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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
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Total 228,000
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- - ------------
(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."
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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."
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