EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT
This Employee Benefits and Compensation Allocation Agreement is
entered into as of February 14, 1997 between FHP International Corporation, a
Delaware corporation ("FHP"), and Talbert Medical Management Holdings
Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, FHP has agreed to merge (the "FHP Merger") with PacifiCare
Health Systems, Inc., pursuant to an Amended and Restated Agreement and Plan of
Reorganization dated as of November 11, 1996 (the "FHP Merger Agreement").
WHEREAS, in connection with the FHP Merger, FHP intends to sell its
shares of common stock of Talbert Medical Management Corporation, a Delaware
corporation ("TMMC"), and Talbert Health Services Corporation, a Delaware
corporation ("THSC"), to Holdings in exchange for subscription rights to
purchase shares of Holdings' common stock (the "Rights"), which Rights are to be
distributed to FHP's stockholders as a portion of the consideration in the FHP
Merger (the "Offering").
WHEREAS, if upon the expiration of the Rights (the "Expiration Date"),
FHP holds less than a majority of the shares of Holdings' common stock, Holdings
(including TMMC and THSC) will not be a subsidiary of FHP.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the parties hereby agree
as follows:
ARTICLE 1. PURPOSE AND DEFINITIONS
SECTION 1.1 PURPOSE. The purpose of this Agreement is to set forth
the agreement of the parties regarding (a) the provision of employee benefits
after the Expiration Date to the Talbert Individuals (as defined below), and (b)
the disposition after the Expiration Date of various employee benefit plans
which cover Talbert Individuals.
SECTION 1.2 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement the following terms will have the
following meanings (applicable to both the singular and plural forms of the
terms defined):
"Agreement" means this Employee Benefits and Compensation Allocation
Agreement between FHP and Holdings, including any appendices attached hereto, as
amended or supplemented.
"FHP Individual" means any person who immediately after the Expiration
Date is a current or former officer or employee of FHP or any entity which is a
member of the same controlled group of corporations (within the meaning of
Section 1563(a) of the Internal Revenue Code of 1986, as amended (the "Code"))
as FHP (after giving effect to the Offering) or any current or former director
of FHP, who does not then become exclusively a Talbert Individual, and any duly
designated legal representative or beneficiary of any FHP Individual.
"Talbert Individual" means (i) for all references in this Agreement
excluding Articles 2 and 7, the active employees and former employees of
Holdings (including TMMC and THSC), their dependents, beneficiaries, and
alternate payees under qualified domestic relations orders, (ii) for all
references in Article 2 of this Agreement, the individuals described in clause
(i) as well as the employees and former employees of the professional medical
and dental corporations that are listed on Appendix A attached hereto, their
dependents, beneficiaries, and alternate payees under qualified domestic
relations orders, and (iii) for all references in Article 7, any person who
immediately after the Expiration Date is a current officer or employee of
Holdings (including TMMC and THSC) and, for purposes of clause (i), (ii) or
(iii), who is not immediately after the Expiration Date also an FHP Individual,
and any duly designated legal representative or beneficiary of any such Talbert
Individual.
ARTICLE 2. QUALIFIED PLANS
SECTION 2.1 MONEY PURCHASE PENSION PLAN. FHP sponsors the FHP
Money Purchase Pension Plan (the "Pension Plan"), which covers Talbert
Individuals, as well as employees of FHP and its subsidiaries. A portion of the
assets and liabilities of the Pension Plan are attributable to Talbert
Individuals. As soon as administratively feasible following the Expiration
Date, Holdings will establish a plan (and accompanying trust) to which the
account balances attributable to Talbert Individuals in the Pension Plan will be
directly transferred. Such plan will comply with all applicable provisions of
the Code, including, without limitation, Code Section 411(d). As soon as
administratively feasible following the Expiration Date, Holdings will submit
such plan and trust to the Internal Revenue Service for a determination of its
qualified status and tax-exempt status under Code Sections 401 and 501(a).
Holdings will amend such plan and trust as and if requested by the Internal
Revenue Service as a condition of granting a favorable determination of the tax-
qualified and tax-exempt status of such plan and trust. As soon as
administratively feasible following the Expiration Date, FHP will cause the
trustee of the Pension Plan to transfer to the trust established by Holdings the
assets and liabilities of the Pension Plan attributable to Talbert Individuals.
Such assets (other than the real estate assets) will be distributed in-kind
based on the investments of the accounts of the Talbert Individuals, and a
tenancy in common interest will be transferred with respect to
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the real estate assets. Holdings will be responsible for all required
governmental compliance testing, reporting, disclosure and funding with respect
to the plan established by Holdings pursuant to this Section 2.1 (including
without limitation, the obligation to file Forms 5500). Holdings will have the
same power and authority to amend or terminate coverage under said successor
plan as held by FHP under the Pension Plan.
Notwithstanding anything else contained herein to the contrary, the
parties to this Agreement anticipate that the Investment Committees of the
Pension Plan and the plan established by Holdings (the "Holdings Plan") will
enter into an agreement (the "Real Estate Disposition Agreement") to provide
for the prompt disposition and maintenance pending disposition of certain real
estate assets which will be held as a tenancy in common following the
Expiration Date by the trustee of the Pension Plan and the trustee of the
Holdings Plan. Consistent with the preceding sentence, Holdings will as soon as
practicable appoint the members of the Investment Committee for the Holdings
Plan. In addition, the parties to this Agreement anticipate that the
respective Committees will negotiate and execute the Real Estate Disposition
Agreement within 30 days or such later date as may be mutually agreed to by the
Investment Committees. In the event that the Investment Committees are unable
to reach agreement with respect to the Real Estate Disposition Agreement, the
Investment Committees will appoint a qualified real estate professional to
determine whether the terms of a proposed disposition are fair and reasonable.
SECTION 2.2 EMPLOYEE STOCK OWNERSHIP PLAN.
(a) FHP ESOP. FHP sponsors the FHP International Corporation
Employee Stock Ownership Plan (the "FHP ESOP"), which covers Talbert
Individuals, as well as employees of FHP and its subsidiaries. FHP will
amend, if necessary, the FHP ESOP or otherwise establish appropriate
administrative procedures to allow participants to direct the trustee of
the FHP ESOP with respect to the exercise of any Rights which are
attributable to shares of FHP allocated to their accounts pursuant to the
FHP Merger. Such amendment or procedures will also provide for the
exercise of Rights by the trustee (or pursuant to some other method
determined to be appropriate by the Committee which administers the FHP
ESOP) which are attributable to shares of FHP which are unallocated under
the FHP ESOP, if any.
(b) HOLDINGS ESOP. A portion of the assets and liabilities of
the FHP ESOP are attributable to Talbert Individuals. As soon as
administratively feasible following the Expiration Date, Holdings will
establish a plan (and accompanying trust) to which the account balances
attributable to Talbert Individuals in the FHP ESOP will be directly
transferred. Such plan will comply with all applicable provisions of the
Code, including, without limitation, Code Section 411(d). As soon as
administratively feasible following the Expiration Date, Holdings will
submit such plan and trust to the Internal Revenue Service for a
determination of its qualified status and tax-exempt status under Code
Sections 401 and 501(a). Holdings will amend such plan and trust as and if
requested by the Internal Revenue Service as a condition of granting a
favorable determination of the tax-qualified and tax-exempt status of such
plan and trust. As soon as administratively feasible following the
Expiration Date, FHP will cause the
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trustee of the FHP ESOP to transfer to the trust established by Holdings
the assets and liabilities of the FHP ESOP attributable to Talbert
Individuals. Such assets will be distributed in-kind based on the
investments of the accounts of the Talbert Individuals under the FHP ESOP.
Holdings will be responsible for all required governmental compliance
testing, reporting, disclosure and funding with respect to the plan
established by Holdings pursuant to this section (including without
limitation, the obligation to file Forms 5500). Holdings will have the
same power and authority to amend or terminate coverage under said
successor plan as held by FHP under the FHP ESOP.
ARTICLE 3. COMPENSATION; NON-QUALIFIED DEFERRED COMPENSATION PLANS
SECTION 3.1 ASSUMPTION OF FHP'S OBLIGATIONS. Holdings will, as of
the Expiration Date, assume the obligations of FHP and Holdings (including TMMC
and THSC) to Talbert Individuals under the FHP International Corporation
Deferred Compensation Plan. Holdings will adopt one or more non-qualified
deferred compensation plans under which the liabilities assumed by Holdings will
be provided to Talbert Individuals. FHP will amend the FHP International
Corporation Deferred Compensation Plan to provide that no distribution of
benefits will take place as a result of the Offering. In addition, as soon as
administratively feasible following the Expiration Date, Holdings will establish
a grantor trust to which the balance of the Holdings subtrust maintained under
the FHP International Corporation Master Trust Agreement will be directly
transferred in-kind.
SECTION 3.2 FICA TAX OBLIGATIONS. Holdings will, as of the
Expiration Date, assume any obligation of FHP, if any, to pay FICA, Medicare,
income tax withholding and similar taxes for any benefits earned by or owed to
the Talbert Individuals under the FHP International Corporation Deferred
Compensation Plan, whether before or after the Expiration Date.
SECTION 3.3 AMENDMENT OR TERMINATION BY HOLDINGS. Holdings will
have the same power and authority as held by FHP under the FHP International
Corporation Deferred Compensation Plan to amend or terminate benefits under the
Holdings successor plan contemplated by Section 3.1.
ARTICLE 4. MEDICAL AND DENTAL PLANS
SECTION 4.1 IMMEDIATE COVERAGE. Holdings will establish a medical
and dental plan or plans providing to Talbert Individuals medical and dental
benefits similar to those provided by FHP immediately prior to the Expiration
Date. Coverage under the medical and dental plan or plans of Holdings will
commence immediately after the Expiration Date with respect to the Talbert
Individuals. Effective as of the Expiration Date, the medical and
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dental plan or plans established by Holdings will not contain any exclusions or
limitations for preexisting conditions. Holdings will continue to maintain such
similar plans for a period of at least 12 months following the Expiration Date.
SECTION 4.2 CLAIMS PAYMENT AND REIMBURSEMENT. Holdings medical and
dental plan or plans will be responsible for all claims incurred by Talbert
Individuals on or after the Expiration Date. FHP's medical and dental plan and
any other group health plans, if any, will be responsible for all claims
incurred by Talbert Individuals before the Expiration Date.
SECTION 4.3 SUCCESSOR EMPLOYER. For purposes of the obligations
set forth in Section 601, ET SEQ., of the Employee Retirement Income Security
Act, (commonly known as "COBRA continuation coverage"), Holdings (including TMMC
and THSC) will be considered a successor employer to FHP. Holdings medical and
dental plan or plans will provide COBRA continuation coverage to Talbert
Individuals even if such individuals became entitled to COBRA continuation
coverage prior to the Expiration Date.
SECTION 4.4 REPORTING, COMPLIANCE AND FUNDING. Holdings will be
responsible for all required governmental compliance testing, reporting,
disclosure and funding with respect to the medical and dental plan or plans
established by Holdings after the Expiration Date (including without limitation,
the obligation to file Forms 5500). Subject to Section 4.1, Holdings will have
the same power and authority as held by FHP under FHP's medical plan or plans to
amend or terminate coverage under said successor plan(s).
ARTICLE 5. OTHER WELFARE BENEFITS
SECTION 5.1 INSURED PLANS. Coverage of Talbert Individuals under
any insured welfare benefit plans sponsored by FHP will continue until the
Expiration Date, pursuant to the terms of such plans, and will then terminate.
SECTION 5.2 FUTURE BENEFITS. Except as specifically provided in
this Benefits Agreement, Holdings will establish benefit plans and programs
following the Expiration Date according to the terms and conditions it selects.
SECTION 5.3 REPORTING, COMPLIANCE AND FUNDING. Holdings will be
responsible for all required governmental compliance testing, reporting,
disclosure and funding with respect to any welfare plan or plans established by
Holdings (including without limitation, the obligation to file Forms 5500) on or
after the Expiration Date.
ARTICLE 6. SEVERANCE BENEFITS
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SECTION 6.1 SEVERANCE BENEFITS. FHP will, if necessary, amend its
severance plans to provide that no severance benefits will be payable to Talbert
Individuals as a result of the Offering.
ARTICLE 7. STOCK OPTION PLAN
Section 7.1 STOCK OPTION PLAN. FHP maintains the FHP
International Corporation Executive Incentive Plan (the "EIP"). Some Talbert
Individuals currently hold outstanding options (the "FHP Options") granted under
the EIP. Pursuant to Section 4.8 of the FHP Merger Agreement, FHP Options
outstanding as of the date of the FHP Merger will either be (i) cashed out in
accordance with Section 4.8(a) of the FHP Merger Agreement or (ii) exchanged for
options (the "Exchange Options") to purchase Class B common stock of N-T
Holdings, Inc., the holding company for FHP and PacifiCare following the FHP
Merger, in accordance with Section 4.8(b) of the FHP Merger Agreement. The
effect of the separation of TMMC and THSC from N-T Holdings, Inc. on the
Exchange Options held by Talbert Individuals will be as set forth in Section
4.8(b) of the FHP Merger Agreement.
ARTICLE 8. GENERAL
SECTION 8.1 INDEMNIFICATION. Holdings will indemnify and hold
harmless FHP for any costs, liabilities and expenses, including attorneys'
fees and other costs of defense, for any claims or actions against FHP (or
any plan established or maintained by FHP, or any successor thereto), and for
any liabilities or obligations imposed upon FHP, (or any plan established or
maintained by FHP, or any successor thereto) with respect to (i) the
obligations or liabilities assumed by Holdings (or any plan established or
maintained by Holdings, or its subsidiaries, or any successor thereto) under
this Benefits Agreement, and (ii) actions or omissions of Holdings (or any
plan established or maintained by Holdings or its subsidiaries, or any
successor thereto) with respect to any employee pension, benefit, health,
welfare or other plans which are established by Holdings and which relate to
any period after the Expiration Date.
SECTION 8.2 NO THIRD PARTY BENEFICIARIES. Notwithstanding anything
to the contrary herein, this Benefits Agreement is solely for the benefit of FHP
and Holdings. There will be no third party beneficiaries under this Benefits
Agreement, including, without limitation, any Talbert Individual or FHP
Individual.
SECTION 8.3 OTHER ACTIONS. FHP and Holdings will take such other
and further actions as may be necessary or appropriate to carry out this
Benefits Agreement.
SECTION 8.4 GOVERNING LAW. This Benefits Agreement and the legal
relations between the parties hereto will be governed by and construed in
accordance with the internal laws of the State of California and without regard
to conflict of laws principles.
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SECTION 8.5 OBLIGATIONS BINDING UPON SUCCESSOR. Obligations of FHP
and Holdings under this Benefits Agreement will be binding upon their respective
successors or assigns.
SECTION 8.6 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties hereto, and incorporates all prior
and contemporaneous discussions, agreements and understandings between the
parties with respect to the subject matter hereof.
SECTION 8.7 AMENDMENT AND MODIFICATIONS. No amendment or other
modification of this Agreement will be binding upon any party unless executed in
writing by all parties thereto.
SECTION 8.8 WAIVER. No waiver by any party of any of the
provisions of this Agreement will be deemed, or will constitute, a waiver of any
other provision, whether similar, nor will any waiver constitute a continuing
waiver. No waiver will be binding unless executed in writing by the party
making the waiver.
SECTION 8.9 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision of this Agreement.
SECTION 8.10 COUNTERPARTS. This agreement and any amendment hereto
may be executed in one or more counterparts and by different parties in separate
counterparts. Such counterparts will constitute one and the same agreement and
will become effective when the counterparts have been signed by each party and
delivered to the other party.
SECTION 8.11 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
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IN WITNESS WHEREOF, the parties have caused this Benefits
Agreement to be executed by their duly authorized officers as of the day and
year first written above.
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price
--------------------------
Westcott W. Price
President and Chief Executive Officer
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: /s/ Jack D. Massimino
--------------------------
Jack D. Massimino
President and Chief Executive Officer
S-1
APPENDIX A
PROFESSIONAL MEDICAL AND DENTAL CORPORATIONS
1. Robert Anderson, DDS, Inc. (CA), (dba Talbert Dental Group).
2. James Brodahl, DDS, Inc. (CA), (dba Talbert Dental Group).
3. Larry Kaban, DDS, Inc. (CA), (dba Talbert Dental Group).
4. John Whitley, DDS, Inc. (CA), (dba Talbert Dental Group).
5. Talbert Medical Group, Inc. (CA) (dba Talbert Medical Group).
6. Talbert Medical Group, Ltd. (NV).
7. Talbert Dental Group, P.C. (AZ).
8. Talbert Medical Group, P.C. (AZ).
9. Talbert Dental Group, Inc. (UT).
10. Talbert Medical Group, Inc. (UT).
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