Charles A. and Marian L. Derby, et al. - Page 12

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          formed medical group would then affiliate with a larger                     
          organization seeking to acquire group practices.  A "steering               
          committee" of six UHMG physicians was formed for purposes of                
          exploring an affiliation.  Letters announcing the physicians'               
          interest in forming a medical group and affiliating with a larger           
          organization were sent to five potential acquirers:  U.C.-Davis             
          Medical Center, Foundation Health Corp., Woodland Clinic,  Mercy            
          Healthcare of Sacramento, and Sutter Health, all of which were              
          seeking to acquire or affiliate with medical practices.                     
               B.  Rejection of Foundation Health Corp. Affiliation                   
               The steering committee met and negotiated with                         
          representatives of the foregoing entities and recommended that              
          the group affiliate with Foundation Health Corp. (Foundation).              
          Foundation was an HMO operated for profit and publicly traded; it           
          had embarked on a course of becoming a "Kaiser model" HMO; i.e.,            
          one that acquired medical practices as a means of expanding its             
          patient base or "market share" in California.  Foundation had               
          offered what steering committee members believed was the most               
          generous financial consideration, including substantial cash                
          payments for the intangible assets, or goodwill, associated with            
          the UHMG physicians' practices.  Foundation considered the UHMG             
          physicians more valuable to it as a medical group (rather than              
          individual practices) because its experience had shown that                 
          existing working arrangements between physicians, such as call              

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