medical Management Holdings Corporation Employee Stock Ownership Plan (the "ESOP") and the Talbert Medical Management Holdings Corporation Money Purchase Pension Plan if the Executive had remained employed through the end of the Employment Period and deferred the maximum pretax deferral allowed under the terms of the ESOP (after the application of the limitations on deferrals set forth in the ESOP) and (B) the amount of any benefits under the ESOP which were forfeited upon termination of employment but which would have become vested if the Executive had remained employed through the end of the Employment Period; (vi) Payment within 30 days of the Date of Termination of all accrued vacation, holiday and personal leave days as of the Date of Termination; and (vii) Payment of any incentive compensation that Executive would have earned if Executive had remained employed through the end of the Employment Period under, and in accordance with the terms of, any applicable incentive compensation plan. The Company reserves the right to deduct from any applicable sum those amounts required by law. Any monies owed to the Company by Executive may be deducted 8 9 from the Amounts payable pursuant to this Section 6(a). All accruals of vacation, holiday and personal leave days shall end effective the Date of Termination. The payments called for in this Section 6(a) shall be in lieu of and discharge any obligations of Company to Executive for compensation, accrued vacation, accrued personal leave days, accrued holidays, incentive compensation, car allowances or any other expectations of remuneration or benefit on the part of the Executive. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of accrued obligations and the timely payment or provision of other benefits under any plan, program, policy or practice of the Company in accordance with the terms of such plan, program, policy or practice (the "Other Benefits"). Accrued obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of accrued obligations and the timely payment or provision of Other Benefits. Accrued obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for accrued obligations and the timely payment or provision of Other Benefits. In such case, all accrued obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (e) ACCELERATION OF OPTIONS. The Board of Directors has determined that the events described in Section 2 hereof will constitute a "Change of Control of the Company" for purposes of Section 6.2(b) of the Incentive Plan (as defined below). Therefore, if the Executive's employment is terminated other than voluntarily or for Cause, Death or Disability prior to the end of the Employment Period, then, subject to Section 11 of this Agreement, all of the Executive's outstanding Options under, and as defined in, the Talbert Medical Management Holdings Corporation 1996 Stock Incentive Plan (the "Incentive Plan") which have not otherwise become exercisable shall become immediately exercisable in full on the Date of Termination, and all substantial risks of forfeiture and restrictions on transfer relating to any of the Executive's shares of Restricted Stock under, 9 10 and as defined in, the Incentive Plan shall be terminated on the Date of Termination. For purposes of this provision, any termination of the Executive's employment other than voluntarily or for Cause, Death or Disability shall be deemed to be a termination for the convenience of the Board; accordingly, any Option granted to the Executive which are or become exercisable as of the Date of Termination shall terminate 90 days after the Date of Termination. (f) DUTY TO COOPERATE. During the Employment Period and thereafter, Executive agrees to cooperate with and assist the Company, upon reasonable notice, in the defense of any litigation or governmental investigation arising from events which occurred while Executive was employed by the Company. Such cooperation and assistance shall include, but not be limited to, Executive's full participation in locating, producing, collecting, analyzing and preparing documents and other informational materials; in preparing for and participating in depositions, hearings and trials; and in responding to document production requests, interrogatories, and other discovery. If it becomes necessary for Executive to testify in any judicial or administrative proceedings, the Company shall reimburse Executive for any reasonable travel expenses (including transportation, food and lodging) which are incurred (or are to be incurred) in connection with such testimony (including preparation therefor). The Company shall not be required to pay Executive any additional consideration, including, but not limited to, consulting or witness fees, in connection with any cooperation, assistance or testimony required of or provided by Executive pursuant to this Agreement. In addition, from the Date of Termination to the end of the Employment Period, the Executive shall devote a reasonable amount of time cooperating with and assisting the Company in maintaining and improving its relationships with its customers. 7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. FULL SETTLEMENT. Except as stated herein, the Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other 10 11 action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. CERTAIN PAYMENTS BY THE COMPANY (a) If any payment made to Executive pursuant to this Agreement or otherwise would constitute an excess parachute payment within the meaning of Section 280(G) of the Code, Executive shall forfeit (to the extent necessary to avoid such excess parachute payment) (i) first, cash receivable hereunder under Sections 6(a)(i) and 6(a)(v), (ii) next, shares of Common Stock of the Company received under that certain Stock Purchase Agreement dated as of March 15, 1996, between Executive, certain other individuals, Talbert Medical Management Corporation and FHP International Corporation, as amended (the "Purchase Agreement") that are subject to restrictions under paragraphs 5.3.(c) thereof and that are not yet free of restrictions on the sale thereof that are applicable until July 1, 1998, 11 12 and (iii) lastly, shares of Common Stock of the Company received under the Purchase Agreement that are not yet free of restrictions on the sale thereof that are applicable until July 1, 1999; provided, however, that none of the foregoing forfeitures shall take place if Executive, within 30 days after the Date of Termination shall have executed and delivered to the Company (i) a Covenant Not to Compete in substantially the form of "EXHIBIT A" hereto (as amended to provide that such Covenant Not to Compete shall terminate on September 18, 1999 and the references to Section 11(c) are revised to Section 11(a)), and (ii) a Settlement and Release Agreement in substantially the form of "EXHIBIT B" hereto. 12. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: ------------------------ ------------------------ ------------------------ IF TO THE COMPANY: Talbert Medical Management Holdings Corporation 3540 Howard Way Costa Mesa, California 92626 Attention: President or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) As stated, the Company may withhold from any amounts payable under 12 13 this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(iv) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. (g) From and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof entered into prior to the date hereof. (h) This Agreement shall be void and without further force and effect unless executed and delivered by the Executive to Russell D. Phillips, Jr., Assistant Secretary of the Company, at least 48 hours prior to the Effective Time of the merger contemplated by the Amended and Restated Agreement and Plan of Reorganization among PacifiCare Health Systems, Inc., N-T Holdings, Inc., Neptune Merger Corp., Tree Acquisition Corp., and FHP, dated as of November 11, 1996. (i) This Agreement shall be void and without further force and effect if FHP holds in excess of 50% of the Company's Common Stock as a result of the Rights Offering. 13 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION ------------------------- By: Jack D. Massimino Its: President and Chief Executive Officer ------------------------ Executive 14 15 COVENANT NOT TO COMPETE This COVENANT NOT TO COMPETE, is entered into as of ____________, 1997 (the "Agreement"), is made by and between Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), and _____________________ ("Executive") pursuant to the Employment Agreement between them dated as of the 7th day of January, 1997 (the "Employment Agreement"). Defined terms not defined herein shall have the meanings assigned to them in the Employment Agreement. WHEREAS, the Company desires the benefits of the continued services of the Executive, and the Executive is willing to render such services, pursuant and subject to the terms and conditions of the Employment Agreement; and WHEREAS, Executive desires the benefits of Section 11(c) of the Employment Agreement and in consideration thereof desires to execute and deliver this Agreement in accordance therewith. NOW, THEREFORE, in consideration of the promises and the covenants and agreements contained herein, the parties hereto agree as follows: 1. COVENANT NOT TO COMPETE. Until the earlier of the expiration of the Employment Period or the expiration of 30 days following Executive's Date of Termination without execution and delivery by Executive of a Settlement and Release Agreement as provided in Section 11(c) of the Employment Agreement, Executive shall not, directly or indirectly, as principal, employee, agent, independent contractor, proprietor, partner, or otherwise, operate, own, manage, control, or participate in conducting the same business in the same cities and counties as carried on by the Company in the State of California at the Effective Date, if in so doing Executive personally carries on activities substantially the same in all material respects as the activities carried on by Executive as an officer and employee of the Company at the Effective Date. 2. REASONABLENESS OF COVENANT. Executive has carefully considered the nature and extent of the restrictions upon Executive and the rights and remedies conferred upon Company under this Agreement, and hereby acknowledges and agrees that such covenants are reasonable, are designed to prevent irreparable damage to Company, are required to protect Company's legitimate interests, and do not confer a benefit upon Company disproportionate to the detriment of Executive. 3. NO WAIVER. No waiver of any of the provisions herein shall be valid unless in writing signed by the party against whom such claimed waiver is sought to be enforced, nor shall a failure to enforce any right hereunder constitute a continuing waiver of 15 16 the notice or a waiver of any other right hereunder. The failure of the Company at any time or from time to time to require performance of any of Executive's obligations hereunder shall in no manner affect the Company's right to enforce any provision of this Agreement at a subsequent time. 4. SEVERABILITY. In the event that any provision or portion of this Agreement be found by a court of competent jurisdiction to be invalid or unenforceable, this Agreement shall be deemed to be amended so as to delete only the invalid or unenforceable provision, or the invalid or unenforceable portion thereof, and the remaining provisions hereof shall remain in full force and effect. 5. SUCCESSORS. This Agreement shall inure to the benefit of, and be binding upon the parties, their heirs, executors, administrators, successors and assigns. 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of California, without reference to principles of conflicts of laws. 7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one instrument. 16 17 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above mentioned. TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION By: ______________________ Jack D. Massimino President and Chief Executive Officer ------------------------- Executive 17 18 SETTLEMENT AGREEMENT AND RELEASE This SETTLEMENT AGREEMENT AND RELEASE ("Agreement") is entered into by and between ____________________ ("Executive") and Talbert Medical Management Holdings Corporation, a Delaware corporation (the "Company"), pursuant to the EMPLOYMENT AGREEMENT between them dated as of the 7th day of January, 1997 (the "Employment Agreement"). WHEREAS, the employment of Executive by the Company terminated __________________ (the "Termination Date"); and WHEREAS, Executive desires the benefits of Section 11(c) of the Employment Agreement and in consideration thereof desires to execute and deliver this Agreement in accordance therewith. NOW, THEREFORE, in consideration of the promises and the covenants and agreements contained herein, the parties hereto agree as follows: 1. RELEASE. In consideration of the above, the sufficiency of which Executive hereby acknowledges, and subject to the proviso hereinafter set forth, Executive hereby agrees not to sue and fully, finally, completely and generally releases, absolves and discharges the Company, its predecessors, successors, subsidiaries, parents, related companies and business concerns, affiliates, partners, trustees, directors, officers, agents, attorneys, servants, representatives and employees, past and present, and each of them (hereinafter collectively referred to as "Releasees") from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, grievances, arbitrations, unfair labor practice charges, wages, vacation payments, severance payments, obligations, commissions, overtime payments, Workers' Compensation claims, debts, profit sharing or bonus claims, expenses, damages, judgments, orders and/or liabilities of whatever kind or nature in law, equity or otherwise, whether known or unknown to Executive, which Executive now owns or holds or has at any time owned or held as against Releasees, or any of them ("Claims"), including specifically but not exclusively and without limiting the generality of the foregoing, any and all Claims arising out of or in any way connected to Executive's employment with or separation of employment from Executive including any Claims based on contract, tort, wrongful discharge, fraud, breach of fiduciary duty, attorneys' fees and costs, discrimination in employment, any and all acts or omissions in contravention of any federal or state laws or statutes (including but not limited to federal or state securities laws and the Racketeer Influenced and Corrupt Organizations Act), and any right to recovery based on state or federal age, sex, pregnancy, race, color, national origin, marital status, religion, veteran status, disability, sexual orientation, medical condition, union affiliation or other anti-discrimination laws, including, without limitation, Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the National Labor Relations Act, and the California Fair Employment and Housing Act, all as amended, 18 19 whether such claim be based upon an action filed by Executive or by a governmental agency; PROVIDED, HOWEVER, the foregoing release shall not affect or diminish any rights of Executive under the Employment Agreement or in respect of vested employee benefits. "Vested employee benefits" means any and all rights of Executive under or in respect of (i) any employee benefit plan of the Company or any corporation or other entity which controlling, controlled by or under common control with the Company or that is a Releasee ("Affiliated Company"), (ii) any option or other agreement relating to any right or interest of Executive in any stock or other securities of the Company or any Affiliated Company, (iii) salary or wages payable for services rendered before the Termination Date, (iv) reimbursement for business expenses or other amounts for which Executive is entitled to reimbursement by the Company immediately before the Termination Date, or (v) indemnification as an agent. (a) Executive acknowledges and agrees that neither anything in this Agreement or the offer, execution, delivery, or acceptance thereof shall be construed as an admission of any kind by the Company, and this Agreement shall not be admissible as evidence in any proceeding except to enforce this Agreement. (b) It is the intention of Executive in executing this instrument that it shall be effective as a bar to each and every claim, demand, grievance and cause of action hereinabove specified as being released. In furtherance of this intention, Executive hereby expressly consents that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demand and causes of action hereinabove specified, and elects to assume all risks for claims that now exist in Executive's favor, known or unknown, that are released under this Agreement. Executive acknowledges that Executive may hereafter discover facts different from, or in addition to, those Executive now knows or believes to be true with respect to the claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, wages, obligations, debts, expenses, damages, judgments, orders and liabilities herein released, and agrees the release herein shall be and remain in effect in all respects as a complete and general release as to all matters released herein, notwithstanding any such different or additional facts. (c) If any provision of this Agreement or application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provision or application. To this end, the provisions of this Agreement are severable. (d) Executive represents and warrants that Executive has not heretofore assigned or transferred or purported to assign or transfer to any person, firm or corporation any claim, demand, right, damage, liability, debt, account, action, cause of action, or any other matter herein released. 19 20 (e) NOTICE TO EXECUTIVE: The law requires that Executive be advised and the Company hereby advises Executive to consult with an attorney and discuss this Agreement before executing it. Executive acknowledges that the Company has provided to Executive at least 21 days within which to review and consider this Agreement before signing it. If Executive decides not to use the full 21 days, then Executive knowingly and voluntarily waives any claims that Executive was not in fact given that period of time or did not use the entire 21 days to consult an attorney and/or consider this Agreement. Executive acknowledges that Executive may revoke this Agreement for up to seven calendar days following Executive's execution of this Agreement and that it shall not become effective or enforceable until the revocation period has expired. Executive further acknowledges and agrees that such revocation must be in writing addressed to the Company as follows: Talbert Medical Management Holdings Corporation, 3540 Howard Way, Costa Mesa, California 92626-1417, Attn: President, and received by the Company as so addressed not later than midnight on the seventh day following execution of this Agreement by Executive. If Executive so revokes this Agreement, the Agreement shall not be effective or enforceable and Executive will not receive the benefits described above. If Executive does not revoke this Agreement in the time frame specified above, the Agreement shall become effective at 12:00:01 on the eighth day after it is signed by Executive. (f) Executive represents that Executive has read and understood the foregoing Agreement, has been advised to and has had the opportunity to discuss it with anyone he or she desires, including an attorney of his or her own choice, and Executive accepts and agrees to the terms of this Agreement, acknowledges receipt of a copy of the same and the sufficiency of the benefits described above, and hereby executes this Agreement voluntarily and with full understanding of its consequences. 20 21 PLEASE READ CAREFULLY. THIS AGREEMENT CONTAINS A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. Date:_______________, 199__ Executive: ________________________ Date:_______________, 199__ Talbert Medical Management Holdings Corporation By: __________________________ Its: ___________________________ 21 EX-11 12 LETTER AGREEMENT WITH JIM WADE 1 EXHIBIT 11 July 28, 1997 Jim Wade 20792 Skimmer Lane Huntington Beach, CA 92646 Re: Settlement Agreement -------------------- Dear Jim: In the event of a change of control of Talbert Medical Management Holdings Corporation (TMMHC), causing or the termination of your employment with Talbert Medical Management Corporation (TMMC) on a "not for cause" basis, you will receive the following: a) Bi-weekly salary continuation at your then current base rate of pay and executive auto allowance for the twelve (12) months following your separation from TMMC; b) TMMC Medical Coverage continuation for the twelve months following your separation from TMMC; c) TMMC Dental Coverage continuation for the twelve (12) months following your separation from TMMC; d) Outplacement services consistent with TMMC's outplacement policy for a person at the job classification of "Vice President"; e) Continued eligibility to fully participate in TMMC's Retirement Plans for the twelve (12) months following your separation from TMMC; and f) Payment effective upon separation of all accrued vacation, holiday and personal leave days. TMMC reserves the right to deduct from any applicable sum those amounts required by law. Any monies owned to TMMC may be deducted from the amounts payable pursuant to this paragraph. None of the aforementioned payments and benefits will be reduced or eliminated if you gain employment elsewhere during the twelve (12) month period in which you are entitled to receive those benefits. 2 For the purpose of this letter agreement, a "Change of Control" shall mean: a) The acquisition by any individual, entity or group (within the meaning of the Securities Exchange Act of 1934, as amended, of beneficial ownership of 20% or more of either (i) the then outstanding shares of common stock of TMMHC, or (ii) the combined voting power of the then outstanding voting securities of TMMC entitled to vote generally in the election of directors. b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by TMMHC's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an acquiring person other than the Board; or c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of TMMHC (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding TMMHC Common Stock and outstanding TMMHC voting securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination. d) Approval by the shareholders of TMMHC of a complete liquidation or dissolution of TMMHC. The terms and conditions of this severance arrangement will be memorialized and incorporated in a Severance Agreement and General Release, which will be presented to you for consideration and acceptance in the event of your termination "not for cause" after a Change of Control. 2 3 Please indicate your acknowledgement and acceptance of this letter agreement by signing and dating this document in the space indicated below, and returning it to me. A photocopy will be provided to you for your records. Sincerely, /s/ JACK MASSIMINO Jack Massimino President and CEO Talbert Medical Management Holdings Corporation By: /s/ JIM WADE ---------------------------- Date: 7/29/97 -------------------------- 3 EX-12 13 CONFIDENTIALITY AGREEMENT 1 EXHIBIT 12 [LETTERHEAD OF TALBERT MEDICAL] July 23, 1997 Mr. Kent Marquardt Chief Operating Officer - Western Region MedPartners, Inc. 5000 Airport Plaza Drive Long Beach, CA 90815 Dear Mr. Marquardt: In connection with your and our consideration of a possible transaction (the "Transaction") between us and/or our shareholders and you and/or your shareholders, you have requested information concerning us and we have requested information concerning you. For the purposes of this letter agreement ("Agreement"), you or we may each sometimes hereinafter be referred to as the "Receiving Party" when the recipient of information, or the "Providing Party" when the provider of information, as the context may require. As a condition to the Receiving Party being furnished information from the Providing Party, the Receiving Party agrees to treat any information which is furnished by, or on behalf of the Providing Party before or after the date of this letter, and all notes, analyses, compilations, studies or other documents, whether prepared by the Providing Party or others, which contain or otherwise reflect such information (collectively, the "Evaluation Material") in accordance with the provisions of this Agreement and to take or to abstain from taking certain other actions set forth in this Agreement. The term Evaluation Material does not include information which (i) is already in the possession of the Receiving Party, provided that such information was not supplied to the Receiving Party by, or on behalf of, the Providing Party, and provided further that such information is not known to the Receiving Party to be subject to another confidentiality agreement with or other obligation of secrecy or a fiduciary obligation to the Providing Party or to another party, or (ii) is or becomes generally available to the public other than directly or indirectly as a result of disclosure by the Receiving Party or any of the directors, officers, employees, agents, advisers or representatives (collectively, "Representatives") of the Receiving Party in violation of this Agreement. 1. Confidentiality. The Receiving Party agrees that the Evaluation Material will be used solely for the purpose of evaluating the possible Transaction, and that such 2 Mr. Kent Marquardt July 23, 1997 Page 2 information will be kept strictly confidential by the Receiving Party, provided that any of such information may be disclosed by the Receiving Party to its Representatives who need to know such information for the purpose of evaluating the possible Transaction (it being understood that such Representatives will be informed by the Receiving Party of the confidential nature of such information and will agree, and be directed by the Receiving Party, to keep such information strictly confidential and that the Receiving Party will be responsible if they should fail to comply with the terms of this Agreement). 2. Confidentiality of Discussions. In addition, you and we agree not to disclose, and will cause our respective Representatives not to disclose to any person, without the prior written consent of the other party, either the fact that you and we are considering any possible Transaction or that information has been provided to you or us, or that discussions or negotiations are taking place concerning any possible Transaction, or any of the terms, conditions or other facts with respect to any possible Transaction, including the status thereof. The term "person" as used in this Agreement means without limitation any corporation, company, group, partnership, individual or other entity. The foregoing does not prohibit disclosures of the status of any discussions between you and us required (in the written opinion of counsel independent of the disclosing party and acceptable to the other party ("Independent Counsel")) by federal or state securities laws, but in such event each of us will consult with the other party and its counsel in advance of such disclosure about the need for, and the exact text of, any such disclosure. 3. Requests for Disclosure. If either of us is requested or required by applicable law (by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Evaluation Material, such party will provide the other party with immediate notice of the existence, terms and circumstances surrounding such request or requirement so that the other party may consider seeking a protective order or other appropriate relief (and will provide such cooperation in connection therewith as may be reasonably requested by the other party) and/or waive compliance with this Agreement. If in absence of a protective order or the receipt of a waiver hereunder either of us is nonetheless, in the written opinion of Independent Counsel, compelled to disclose any Evaluation Material to any tribunal or any other person or else stand liable for contempt or suffer other material censure or penalty, such party may disclose such information to such tribunal or other party without liability hereunder, provided that such party agrees to furnish only that portion of the Evaluation Material which it is advised by written opinion of Independent Counsel is legally required and that it will use its best efforts to obtain assurance that confidential treatment will be accorded to any Evaluation Material that is disclosed. 4. Insider Trading Laws. You and we hereby acknowledge that you and we are aware, and that you and we will advise our respective Representatives who are informed as to the matters which are the subject of this letter, that federal and many state 3 Mr. Kent Marquardt July 23, 1997 Page 3 securities laws prohibit any person who has received from an issuer material, non-public information concerning the matters which are the subject of this letter from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. 5. No Improper Use of Evaluation Material. For a period commencing on the date hereof and ending two years from the date hereof, each of us and our respective affiliates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will not (and we and they will not assist or encourage others to or request permission to), directly or indirectly, unless specifically requested in writing in advance by the other party's Board of Directors: (i) acquire or agree, offer, seek or propose to acquire (or request permission to do so), ownership (as defined in Rule 13d-3 under the Exchange Act) of any of the other party's assets or businesses or any securities issued by the other party, or any rights or options to acquire such ownership (including from a third party); or (ii) seek or propose to influence or control the management or policies of the other party; or (iii) enter into any discussions, negotiations, arrangements or understanding with any third party with respect to any of the foregoing. If at any time during such period either of us is approached by any third party concerning participation in a transaction involving the assets or businesses or securities issued by the other party, such party will promptly inform the other party of the nature of such contract and the parties thereto. 6. No Representation. Although each of us will endeavor to include in the Evaluation Material information which we believe to be relevant for the purpose of investigation of the other party, each of us acknowledges that neither of us nor any or our respective Representatives or advisers has made or makes any representation or warranty as to the accuracy or completeness of the Evaluation Material. Subject to the terms of this Agreement and of any definitive agreement we may reach, each of us agrees that neither party nor our respective directors, officers, employees, agents, representatives or advisers will have any liability to the other party or any of its representatives or advisers resulting from the use of the Evaluation Material. 7. Return of Materials. If we do not proceed with a Transaction in a reasonable time or if either of us so requests, the Receiving Party will promptly redeliver to the Providing Party all copies of extracts or other reproductions of Evaluation Material 4 Mr. Kent Marquardt July 23, 1997 Page 4 delivered to the Receiving Party and will destroy all memoranda, notes, analyses, compilations and other materials (whether written, electronic or otherwise) prepared by the Receiving Party or its Representatives based on or reflecting the information in the Evaluation Material. The Receiving Party and its Representatives will not retain any such material in any form whatsoever. Following such redelivery or destruction, the Receiving Party will deliver to the Providing Party, upon request, a certification in writing by an officer of the Receiving Party who has supervised such redelivery or destruction. 8. No Solicitation. Until the earliest to occur of (a) the execution by you and us of a definitive agreement with respect to the Transaction; (b) an acquisition of either of us by a third party; or (c) one year from the date of this Agreement, each of us agrees not to initiate or maintain contact (except for those contacts made in the ordinary course of business) with any Representative of the other party regarding its business, operations, prospects or finances, except with the express permission of such party. Each of us further agrees that until the earlier of (i) an acquisition of either of us by a third party or (ii) one year from the date of this agreement, neither of us will solicit for hire any person employed by the other party at the time of such solicitation with whom it has had contact during the period of investigation except for solicitations by general advertisement. 9. Definitive Agreement. Each of us agrees that unless and until a definitive agreement regarding the Transaction has been executed and delivered, neither we nor you will be under any legal obligation of any kind with respect to any Transaction by virtue of this Agreement except for such matters that are specifically set forth herein, notwithstanding any statements made by either of us or our respective Representatives. Neither party has any obligation to authorize or pursue with the other party, its Representatives, or any other party any transaction, and is not prohibited from seeking to effect any of the transactions contemplated herein with any third party. This Agreement may be expressly modified or waived only by a separate writing executed by both parties. 10. Injunctive Relief. Each of us agrees that money damages would not be sufficient remedy for any breach of this Agreement by either of us or our Representatives because of the difficulty in ascertaining the amount of damages suffered by the aggrieved party in the event of such breach. Therefore, each of us agrees that the aggrieved party will be entitled to injunctive relief, specific performance and/or any other appropriate equitable remedies for any such breach, without having to post any bond or any other form of security, without having to show any likelihood of irreparable harm, and without having to prove that money damages would be an inadequate remedy. Such remedies will not be deemed to be exclusive, but will be in addition to all other remedies available at law or in equity, including without limitation the recovery of damages for the period preceding such relief. 5 Mr. Kent Marquardt July 23, 1997 Page 5 11. Indemnification. Each of us agrees to indemnify and to save and hold harmless the other for any and all damages, claims, liabilities and expenses (without duplication of the expenses referred to in the following paragraph) arising out of any breach or failure to comply with any term of this Agreement by any of our respective Representatives. 12. Attorney's Fees. In the event that either party should institute proceedings to enforce any provision of this Agreement, the party that substantially prevails in such proceedings will be entitled to recover all expenses relating to the enforcement of this Agreement, including reasonable attorney's fees and costs in addition to any other remedies. 13. Severability. If any term, 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 restrictions of this Agreement will remain in full force and effect and will in no way be affected, impaired or in any way invalidated by such court action. 14. Law to Govern; Jurisdiction. This Agreement will be governed by and construed in accordance with the internal laws of the State of California without regard to the rules of conflict of laws of such state. Each of us hereby agrees to submit to the exclusive jurisdiction of any court of the State of California for the purpose of any suit, action or other proceeding arising out of this Agreement, or of the Transaction contemplated hereby. 15. No Waiver. No failure or delay by either of us in exercising any right, power or privilege will operate as a waiver thereof nor will any single or partial exercise preclude any other or further exercise of any right, power or privilege. If you are in agreement with the foregoing, please so indicate by signing and returning one copy of this Agreement, whereupon it will become a binding agreement. This Agreement may be executed by telecopy with original to follow. Very truly yours, By: /s/ JACK D. MASSIMINO ------------------------------------ Jack D. Massimino President and Chief Executive Officer 6 Mr. Kent Marquardt July 23, 1997 Page 6 Confirmed and agreed to as of the date of this letter: MEDPARTNERS, INC. By: /s/ KENT MARQUARDT ----------------------------------------- Kent Marquardt Chief Operating Officer -- Western Region EX-13 14 PRESS RELEASE 1 EXHIBIT 13 MEDPARTNERS ANNOUNCES ACQUISITION OF TALBERT MEDICAL MANAGEMENT BIRMINGHAM, ALA., AUG. 14/PRNEWSWIRE -- MedPartners, Inc. (NYSE: MDM) today announced it has entered into a definitive agreement to acquire Talbert Medical Management Holdings Corporation (Nasdaq: TMMC) of Costa Mesa, California, pursuant to a tender offer followed by a merger, for $63 per share in cash, or about $200 million. Talbert Medical Management is a physician practice management company representing 282 primary and specialty care physicians and operating 52 clinics in five Southwestern states. The acquisition will give MedPartners the opportunity to broaden Talbert's patient and clinic base through MedPartners' agreements with other payors and existing clinic network. Efficiencies will also be gained in corporate overhead expenses and other areas. MedPartners said the acquisition will be accounted for as a purchase transaction with MedPartners assuming all assets and liabilities of Talbert. The transaction is contingent on receiving approval from the Federal Trade Commission under the provisions of the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976. Talbert Medical Management, founded in 1961 as part of the FHP Health Maintenance Organization (HMO), went public through an initial stock offering in April 1997. FHP International merged with PacificCare Health Systems, Inc. (Nasdaq: PHSYA PHSYB) in February 1997. Since then, Talbert has added enrollees from other HMO companies and payors, although PacificCare still represents a significant portion of the 270,000 patients in the network; 88,000 of Talbert's patients are senior enrollees. "Talbert Medical Management represents an excellent source of highly-respected primary and specialty care physicians in the Southwest, and dovetails with our existing network of providers extremely well," said Larry R. House, MedPartners' chairman and chief executive officer. "It also gives us an entree into three new markets, Salt Lake City/Provo, Tucson, and Albuquerque which are among the major markets in the United States that we have targeted for entry or expansion. Their eight clinics in Phoenix and 24 in Southern California will also significantly increase our presence in these markets." "All of us at PacifiCare are supportive of this affiliation of Talbert with MedPartners," said Alan Hoops, president and chief executive officer of PacificCare. "Because of the long-standing relationship we have with MedPartners, we are confident that the contractual agreements between our company and Talbert will be addressed in a manner which protects all parties' interests." Jack D. Massimino, president and chief executive officer of Talbert, noted, "Talbert has always strived to achieve excellence in patient care and patient satisfaction. This makes for an excellent fit with MedPartners, which shares the same philosophy. This partnership gives our existing patients an even broader spectrum of physicians and services to choose from. It will also enhance the services received by current MedPartners clients by giving them access to our network of physicians and clinics. We are excited to be associated with MedPartners' more than 13,000 physicians, and have the benefit of their business and clinical expertise. MedPartners' Medical Advisory Committee is on the leading edge of medicine, allowing for the sharing of best clinical and administrative practices across the entire organization. Their physician-led, patient-centered approach is a model for the industry. MedPartners, based in Birmingham, Alabama, is the nation's largest manager of physician practices, and after the Talbert acquisition will operate in 39 states. The company develops, consolidates and manages healthcare delivery systems. Through the company's network of affiliated group and IPA physicians, MedPartners provides primary and specialty healthcare services to prepaid managed care enrollees and fee-for-service patients. After the acquisition, the company will be affiliated with 13,410 physicians, which includes 3,270 group physicians, 7,688 IPA physicians, 2,211 hospital-based physicians, and 241 correctional and military care physicians. MedPartners also manages the nation's largest independent prescription benefits management (PBM) company. Through the PBM, the company dispenses 53 million prescriptions annually. NOTE: The following charts show selected statistical information for MedPartners, Talbert and the combined companies. More information on MedPartners is available on the World Wide Web at http://www.medpartners.com. Information may also be obtained by calling PR Newswire Company News on Call at 1-800-758-5804 extension 106751. 2 MEDPARTNERS/TALBERT COMBINED STATISTICAL DATA
MEDPARTNERS TALBERT COMBINED ----------- ------- --------- Physicians Group........................................ 2,988 282 3,270 IPA................................................... 7,688 (0) 7,688 Hospital-Based........................................ 2,211 (0) 2,211 Government Services................................... 241 (0) 241 Total......................................... 13,128 282 13,410 Capitated Lives....................................... 998,380 270,090 1,268,470 Professonal Only Global................................................ 959,135 (0) 959,135 Total......................................... 1,957,515 270,090 2,227,605 Payor Type (Lives) Commercial............................................ 1,583,470 182,090 1,765,560 Senior................................................ 163,531 88,000 251,531 Other................................................. 210,514 (0) 210,514 Total......................................... 1,957,515 270,090 2,227,605 Practice Locations.................................... 659 52 711 Hospital-Based Contracts.............................. 327 (0) 327 Government Services Contracts......................... 60 (0) 60
PHYSICIANS AND ENROLLEES IN SELECTED WESTERN STATES: MEDPARTNERS
GROUP COMMERCIAL SENIOR OTHER TOTAL STATE PHYSICIANS SITES ENROLLEES ENROLLEES ENROLLEES ENROLLEES - - ------------------------------ ---------- ----- ---------- ------- ------- --------- Arizona....................... 15 5 13,000 1,000 1,000 15,000 California.................... 1,286 174 1,111,000 104,000 112,000 1,327,000 Nevada........................ 16 5 13,000 1,000 (0) 14,000 New Mexico.................... (0) (0) (0) (0) (0) (0) Utah.......................... (0) (0) (0) (0) (0) (0) TOTAL............... 1,317 184 1,137,000 106,000 113,000 1,356,000
TALBERT MEDICAL MANAGEMENT
GROUP COMMERCIAL SENIOR OTHER TOTAL STATE PHYSICIANS SITES ENROLLEES ENROLLEES ENROLLEES ENROLLEES - - ------------------------------------------ ---------- ----- ---------- --------- --------- --------- Arizona................................... 31 14 15,000 18,000 (0) 3,000 California................................ 151 24 70,000 45,000 (0) 115,000 Nevada.................................... 4 2 1,000 2,000 (0) 3,000 New Mexico................................ 23 5 12,000 12,000 (0) 24,000 Utah...................................... 73 7 84,000 11,000 (0) 95,000 TOTAL........................... 282 52 182,000 88,000 (0) 270,000
Copyright 1997, PR Newswire. CONTACT: Larry R. House, Chairman of the Board, CEO; Investor Relations: Randy Pittman or Media Relations: Thomas Dingledy, all of MedPartners, 205-733-8996 or Kenneth S. Ord, Talbert Medical, 714-436-4852. EX-14 15 LETTER FROM PRESIDENT & CEO TO STOCKHOLDERS 1 EXHIBIT 14 [TALBERT LOGO] 3540 Howard Way Costa Mesa, CA 92626 August 20, 1997 TO THE STOCKHOLDERS OF TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION Dear Stockholder: I am pleased to report that on August 14, 1997, Talbert Medical Management Holdings Corporation ("Talbert") entered into a merger agreement with MedPartners, Inc., a Delaware corporation ("MedPartners"), and its wholly-owned subsidiary, Talmed Merger Corporation, a Delaware corporation (the "Subsidiary"), that provides for the acquisition of all of the Common Stock of Talbert by the Subsidiary at a price of $63.00 per share, net to the seller. Under the terms of the proposed transaction, the Subsidiary has commenced a tender offer for all outstanding shares of Talbert Common Stock (together with their associated rights) at $63.00 per share. The tender offer is currently scheduled to expire at 12:00 midnight (New York City time) on September 19, 1997. Following the successful completion of the tender offer, upon approval by stockholder vote, if required, the Subsidiary will be merged with and into Talbert, and all shares not purchased in the tender offer will be converted in the right to receive $63.00 per share in cash, net to seller, without interest. YOUR BOARD OF DIRECTORS HAS, BY A UNANIMOUS VOTE OF THE DIRECTORS PRESENT, APPROVED THE OFFER AND DETERMINED THAT THE TERMS OF THE OFFER AND THE RELATED MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, TALBERT STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS, BY A UNANIMOUS VOTE OF THE DIRECTORS PRESENT, HAS RECOMMENDED THAT ALL TALBERT STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES. In arriving at its recommendations, the Board of Directors gave careful consideration to a number of factors. The factors considered by the Board of Directors are more fully described in the Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") filed by Talbert with the Securities and Exchange Commission and enclosed with this letter. We urge you to read carefully the Schedule 14D-9 in its entirety so that you will be fully informed as to the Board's recommendations. Also accompanying this letter is a copy of the Offer to Purchase and related materials, including a Letter of Transmittal for use in tendering shares. These documents set forth the terms and conditions of the offer and provide instructions as to how to tender your shares. We urge you to read each of the enclosed materials carefully. The management and directors of Talbert thank you for the support you have given Talbert. On behalf of the Board of Directors, Sincerely, /s/ JACK D. MASSIMINO - - ----------------------------------- Jack D. Massimino President and Chief Executive Officer EX-15 16 OPINION OF SMITH BARNEY INC. 1 Exhibit 15 [SMITH BARNEY LETTERHEAD] CONFIDENTIAL August 14, 1997 The Board of Directors Talbert Medical Management Holdings Corporation 3540 Howard Way Costa Mesa, California 92626 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, to the holders of the common stock of Talbert Medical Management Holdings Corporation ("Talbert") of the consideration to be received by such holders pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger, dated as of August 14, 1997 (the "Merger Agreement"), among MedPartners, Inc. ("MedPartners"), Talmed Merger Corporation, a wholly owned subsidiary of MedPartners ("Subsidiary"), and Talbert. As more fully described in the Merger Agreement, (i) MedPartners will cause Subsidiary to commence a tender offer to purchase all outstanding shares of the common stock, par value $0.01 per share, of Talbert (the "Talbert Common Stock") at a purchase price of $63.00 per share, net to the seller in cash (the "Tender Offer") and (ii) subsequent to the Tender Offer, Subsidiary will be merged with and into Talbert (the "Merger" and, together with the Tender Offer, the "Transaction") and each outstanding share of Talbert Common Stock not previously tendered will be converted into the right to receive $63.00 in cash. In arriving at our opinion, we reviewed the Merger Agreement and held discussions with certain senior officers, directors and other representatives and advisors of Talbert and certain senior officers and other representatives of MedPartners concerning the business, operations and prospects of Talbert. We examined certain publicly available business and financial information relating to Talbert as well as certain financial forecasts and other information and data for Talbert which were provided to or otherwise discussed with us by the management of Talbert. We reviewed the financial terms of the Merger as set forth in the Merger Agreement in relation to, among other things: current and historical market prices and trading volumes of Talbert Common Stock; the historical and projected earnings and other operating data of Talbert; and the capitalization and financial condition of Talbert. We considered, to the extent publicly available, the financial terms of certain other similar transactions recently effected which we considered relevant in evaluating the Merger and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations we considered relevant in evaluating those of Talbert. In addition to the foregoing, we conducted such other analyses and examinations and considered such other financial, economic and market criteria as we deemed appropriate in arriving at our opinion. In rendering our opinion, we have assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information and data publicly available or furnished to or otherwise reviewed by or discussed with us. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with us, we have been advised by the management of Talbert that such forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Talbert as to the future financial performance of Talbert. We have not made or been 2 The Board of Directors Talbert Medical Management Holdings Corporation August 14, 1997 Page 2 provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Talbert nor have we made any physical inspection of the properties or assets of Talbert. In connection with our engagement, we were not requested to, and did not, solicit third party indications of interest in a possible acquisition of Talbert. Our opinion is necessarily based upon information available to us, and financial, stock market and other conditions and circumstances existing and disclosed to us, as of the date hereof. Smith Barney has been engaged to render financial advisory services to Talbert in connection with the proposed Transaction and will receive a fee for such services, a significant portion of which is contingent upon the consummation of the Transaction. We also will receive a fee upon the delivery of this opinion. In the ordinary course of our business, we and our affiliates may actively trade or hold the securities of Talbert and MedPartners for our own account or for the account of our customers and, accordingly, may at any time hold a long or short position in such securities. We have in the past provided investment banking services to affiliates of Talbert and to MedPartners unrelated to the proposed Transaction, for which services we have received compensation. In addition, we and our affiliates (including Travelers Group Inc. and its affiliates) may maintain relationships with Talbert, MedPartners and their respective affiliates. Our advisory services and the opinion expressed herein are provided for the information of the Board of Directors of Talbert in its evaluation of the proposed Transaction, and our opinion is not intended to be and does not constitute a recommendation to any stockholder as to whether or not such stockholder should tender shares of Talbert Common Stock in the Tender Offer or how such stockholder should vote on the proposed Merger. Our opinion may not be published or otherwise used or referred to, nor shall any public reference to Smith Barney be made, without our prior written consent; provided, that this opinion letter may be included in its entirety in the Solicitation/Recommendation Statement of Talbert relating to the proposed Transaction. Based upon and subject to the foregoing, our experience as investment bankers, our work as described above and other factors we deemed relevant, we are of the opinion that, as of the date hereof, the cash consideration to be received in the Transaction by the holders of Talbert Common Stock (other than MedPartners and its affiliates) is fair, from a financial point of view, to such holders. Very truly yours, /s/ SMITH BARNEY INC. - - -------------------------- SMITH BARNEY INC. -----END PRIVACY-ENHANCED MESSAGE-----