ALLOCATION OF LIABILITIES AND INDEMNIFICATION AGREEMENT
This Allocation of Liabilities and Indemnification Agreement (the
"Agreement") is entered into as of February 14, 1997 between FHP International
Corporation, a Delaware corporation ("FHP"), Xxxxxxx Medical Management
Corporation, a Delaware corporation ("TMMC"), Xxxxxxx Health Services
Corporation, a Delaware corporation ("THSC"), and Xxxxxxx Medical Management
Holdings Corporation, a Delaware corporation ("Holdings").
RECITALS
WHEREAS, TMMC and THSC were organized as wholly-owned subsidiaries of
FHP and succeeded to certain portions of FHP's former staff model operations as
of January 1, 1996, since which date TMMC and THSC have maintained their own
balance sheets, which have been consolidated with FHP's balance sheet for
purposes of reporting FHP's consolidated financial condition.
WHEREAS, in connection with FHP's merger (the "FHP Merger") with
PacifiCare Health Systems, Inc. ("PacifiCare"), Holdings intends to acquire
FHP's shares of the common stock of TMMC and THSC (the "Acquisition") in
exchange for subscription rights to purchase shares of Holdings' common stock
("Rights"), which Rights are to be distributed to FHP's stockholders as a
portion of the consideration in the FHP Merger (the "Offering").
WHEREAS, in light of the Acquisition and the Offering, TMMC, THSC and
Holdings (collectively, "Xxxxxxx") and FHP have agreed that it is appropriate
and desirable to set forth herein the principles of their relationship and
responsibilities after the Acquisition and the Offering regarding the allocation
of liabilities between them and their indemnification obligations with respect
to those liabilities.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
of the parties contained herein, the parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to the terms defined in the
text hereof, for the purpose of this Agreement, the following terms will have
the following meanings:
"Affiliate" will have the meaning provided under Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
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"Claim" means (a) a suit, proceeding or investigation by or before
any court or governmental or regulatory agency or body, or a written demand for
payment of a Liability or cause of action asserted against FHP, Xxxxxxx or both
by a person or entity other than Xxxxxxx or FHP (a "Claimant"); or (b) a written
demand or assertion by or on behalf of a Claimant that a cause of action giving
rise to a Liability exists against Xxxxxxx or FHP.
"Expiration Date" means the date on which the Rights expire.
"FHP" means FHP International Corporation, its parent and all of their
respective subsidiaries after the Acquisition.
"FHP Balance Sheet" means the consolidated balance sheet of the FHP
Group, including the consolidating balance sheets of each subsidiary of FHP
and all asset and liability work schedules underlying such balance sheets.
"FHP Business" means any business conducted by FHP after the
Expiration Date.
"FHP Group" means FHP International Corporation, and all of its
existing and former subsidiaries (including Xxxxxxx) and Affiliates, immediately
prior to the Acquisition.
"Indemnified Loss" means a cost or loss for which an Indemnitee
receives or is entitled to receive a payment from an Indemnifying Party.
"Indemnifying Party" means a party indemnifying another party pursuant
to Article 3, or a party against whom such indemnification is sought pursuant to
those provisions of this Agreement.
"Indemnitee" means a party or other person or entity entitled to be
indemnified pursuant to Article 3.
"Liability or Liabilities" means losses, debts, liabilities, damages,
obligations, claims, demands, judgments or settlements of any nature or kind,
including all costs and expenses (legal, accounting or otherwise) associated
therewith, but excluding "Taxes" as such term is defined in the Tax Allocation
Agreement of even date herewith between FHP and Xxxxxxx.
"Offering Balance Sheet Date" means [June 30, 1996].
"Rights Offering" means the offering of rights to purchase the Common
Stock of Holdings in connection with the FHP Merger.
"Rights Offering Costs" means all legal, accounting, printing and
filing fees incurred by Xxxxxxx and FHP in connection with the Rights Offering.
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"Xxxxxxx" means TMMC, THSC, Holdings, and all of their respective
subsidiaries after the Acquisition.
"Xxxxxxx Balance Sheet" means the consolidated balance sheet of TMMC,
THSC and Holdings, including the consolidating balance sheets of each subsidiary
of TMMC and THSC and all asset and liability work schedules underlying such
balance sheets.
"Xxxxxxx Business" means any business conducted by TMMC, THSC,
Holdings or their predecessors at any time.
"Xxxxxxx Medical Malpractice Liabilities" means any Liabilities for
medical malpractice, clinic professional liability, or errors and omissions that
result from a Claim arising out of the Xxxxxxx Business prior to February 15,
1996.
"Tax Allocation Agreement" means the Tax Allocation Agreement of even
date herewith between the parties.
"Xxxxxxx Pre-1996 Liabilities" means Liabilities other than Xxxxxxx
Medical Malpractice Liabilities that are not disclosed or for which no reserves
have been established on the FHP Balance Sheet as of June 30, 1996, and result
from a Claim arising out of the Xxxxxxx Business and based on events occurring
after January 1, 1994 and prior to the Expiration Date.
ARTICLE 2. ASSUMPTION AND ALLOCATION OF LIABILITIES
SECTION 2.1 FHP LIABILITIES. On and after the Expiration Date, FHP
will assume, the following Liabilities (the "FHP Liabilities"):
(a) Liabilities (including any Liabilities for which reserves
have been established) reflected on the FHP Balance Sheet as of the
Expiration Date (excluding any Xxxxxxx Liabilities), regardless of the
adequacy of the amount set forth thereon;
(b) Liabilities that result from a Claim arising out of the
business of the FHP Group based on events occurring prior to January 1,
1996 (excluding any Xxxxxxx Pre-1996 Liabilities);
(c) Liabilities that arise out of the FHP Business or any other
activity undertaken by, or any failure to act by, FHP after the Expiration
Date;
(d) Liabilities for Rights Offering Costs; and
(e) Xxxxxxx Medical Malpractice Liabilities.
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SECTION 2.2 XXXXXXX LIABILITIES. On and after the Expiration Date,
Xxxxxxx will assume, the following Liabilities (the "Xxxxxxx Liabilities"):
(a) Liabilities reflected on the Xxxxxxx Balance Sheet as of the
Expiration Date, regardless of the adequacy of the amount set forth
thereon;
(b) Liabilities that are disclosed, or for which reserves have
been established, on the FHP Balance Sheet as of June 30, 1996, and
result from a Claim arising out of the Xxxxxxx Business and based on events
occurring after January 1, 1996 and prior to the Expiration Date;
(c) the Xxxxxxx Pre-1996 Liabilities, except to the extent of
any reserves established by FHP between June 30, 1996 and the Offering
Balance Sheet Date with respect to Xxxxxxx Pre-1996 Liabilities; and
(d) Liabilities that arise out of the Xxxxxxx Business or any
other activity undertaken by, or any failure to act by, Xxxxxxx after the
Expiration Date.
ARTICLE 3. INDEMNIFICATION
SECTION 3.1 BY FHP. FHP will indemnify and hold harmless Xxxxxxx,
its subsidiaries and Affiliates, and each officer, director, employee and agent
thereof, from and against any and all FHP Liabilities.
SECTION 3.2 BY XXXXXXX. Xxxxxxx will indemnify and hold harmless
FHP, its subsidiaries and Affiliates, and each officer, director, employee and
agent thereof, from and against any and all Xxxxxxx Liabilities.
SECTION 3.3 PAYMENT TERMS. All requests for payments to be made
pursuant to this Article 3 will be made by the party seeking indemnification
pursuant to a "Claims Notice." A Claims Notice will set forth, in reasonable
detail (a) the nature of the Liability, (b) the name of the Claimant, (c) the
amount of damages or other demand being sought and (d) the basis for the
indemnification obligation. Within thirty (30) calendar days of receipt of a
Claims Notice, the party from whom indemnification is being sought shall either
(i) make the payment as requested in the Claims Notice or (ii) notify the party
seeking indemnification in writing that such party disputes all or part of the
amounts being sought (a "Dispute Notice"). The Dispute Notice shall set forth,
in detail, the basis for such dispute. The parties shall in good faith, attempt
to resolve in a diligent manner the matter set forth in the Dispute Notice.
SECTION 3.4 TAXES. Any Indemnified Loss will be calculated net of
any tax benefits (net of any tax detriments) realized or realizable by the
Indemnified Party based on the present value thereof in respect of the
Indemnified Loss.
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SECTION 3.5 INSURANCE. The indemnification provisions of this
Agreement are not to be construed to be insurance coverage and do not amend or
affect in any manner any insurance policies purchased by the FHP Group prior to
the Expiration Date. Each party will use commercially reasonable efforts to
collect on insurance as to which it is the insured party, without regard to
whether it is the Indemnitee or the Indemnifying Party hereunder. If either
party receives insurance proceeds from an unrelated insurance company after a
payment has been made between the parties for an Indemnified Loss, it will
promptly remit to the other a portion of such proceeds equal to the other
party's proportion of the Indemnified Loss (but net of the other party's pro
rata portion of any resulting premium increase). In the event that the
Indemnitee collects on or otherwise receives proceeds from insurance and such
insurance is used to satisfy the indemnification obligations of the Indemnifying
Party, the Indemnifying Party shall pay to the Indemnitee any deductible amount
and other fees, costs and expenses (including any expenses incurred in
connection with enforcing the Indemnitee's right to collect on insurance).
SECTION 3.6 EFFECT OF OTHER REDUCTIONS OF INDEMNIFIED LOSS. If the
amount of any Indemnified Loss will at any time subsequent to indemnification
pursuant to this Agreement be reduced by recovery, settlement or otherwise, the
Indemnifying Party's share of such reduction, less any expenses reasonably
incurred in connection therewith, will promptly be repaid by the Indemnitee to
the Indemnifying Party.
SECTION 3.7 WAIVER OF SUBROGATION. Each party hereby waives any
right of subrogation it may have with respect to any Indemnified Loss.
ARTICLE 4. CONTROL OF CLAIMS
SECTION 4.1 FHP LIABILITIES. Subject to the restrictions and
provisions in this Article 4, FHP will have full control over any action taken
with respect to all Claims subject to assumption and allocation under Section
2.1.
SECTION 4.2 XXXXXXX LIABILITIES. Subject to the restrictions and
provisions in this Article 4, Xxxxxxx will have full control over any action
taken with respect to all Claims subject to assumption and allocation under
Section 2.2.
SECTION 4.3 LEGAL ACTION. If either party is served with any
judicial or administrative process concerning any Claim the defense of which
such party believes should be conducted by the other party, such party will:
(a) take all steps necessary or appropriate to preserve both parties' legal
rights and remedies; (b) notify the other party of the pendency of the action;
and (c) request that the other party assume conduct of the defense and that the
other party use its reasonable best efforts to have itself substituted as a
party to the action. Acceptance of control will not act as an admission of
liability. Unless and until the parties agree to a transfer of control of a
particular action, the party originally notified or served will have full
control over, and responsibility for, the conduct of the proceedings, and will
be solely liable for any default. If both parties are served with judicial or
administrative process
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concerning any Claim covered by this Agreement, each party will use its
reasonable best efforts to reach agreement with the other as to which party
should control the conduct of the proceedings. Pending such agreement, each
party will have full control over, and responsibility for, preserving its legal
rights and remedies, and will be solely responsible for any default entered
against it.
SECTION 4.4 OTHER ACTIONS. If either party receives from a Claimant
any demand, not related to judicial or administrative action, for payment
against which such party believes it is entitled to be indemnified pursuant to
this Agreement, the Indemnitee will promptly forward such demand to the
Indemnifying Party with a request that the Indemnifying Party assume control of
the Claim and acknowledge its obligation to indemnify the Indemnitee with
respect to such Claim. The Indemnifying Party will respond to such a request
from the Indemnitee within 30 days. If the parties cannot agree as to which
party should control the Claim, the party upon whom the demand was made may
settle the Claim and resolve any dispute over indemnification under the
provisions of Section 3.3.
SECTION 4.5 CONSULTATION AND COOPERATION. FHP and Xxxxxxx agree to
cooperate with each other in good faith in connection with all Claims in order
to minimize the Liability resulting from Claims asserted against either party
and the adverse effects on the businesses of both parties.
ARTICLE 5. MISCELLANEOUS PROVISIONS
SECTION 5.1 GOVERNING LAW. This Agreement will be governed by, and
construed in accordance with, the laws of the State of California, disregarding
conflict of law provisions.
SECTION 5.2 NOTICES. Unless specifically provided otherwise in this
Agreement, all notices or other communications under this Agreement will be in
writing and will be deemed to be duly given when delivered in person, sent by
facsimile, deposited in the United States mail, postage prepaid and sent
certified mail, return receipt requested or deposited in private express mail,
postage prepaid, addressed as follows:
If to FHP to:
FHP INTERNATIONAL CORPORATION
0000 Xxxx Xxxxxx Xxxxx
Xxxxx Xxx, XX 00000
Attn: Secretary
Facsimile: (000) 000-0000
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With copies to:
KONOWIECKI & RANK
First Interstate World Center
000 X. 0xx Xxxxxx
Xxx Xxxxxxx, XX 00000-0000
Attn: Xxxxxx Xxxxxxxxxx
Facsimile: (000) 000-0000
If to TMMC, THSC or Holdings:
XXXXXXX MEDICAL MANAGEMENT HOLDINGS CORPORATION
0000 Xxxxxx Xxx
Xxxxx Xxxx, XX 00000-0000
Attn: President
Facsimile: (000) 000-0000
With copies to:
O'MELVENY & XXXXX LLP
000 Xxxxx Xxxx Xxxxxx
Xxx Xxxxxxx, XX 00000
Attn: C. Xxxxx Xxxxx, Esq.
Facsimile: (000) 000-0000
Any party may, by written notice to the other parties, change the address to
which such notices are to be given.
SECTION 5.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties regarding its subject matter. It supersedes all
prior written or contemporaneous oral agreements related thereto.
SECTION 5.4 SEVERABILITY. The parties agree that each provision to
this Agreement will be construed independent of any other provision of this
Agreement. The invalidity or unenforceability of any particular provision of
this Agreement will not affect the other provisions hereof. This Agreement will
be construed in all respects as if such invalid or unenforceable provision were
omitted.
SECTION 5.5 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement will be binding upon any party unless executed in
writing by all of the parties hereto.
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SECTION 5.6 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
SECTION 5.7 CAPTIONS. All captions in this Agreement are intended
solely for the convenience of the parties, and none will be deemed to affect the
meaning and construction of any provision hereof.
SECTION 5.8 CUMULATIVE REMEDIES. No right or remedy conferred upon
or reserved to any of the parties under the terms of this Agreement is intended
to be, nor will it be deemed, exclusive of any other right or remedy provided
herein or by law or equity, but each will be cumulative of every other right or
remedy.
SECTION 5.9 BINDING EFFECT OF AGREEMENT. This Agreement will be
binding upon, and will inure to the benefit of and be enforceable by, the
parties hereto, their respective Affiliates, successors and assigns.
SECTION 5.10 NO THIRD PARTY BENEFICIARY. Nothing in this Agreement,
express or implied, will confer on any person other than the parties any rights
or remedies under or by virtue of this Agreement.
SECTION 5.11 EFFECTIVENESS. If FHP holds in excess of 50% of the
outstanding shares of Holdings' common stock upon completion of the Offering,
this Agreement will be null and void.
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IN WITNESS WHEREOF, the parties, by their duly authorized officers,
have executed and delivered this Agreement on the date first written above.
FHP INTERNATIONAL CORPORATION
By: /s/ Xxxxxxxx X. Xxxxx III
----------------------------
Xxxxxxxx W. Price III
Xxxxxxxx X. Xxxxx III
President and Chief Executive Officer
XXXXXXX MEDICAL MANAGEMENT CORPORATION
By: /s/ Xxxx X. Xxxxxxxxx
----------------------------
Xxxx X. Xxxxxxxxx
President and Chief Executive Officer
XXXXXXX HEALTH SERVICES CORPORATION
By: /s/ Xxxx X. Xxxxxxxxx
----------------------------
Xxxx X. Xxxxxxxxx
President and Chief Executive Officer
XXXXXXX MEDICAL MANAGEMENT HOLDINGS CORPORATION
By: /s/ Xxxx X. Xxxxxxxxx
----------------------------
Xxxx X. Xxxxxxxxx
President and Chief Executive Officer
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