<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 63-1151076
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
3000 GALLERIA TOWER, SUITE 1000, BIRMINGHAM, ALABAMA 35244-2331
(205) 733-8996
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
J. BROOKE JOHNSTON, JR., ESQ.
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
MEDPARTNERS, INC.
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244-2331
(205) 733-8996
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<C> <C>
FREDERICK W. KANNER, ESQ. ROBERT E. LEE GARNER, ESQ.
DEWEY BALLANTINE F. HAMPTON MCFADDEN, JR., ESQ.
1301 AVENUE OF THE AMERICAS HASKELL SLAUGHTER & YOUNG, L.L.C.
NEW YORK, NEW YORK 10019-6092 1200 AMSOUTH/HARBERT PLAZA
(212) 259-7300 1901 SIXTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
(205) 251-1000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock Purchase Units(2)..........................
- ------------------------------------------------------------------------------------------------------------------------------
Stock Purchase Contracts(3)......................
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share
(including the Common Stock Purchase
Rights)(4).....................................
- ------------------------------------------------------------------------------------------------------------------------------
Total............................................ 100% $402,500,000(5) $121,970
==============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) There are being registered hereunder Stock Purchase Units having an
aggregate initial offering price of $402,500,000 (including Stock Purchase
Units subject to the underwriters' over-allotment option), representing
ownership of Stock Purchase Contracts and U.S. Treasury Securities.
(3) There are being registered hereunder that number of Stock Purchase
Contracts, representing rights to purchase Common Stock, forming a part of
the Stock Purchase Units.
(4) There are being registered hereunder such number of shares of Common Stock
as may be sold by the Registrant pursuant to the Stock Purchase Contracts.
(5) In no event will the aggregate initial offering price of all securities
issued from time to time pursuant to this Registration Statement exceed
$402,500,000.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 9, 1997
PROSPECTUS
15,000,000 SECURITIES
LOGO
% TAPS(SM)
(THRESHOLD APPRECIATION PRICE SECURITIES(SM))
------------------
The securities offered hereby are 15,000,000 % TAPS(SM) (Threshold
Appreciation Price Securities(SM)) (the "Securities") of MedPartners, Inc.
("MedPartners" or the "Company"). Each Security has a Stated Amount of $ .
Payments of % of the Stated Amount per annum will be made on each Security
on January 31 and July 31 of each year, commencing January 31, 1998 until the
Final Settlement Date of July 31, 2000. These payments will consist of interest
on Treasury Notes payable by the United States Government at the rate of %
per annum and unsecured, subordinated yield enhancement payments ("Yield
Enhancement Payments") payable by the Company at the rate of % per annum.
On the Final Settlement Date, the Stated Amount will automatically be applied to
the purchase of between of a share and one share of Common Stock of
the Company (depending on the Applicable Market Value of the Common Stock on the
Final Settlement Date, as described herein), subject to adjustment under certain
circumstances. The last reported per share sale price of the Common Stock on the
New York Stock Exchange ("NYSE") on , 1997 was equal to the Stated
Amount. See "Price Range of Common Stock".
(continued on next page)
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION RELEVANT TO
AN INVESTMENT IN THE SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING
AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE SECURITIES MAY BE DEFERRED AND
THE RELATED UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PURCHASE PRICE OF PROCEEDS (DEFICIT) TO
PUBLIC AND COMMISSIONS(1) TREASURY NOTES COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Security $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
==============================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting".
(2) Before deducting expenses payable by the Company estimated at $ .
Does not include proceeds per Security and total proceeds of $ and
$ , respectively ($ and $ , respectively, if the
Underwriters' over-allotment option is exercised in full), receivable by the
Company upon settlement of Purchase Contracts.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional Securities to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds (Deficit) to the Company will be
$ , $ and $ , respectively. See "Underwriting".
------------------
The Securities are offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that delivery of the Securities offered hereby will
be made at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001 on or about , 1997.
------------------
SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
, 1997
(SM)Service Mark of Smith Barney Inc.
<PAGE> 3
(continued from previous page)
Each Security will consist of (a) a stock purchase contract ("Purchase
Contract") under which (i) the holder will purchase from the Company on the
Final Settlement Date, for an amount in cash equal to the Stated Amount, a
number of shares of Common Stock equal to the Settlement Rate described herein
and (ii) the Company will pay the holder the Yield Enhancement Payments
described herein, and (b) % United States Treasury Notes having a principal
amount equal to the Stated Amount and maturing on the Final Settlement Date. The
Treasury Notes will be pledged to the Collateral Agent to secure the holder's
obligation to purchase Common Stock under the Purchase Contract. Unless a holder
of Securities settles the underlying Purchase Contracts either through the early
delivery of cash to the Purchase Contract Agent in the manner described herein
or otherwise, or upon certain termination events, as described herein, principal
of the Treasury Notes underlying such Securities, when paid at maturity, will
automatically be applied to satisfy in full the holder's obligation to purchase
Common Stock under the Purchase Contracts. For so long as a Purchase Contract
remains in effect, such Purchase Contract and the Treasury Notes securing it
will not be separable and may be transferred only as an integrated Security. See
"Description of the Securities".
Prior to the offering made hereby, there has been no public market for the
Securities. Application will be made to have the Securities approved for listing
on the NYSE under the symbol " ", subject to official notice of
issuance. On July 7, 1997, the last reported sale price of the Common Stock on
the NYSE was $23.31 per share.
The Securities will be represented by global certificates registered in the
name of The Depository Trust Company ("DTC") or its nominee. Beneficial
interests in the Securities will be shown on, and transfers thereof will be
effected only through, records maintained by participants in DTC. Except as
described herein, Securities in certificated form will not be issued in exchange
for global certificates. See "Description of the Purchase
Contracts -- Book-Entry System".
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus
and in the documents incorporated herein by reference. Except as otherwise
noted, all information in this Prospectus assumes that the over-allotment option
granted to the Underwriters will not be exercised. Unless the context otherwise
requires, references in this Prospectus to "MedPartners" or the "Company"
include the Company and its subsidiaries and affiliates. Unless otherwise
indicated, the information contained in this Prospectus gives retroactive effect
to the acquisition of InPhyNet Medical Management Inc. ("InPhyNet") which was
completed on June 26, 1997. See "Business -- Acquisition Program".
THE COMPANY
MedPartners is the largest physician practice management ("PPM") company in
the United States, based on revenues. The Company 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 its 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. See "Business --
General".
The Company 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. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. In addition, the Company contracts with health
maintenance organizations and other third-party payors that compensate the
Company 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, the Company 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. See "Business -- Operations".
The Company manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses over 44,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a network
of retail pharmacies. The Company is in the process of integrating its PBM
program with the PPM business by providing pharmaceutical services to affiliated
physicians, clinics and HMOs. The Company's 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. The Company currently provides therapies and services for
individuals with such conditions as hemophilia, growth disorders, immune
deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis. See
"Business -- Operations".
3
<PAGE> 5
SIGNIFICANT HISTORICAL EVENTS
The Company has experienced substantial growth through acquisitions since
1995. The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In pursuing its
acquisition strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, the Company
utilizes sophisticated information systems to improve the operational efficiency
of, and to reduce the operating costs associated with, the Company's networks
and the practices of affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups, including the acquisition of HBP groups and contract
management companies providing emergency department and other hospital-based
services.
The Company acquired Mullikin Medical Enterprises, L.P. ("MME") in November
1995 for $413 million in Common Stock, marking the Company's initial move
towards global capitation. In February 1996, the Company acquired Pacific
Physician Services, Inc. ("PPSI") for $342 million in Common Stock, which
provided the Company with HBP operations through PPSI's previously acquired
subsidiary, Team Health, Inc. ("Team Health"). In September 1996, the Company
acquired Caremark International Inc. ("Caremark") for $1.8 billion in Common
Stock, creating the largest PPM business in the United States and providing
MedPartners with PBM operations. In May 1997, the Company acquired the assets
and operations of Aetna Professional Management Corporation ("APMC"), a PPM
company and an affiliate of Aetna Inc., and simultaneously entered into a
nationwide 10-year master network agreement with Aetna U.S. Healthcare. In June
1997, the Company acquired InPhyNet for $413 million in Common Stock creating
the largest HBP group in the country.
The following table summarizes the significant acquisition and financing
milestones of the Company since its initial public offering ("IPO") in February
1995.
<TABLE>
<CAPTION>
CUMULATIVE
THREE MONTHS NUMBER OF
ENDED NET REVENUE(1) EBITDA(2) PHYSICIANS(3) SIGNIFICANT EVENTS(4)
- ------------ -------------- --------- ------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
12/31/94 (5) $ 31,467 $ 1,169 190 *
03/31/95 45,667 2,164 248 - IPO of $66 million of Common Stock.
06/30/95 57,272 3,056 354 - Establishment of $150 million line of
credit
09/30/95 76,019 4,886 496 *
12/31/95 197,172 14,483 4,092 - Acquisition of Mullikin Medical
Enterprises, L.P.
03/31/96 332,549 24,529 5,077 - Acquisition of Pacific Physician
Services, Inc.
- Public offering of $250 million of
Common Stock.
06/30/96 360,398 24,040 5,777 *
09/30/96 1,182,015 82,691 7,975 - Acquisition of Caremark International
Inc.
- Establishment of $1 billion line of
credit.
12/31/96 1,267,782 90,734 8,875 - Public offering of $450 million of
senior notes.
03/31/97 1,332,271 100,431 9,538 *
06/30/97 ** ** ** - Acquisition of assets and business of
Aetna Professional Management Corporation.
- Acquisition of InPhyNet Medical
Management Inc.
</TABLE>
- ---------------
* During these periods the Company continued its physician practice
acquisition activities.
** Information not yet available.
(1) As originally reported, without restatement for subsequent acquisitions
accounted for as pooling of interests.
(2) EBITDA is defined as earnings before net interest expense, taxes,
non-recurring items, extraordinary items, depreciation and amortization and
minority interest.
(3) At end of period.
(4) The acquisitions of MME, PPSI, Caremark and InPhyNet were accounted for as
poolings of interests. The acquisition of APMC was accounted for as a
purchase.
(5) Pro forma for initial acquisitions and service agreements.
RISK FACTORS
Certain factors to be considered in connection with an investment in the
Securities offered hereby are set forth under "Risk Factors".
4
<PAGE> 6
SUMMARY PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AND OPERATING DATA
The following selected pro forma financial information and operating data
for the Company is derived from the Pro Forma Condensed Combined Financial
Statements found elsewhere in this Prospectus and gives effect to the
acquisition of InPhyNet as a pooling of interests. All of the following selected
pro forma financial information should be read in conjunction with the
historical financial information, including the notes thereto, incorporated
herein by reference and the pro forma financial information set forth elsewhere
herein. The pro forma financial information set forth below is not necessarily
indicative of the results that actually would have occurred had the acquisition
of InPhyNet been consummated on the date indicated or that may be obtained in
the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $2,909,024 $3,908,717 $5,222,019 $1,237,715 $1,454,778
Operating expenses:
Clinic expenses.......................................... 1,200,291 1,785,564 2,683,107 637,117 747,171
Non-clinic goods and services............................ 1,365,203 1,688,075 2,019,895 477,264 555,818
General and administrative expenses...................... 169,273 172,896 173,428 46,032 44,587
Depreciation and amortization............................ 44,384 62,394 86,579 20,651 26,610
Net interest expense..................................... 16,214 19,114 24,715 7,030 9,781
Merger expenses.......................................... -- 69,064 308,945 34,448 --
Loss on investments...................................... -- 86,600 -- -- --
Other, net............................................... (143) (192) (1,075) (107) (39)
---------- ---------- ---------- ---------- ----------
Net operating expenses............................. 2,795,222 3,883,515 5,295,594 1,222,435 1,383,928
---------- ---------- ---------- ---------- ----------
Income (loss) before pro forma income taxes and
discontinued operations.................................. 113,802 25,202 (73,575) 15,280 70,850
Pro forma income tax expense (benefit)..................... 50,292 (6,987) 3,215 8,878 27,074
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations................... 63,510 32,189 (76,790) 6,402 43,776
Loss (income) from discontinued operations................. (25,902) 136,528 68,698 68,698 --
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)................................ $ 89,412 $ (104,339) $ (145,488) $ (62,296) $ 43,776
========== ========== ========== ========== ==========
Pro forma net income (loss) per share(1)................... $ 0.61 $ (0.66) $ (0.83) $ (0.37) $ 0.24
========== ========== ========== ========== ==========
Number of shares used in pro forma net income (loss) per
share calculations(1)(2)................................. 146,773 158,109 174,269 169,381 184,579
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3).................................................. $ 174,400 $ 262,374 $ 346,664 $ 77,409 $ 107,241
Capital expenditures(4).................................... 106,156 128,428 126,873 32,092 18,703
Income per share, excluding merger expense, loss on
investment and discontinued operations................... $ 0.43 $ 0.70 $ 0.84 $ 0.18 $ 0.24
Ratio of earnings to fixed charges(5)...................... 3.91x 4.21x 4.70x 3.78x 4.25x
CERTAIN OPERATING DATA (AT PERIOD END):
Group physicians........................................... 900 1,264 2,398 1,701 2,762
Total physicians........................................... 2,027 7,596 10,775 9,124 11,523
Prepaid enrollees.......................................... 1,088,154 1,344,855 1,746,653 1,568,348 1,808,982
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED(6)
---------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 148,375 $ 232,375
Working capital............................................. 257,173 341,173
Total assets................................................ 2,515,376 2,599,376
Long-term debt, less current portion........................ 764,202 848,202
Total stockholders' equity.................................. 864,276 864,276(7)
</TABLE>
- ---------------
(1) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common equivalent shares outstanding during the
periods in accordance with the applicable rules of the SEC. All stock
options and warrants issued have been considered as outstanding common share
equivalents for all the 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 MedPartners convertible preferred stock
are assumed to be common share equivalents for all periods presented.
5
<PAGE> 7
(2) Number of shares used in pro forma net income (loss) per share gives effect
to the acquisition of InPhyNet by using the fixed Exchange Ratio of 1.18
shares of Common Stock for each share of common stock of InPhyNet.
(3) EBITDA is defined as earnings before net interest expense, non-recurring
items, extraordinary items, taxes, depreciation and amortization and
minority interest. The Company has presented EBITDA because it is commonly
used by investors to analyze and compare companies on the basis of operating
performance. The Company believes EBITDA is helpful in understanding cash
flow generated from operations that is available for debt service, taxes and
capital expenditures. EBITDA should not be considered in isolation or as
substitute for net income or other consolidated statement of operations or
cash flow data prepared in accordance with generally accepted accounting
principles ("GAAP") as a measure of the profitability or liquidity of the
Company.
(4) Excludes capital expenditures related to acquisitions.
(5) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes plus fixed
charges. Fixed charges include interest, expensed or capitalized,
amortization of debt issuance costs and the interest component of rent
expense (approximately 1/3 of rental expense).
(6) Adjusted to reflect the offering of $350.0 million in senior subordinated
notes and the application of the net proceeds thereof to reduce borrowings
under the credit facility. Excludes $117.0 million borrowed since March 31,
1997 through June 30, 1997 under the Credit Facility.
(7) Excludes the addition to stockholders' equity that will occur upon issuance
of Common Stock of the Company at the Final Settlement Date and excludes the
reduction to stockholders' equity that will occur upon the execution of the
Purchase Contract Agreement. The amount of such addition will be equal to
the aggregate Stated Amount (approximately $350 million), and the amount of
such reduction will be approximately $0.5 million for each five basis points
of Yield Enhancement Payments.
6
<PAGE> 8
THE OFFERING
Securities................. 15,000,000 % TAPS
Stated Amount.............. $ per Security
Payments................... % of the Stated Amount per annum, payable
semi-annually in arrears. These payments will
consist of interest on the Treasury Notes (as
defined below) payable by the United States
Government at the rate of % of the Stated
Amount per annum and unsecured, subordinated yield
enhancement payments ("Yield Enhancement Payments")
payable semi-annually by the Company at the rate of
% of the Stated Amount per annum, subject to
the Company's option to defer Yield Enhancement
Payments. See "Description of the Purchase
Contracts -- Yield Enhancement Payments" and "Risk
Factors -- Right to Defer Yield Enhancement
Payments". The Company's obligations with respect
to Yield Enhancement Payments are subordinated and
junior in right of payment to all other liabilities
of the Company and pari passu with the most senior
preferred stock directly issued, from time to time,
if any, by the Company. Amounts payable on the
first Payment Date (as defined below) will be
adjusted as described under "Description of the
Securities -- General".
Payment Dates.............. January 31 and July 31 of each year, commencing
January 31, 1998, through and including the Final
Settlement Date referred to below (each, a "Payment
Date").
Final Settlement Date...... July 31, 2000 (the "Final Settlement Date"). On the
Final Settlement Date, the Stated Amount per
Security will automatically be applied to the
purchase of between of a share and one share
of Common Stock, par value $.001 per share ("Common
Stock"), of the Company (depending on the
Applicable Market Value of the Common Stock on the
Final Settlement Date, as described below), subject
to adjustment under certain circumstances.
Components of the
Securities................. The Securities will be issued under a Purchase
Contract Agreement, dated as of , 1997 (the
"Purchase Contract Agreement"), between the Company
and , as agent for the holders
of the Securities (together with any successor
thereto in such capacity, the "Purchase Contract
Agent").
Each Security will consist of (a) a stock purchase
contract ("Purchase Contract") under which (i) the
holder of the Security will purchase from the
Company on the Final Settlement Date, for an amount
in cash equal to the Stated Amount, a number of
shares of Common Stock equal to the Settlement Rate
described below, and (ii) the Company will pay
Yield Enhancement Payments to the holder of the
Security, and (b) % United States Treasury
Notes due July 31, 2000 ("Treasury Notes") having a
principal amount equal to the Stated Amount and
maturing on the Final Settlement Date. If the
aggregate fair market value of the Treasury Notes
at the time of their purchase exceeds their
aggregate principal amount, the Company shall, for
the benefit of holders of the Securities, provide
the amount of such excess as the additional
purchase price necessary to acquire Treasury Notes
having a principal amount equal to the Stated
Amount (such amounts, "Initial Premium Payments").
Holders of the Securities will not directly receive
any cash
7
<PAGE> 9
as a result of any Initial Premium Payments. The
Treasury Notes will be pledged with
, as collateral agent for the Company
(together with any successor thereto in such
capacity, the "Collateral Agent"), to secure the
obligations of holders of the Securities under the
Purchase Contracts to purchase Common Stock. Unless
a holder of Securities settles the underlying
Purchase Contracts either through the early
delivery of cash to the Purchase Contract Agent in
the manner described below or otherwise, or unless
the Purchase Contracts are terminated (upon the
occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to the
Company), principal of the Treasury Notes
underlying such Securities, when paid at maturity,
will automatically be applied to satisfy in full
the obligations under the Purchase Contracts of
holders of the Securities to purchase Common Stock
under the Purchase Contracts. For so long as a
Purchase Contract remains in effect, such Purchase
Contract and the Treasury Notes securing it will
not be separable and may be transferred only as an
integrated Security. See "Risk Factors" and
"Description of the Securities".
Settlement Rate............ The number of new shares of Common Stock issuable
upon settlement of each Purchase Contract (the
"Settlement Rate") will be calculated as follows
(subject to adjustment under certain
circumstances): (a) if the Applicable Market Value
(as defined below) is greater than $ (the
"Threshold Appreciation Price"), the Settlement
Rate will be , (b) if the Applicable Market
Value is less than or equal to the Threshold
Appreciation Price but greater than the Stated
Amount, the Settlement Rate will equal the Stated
Amount divided by the Applicable Market Value and
(c) if the Applicable Market Value is less than or
equal to the Stated Amount, the Settlement Rate
will be one. "Applicable Market Value" means the
average of the Closing Prices (as defined) per
share of Common Stock on each of the twenty
consecutive Trading Days (as defined) ending on the
second Trading Day immediately preceding the Final
Settlement Date.
Early Settlement........... A holder of Securities may settle the underlying
Purchase Contracts prior to the Final Settlement
Date in the manner described herein, but only in
integral multiples of Securities. Upon such
early settlement, (a) the holder will purchase, for
an amount in cash equal to the Stated Amount per
Security, of a share of Common Stock per
Security (regardless of the market price of the
Common Stock on the date of purchase), subject to
adjustment under certain circumstances, (b) the
Treasury Notes underlying such Securities will
thereupon be transferred to the holder free and
clear of the Company's security interest therein,
(c) the holder's right to receive Deferred Yield
Enhancement Payments (as defined below), if any, on
the Purchase Contracts being settled will be
forfeited, and (d) the holder's right to receive
additional Yield Enhancement Payments will
terminate and, except as contemplated by clause (a)
above, no adjustment will be made to or for the
holder on account of current or deferred amounts
accrued in respect thereof.
Termination................ The Purchase Contracts (including the right to
receive accrued or Deferred Yield Enhancement
Payments and the obligation to purchase Common
Stock) will automatically terminate upon the
occurrence of
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<PAGE> 10
certain events of bankruptcy, insolvency or
reorganization with respect to the Company. Upon
such termination, the Collateral Agent will release
the Treasury Notes held by it to the Purchase
Contract Agent for distribution to the holders,
although there may be a limited delay before such
release and distribution.
Relationship to Common
Stock...................... No dividends have been paid on the Company's Common
Stock. As a result, the Yield Enhancement Payments
and interest payments on the Treasury Notes
represent an economic return to holders of the
Securities that has not historically been available
to holders of the Common Stock. However, since the
number of shares of Common Stock issuable upon
settlement of each Purchase Contract may decline by
up to % as the Applicable Market Value
increases, the opportunity for equity appreciation
afforded by an investment in the Securities is less
than that afforded by a direct investment in the
Common Stock.
Voting Rights.............. Holders of the Securities will have no voting
rights. See "Risk Factors -- No Stockholder
Rights".
Listing of the
Securities................. Application will be made to have the Securities
approved for listing on the NYSE, subject to notice
of issuance, under the symbol " ".
NYSE Symbol of Common
Stock.................... MDM
Federal Income Tax
Consequences............. Holders will include interest on the Treasury Notes
in income when received or accrued, in accordance
with the holder's method of accounting. The Company
intends to report the Yield Enhancement Payments
(and Initial Premium Payments, if any) as income to
holders, but holders should consult their own tax
advisors concerning the possibility that the Yield
Enhancement Payments (and Initial Premium Payments,
if any) may be treated as a reduction in the
holders' basis in the Securities rather than
included in income on a current basis. Additional
income, gain or loss may be realized on maturity of
the Treasury Notes to the extent that the Treasury
Notes are purchased at a premium or discount, and
certain elections should be considered in this
regard. See "Certain Federal Income Tax
Consequences".
Use of Proceeds............ Substantially all of the proceeds from the sale of
the Securities offered hereby will be used by the
Underwriters to purchase, at the direction of the
Company for the benefit of the holders of the
Securities, the underlying Treasury Notes, which
are being transferred to holders pursuant to the
terms of the Securities, and the Company will
receive no proceeds from such sale. Amounts
received by the Company upon settlement of Purchase
Contracts are expected to be used for general
corporate purposes including capital expenditures,
acquisitions, investments in subsidiaries, working
capital, repayment of debt and other business
opportunities. See "Use of Proceeds".
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<PAGE> 11
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD-LOOKING STATEMENTS. This Prospectus contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company. Statements in this document that are
not historical facts are hereby identified as "forward-looking statements" for
the purpose of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act
of 1933 (the "Securities Act"). The Company cautions readers that such
"forward-looking statements", including without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income, wherever they occur in this Prospectus
or in other statements attributable to the Company, are necessarily estimates
reflecting the best judgment of the Company's senior management and involve a
number of risks and uncertainties that could cause actual results to differ
materially from those suggested by the "forward-looking statements". Such
"forward-looking statements" should, therefore, be considered in light of
various important factors, including those set forth in this Prospectus and
other factors set forth from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC").
The words "estimate", "project", "intend", "expect" and similar expressions
are intended to identify forward-looking statements. These "forward-looking
statements" are found at various places throughout this document. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
The Company disclaims any intent or obligation to update "forward looking
statements". Moreover, the Company, through senior management, may from time to
time make "forward-looking statements" about the matters described herein or
other matters concerning the Company. Additionally, the discussions herein under
the captions "Risk Factors", "Use of Proceeds" and "Business", are particularly
susceptible to the risks and uncertainties discussed below.
FACTORS THAT MAY AFFECT FUTURE RESULTS. The healthcare industry in general
and the physician practice management business in particular are in a state of
significant flux. This, together with the circumstances that the Company has a
relatively short operating history and is the nation's largest physician
practice management consolidator, makes the Company particularly susceptible to
various factors that may affect future results such as the following:
risks relating to the Company's growth strategy; risks relating to
integration in connection with acquisitions and risks relating to the
capitated nature of revenues; control of healthcare costs; risks relating
to certain legal matters; risks relating to exposure to professional
liability; liability insurance; risks relating to government regulation;
risks relating to pharmacy licensing and operation; risks relating to
healthcare reform; and proposed legislation.
For a more detailed discussion of these factors and others and their
potential impact on future results, see the applicable discussions herein.
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<PAGE> 12
THE COMPANY
The Company was incorporated under the laws of Delaware in August 1995 as
"MedPartners/Mullikin, Inc." to be the surviving corporation in the combination
of the businesses of the original MedPartners, Inc., incorporated under the laws
of Delaware in 1993, and MME, a California limited partnership which, directly
or through its predecessor entities, had operated since 1957. In September 1996,
the Company changed its name to "MedPartners, Inc." The executive offices of the
Company are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama
35244, and its telephone number is (205) 733-8996. See "Business".
RISK FACTORS
Prospective purchasers of the Securities offered hereby should consider
carefully, in addition to the other information contained or incorporated by
reference in this Prospectus, the following factors in evaluating the Company
and its business and an investment in such Securities. This Prospectus
(including the documents incorporated by reference herein) contains, in addition
to historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this
Prospectus.
RISKS RELATING TO THE COMPANY'S GROWTH STRATEGY; INTEGRATION IN CONNECTION WITH
ACQUISITIONS AND IDENTIFICATION OF GROWTH OPPORTUNITIES
The Company believes that its recent acquisitions of InPhyNet and APMC
represent additional steps in the Company's consolidation initiative in the PPM
business to develop integrated healthcare delivery systems through affiliation
with individual physicians, physician practices, hospitals and third-party
payors. The Company is still integrating these and other acquired businesses.
While the business plans of these acquired companies are generally similar,
their histories, geographical location, business models and cultures are
different in many respects. The Company's Board of Directors and senior
management of the Company face a significant challenge in their efforts to
integrate the businesses of the acquired companies so that the different
cultures and the varying emphases on managed care and fee-for-service can be
effectively managed to continue to grow the enterprise. The dedication of
management resources to such integration may detract attention from the
day-to-day business of the Company. There can be no assurance that there will
not be substantial costs associated with such activities or that there will not
be other material adverse effects as a result of these integration efforts. Such
effects could have a material adverse effect on the operating results and
financial condition of the Company.
Integration Risks. Acquisitions of PPM companies and physician practices
entail the risk that such acquisitions will fail to perform in accordance with
expectations and that the Company will be unable to successfully integrate such
acquired businesses and physician practices into its operations. The
profitability of the Company is largely dependent on its ability to develop and
integrate networks of physicians, to manage and control costs and to realize
economies of scale from acquisitions of PPM companies and physician practices.
The histories, geographic location, business models, including emphasis on
managed care and fee-for-service, and cultures of acquired PPM businesses and
physician practices may differ from the Company's past experiences. Dedicating
management resources to the integration process may detract attention from the
day-to-day business of the Company. Moreover, the integration of the acquired
businesses and physician practices may require substantial capital and financial
investments. These, together with other risks described herein, could result in
the incurrence of substantial costs in connection with acquisitions that may
never achieve revenue and profitability levels comparable to the Company's
existing physician networks, which could have a material adverse effect on the
operating results and financial condition of the Company.
The major acquisitions carried out by the Company since January 1995 have
been structured as poolings of interests. As a result, the operating income of
the Company has been reduced by the merger expenses incurred in connection with
those acquisitions, resulting in a net loss for the year ended December 31,
1996. There will be a merger charge in connection with the acquisition of
InPhyNet during the quarter ended June 30, 1997. See "Pro Forma Combined
Financial Information". There can be no assurance that future
11
<PAGE> 13
merger expenses will not result in further net losses, nor can there be any
assurance that: there will not be substantial future costs associated with
integrating acquired companies; MedPartners will be successful in integrating
such companies; or the anticipated benefits of such acquisitions will be
realized fully. The unsuccessful integration of such companies or the failure of
MedPartners to realize such anticipated benefits fully could have a material
adverse effect on the operating results and financial condition of the Company.
See "-- Risks Relating to Capital Requirements".
Risks Relating to Capital Requirements. The Company's growth strategy
requires substantial capital for the acquisition of PPM businesses and physician
practice assets and for their effective integration, operation and expansion.
Affiliated physician practices may also require capital for renovation,
expansion and additional medical equipment and technology. The Company believes
that its existing cash resources, the use of Common Stock for selected practice
and other acquisitions and available borrowings under the $1.0 billion credit
facility (the "Credit Facility") with NationsBank, National Association (South),
as administrative bank to a group of lenders, or any successor credit facility,
will be sufficient to meet the Company's anticipated acquisition, expansion and
working capital needs for the next twelve months. The Company expects from time
to time to raise additional capital through the issuance of long-term or
short-term indebtedness or the issuance of additional equity securities in
private or public transactions, at such times as management deems appropriate
and the market allows in order to meet the capital needs of the Company. There
can be no assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing networks can be obtained. Any of such
financings could result in increased interest and amortization expense,
decreased income to fund future expansion and dilution of existing equity
positions.
Ability to Pursue New Growth Opportunities. The Company intends to
continue to pursue an aggressive growth strategy for the foreseeable future
through acquisitions and internal development. The Company's successful pursuit
of new growth opportunities will depend on many factors, including, among
others, the Company's ability to identify suitable targets and to integrate its
acquired practices and businesses. There can be no assurance that the Company
will anticipate all of the changing demands that expanding operations will
impose on its management, management information systems and physician network.
Any failure by the Company to adapt its systems and procedures to those changing
demands could have a material adverse effect on the operating results and
financial condition of the Company.
Competition for Expansion Opportunities. The Company is subject to the
risk that it will be unable to identify and recruit suitable acquisition
candidates in the future. The Company competes for acquisition, affiliation and
other expansion opportunities with national, regional and local PPM companies
and other physician management entities. In addition, certain companies,
including hospital management companies, hospitals and insurers, are expanding
their presence in the PPM market. The Company's failure to compete successfully
for expansion opportunities or to attract and recruit suitable acquisition
candidates could have a material adverse effect on the operating results and
financial condition of the Company. The Company is also subject to the risk that
it will be unable to recruit and retain qualified physicians and other
healthcare professionals to serve as employees or independent contractors of
MedPartners and its affiliates. See "Business -- Competition".
Different Business Operations. The PPM business of the Company includes
the provision of PBM and disease management services which are provided by
subsidiaries of the Company. The PBM services provided by the Company accounted
for approximately 34% and 35% of the Company's net revenue and operating
expenses, respectively, at March 31, 1997. Specialty Services, which include
disease management comprised 8% of the Company's net revenue and 7% of the
Company's operating expenses at March 31, 1997.
Physician Compensation. Approximately 68% of the Company's PPM revenue at
March 31, 1997, was derived from or through contracts between the Company and
hospitals or HMOs. The balance of the Company's PPM revenue is generated through
professional corporations ("PCs") that have entered into contracts directly with
HMOs or have the right to receive payment directly from HMOs for the provision
of medical services. The Company has a controlling financial interest in these
PCs by virtue of a long-term management agreement that also provides for
physician compensation.
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<PAGE> 14
The most significant clinic expense, physician compensation, accounted for
41% of total expenses in the Company's PPM service area in the first quarter of
1997. Physicians that generated 9% of PPM revenue in 1996 received a
fixed-dollar amount plus a discretionary bonus based on performance criteria
goals. Physician compensation expense was 55% of this first category of PCs'
total net revenue in the first quarter of 1997. Physicians that were compensated
on a fee-for-service basis produced approximately 14% of the Company's PPM
revenue in the first quarter of 1997. Physician compensation expense pursuant to
such agreements represented 50% of this second category of PCs' total net
revenue in the first quarter of 1997. The remaining 9% of PPM revenues were
generated by physicians who were provided a salary, bonus and profit-sharing
payment based on the PC's net income. Physician compensation expense pursuant to
such agreements represented 45% of this third category of PCs' total net revenue
in the first quarter of 1997. Under each of these arrangements, revenue is
assigned to MedPartners by the PC, and MedPartners is responsible and at risk
for all clinic expenses. See "Business -- Operations". The profitability of the
Company is largely dependent on its ability to develop and integrate networks of
physicians from the affiliated practices, to manage and control costs and to
realize economies of scale. The Company's operating results could be adversely
affected in the event the Company incurs costs associated with developing
networks without generating sufficient revenues from such networks.
Dependence on HMO Enrollee Growth. The Company is also largely dependent
on the continued increase in the number of HMO enrollees who use its physician
networks. This growth may come from development or acquisition of other PPM
entities, affiliation with additional physicians, increased enrollment in HMOs
currently contracting with MedPartners through its affiliated physicians and
additional agreements with HMOs. There can be no assurance that the Company will
be successful in identifying, acquiring and integrating additional medical
groups or other PPM companies or in increasing the number of enrollees. A
decline in enrollees in HMOs could have a material adverse effect on the
operating results and financial condition of the Company.
Dependence on Affiliated Physicians. MedPartners' revenue depends on
revenues generated by the physicians with whom MedPartners has practice
management agreements. These agreements define the responsibilities of the
physicians and MedPartners and govern all terms and conditions of their
relationship. The practice management agreements have terms generally of 20 to
40 years, subject to termination for cause, which includes bankruptcy or a
material breach. Practice management agreements with certain of the affiliated
practices contain provisions giving the physician practice the option to
terminate the agreement without cause, subject to significant limitations.
Because MedPartners cannot control the provision of medical services by its
affiliated physicians contractually or otherwise under the laws of California
and most other states in which MedPartners operates, affiliated physicians may
decline to enter into HMO agreements that are negotiated for them by MedPartners
or may enter into contracts for the provision of medical services or make other
financial commitments which are not intended to benefit MedPartners and which
could have a material adverse effect on the operating results and financial
condition of MedPartners. See "Business -- Operations -- Affiliated Physicians".
RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTHCARE COSTS
A substantial portion of MedPartners' revenue is derived from agreements
with HMOs that provide for the receipt of capitated fees. Under these
agreements, the Company, through its affiliated physicians, is generally
responsible for the provision of all covered outpatient benefits, regardless of
whether the affiliated physicians directly provide the medical services
associated with the covered benefits. MedPartners is statutorily and
contractually prohibited from controlling any medical decisions made by any
healthcare provider. To the extent that enrollees require more care than is
anticipated or require supplemental medical care that is not otherwise
reimbursed by the HMO, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If revenue is insufficient
to cover costs, the operating results and financial condition of the Company
could be materially adversely affected. As a result, MedPartners' success will
depend in large part on the effective management of healthcare costs through
various methods, including utilization management, competitive pricing for
purchased services and favorable agreements with payors. Recently, many
providers, including MedPartners, have experienced pricing pressures with
respect to
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<PAGE> 15
negotiations with HMOs. In addition, employer groups are becoming increasingly
successful in negotiating reductions in the growth of premiums paid for their
employees' health insurance, which tends to depress the reimbursement for
healthcare services. At the same time, employer groups are demanding higher
accountability from payors and providers of healthcare services with respect to
measurable accessibility, quality and service. If these trends continue, the
cost of providing physician services could increase while the level of
reimbursement could grow at a lower rate or could decrease. There can be no
assurance that these pricing pressures will not have a material adverse effect
on the operating results and financial condition of MedPartners. In addition,
changes in healthcare practices, inflation, new technologies, major epidemics,
natural disasters and numerous other factors affecting the delivery and cost of
healthcare could have a material adverse effect on the operating results and
financial condition of the Company.
The Company's financial statements include estimates of costs for covered
medical benefits incurred by HMO enrollees, but not yet reported. While these
estimates are based on information available at the time of calculation, there
can be no assurance that actual costs will approximate the estimates of such
amounts. If the actual costs significantly exceed the amounts estimated and
accrued, such additional costs could have a material adverse effect on the
operating results and financial condition of the Company.
The HMO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital and non-professional services by HMO enrollees.
MedPartners' financial statements contain accruals for estimates of shared-risk
amounts receivable from or payable to the HMOs that contract with their
affiliated physicians. These estimates are based upon inpatient utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually. This may cause fluctuations from amounts previously
accrued. To the extent that HMO enrollees require more care than is anticipated
or require supplemental care that is not otherwise reimbursed by the HMOs,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. Any such insufficiency could have a material
adverse effect on the operating results and financial condition of the Company.
Physician groups that render services on a fee-for-service basis (as
opposed to a capitated plan) typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients. A
significant portion of the revenue of MedPartners is derived from payments made
by these third-party payors. There can be no assurance that payments under
governmental programs or from other third-party payors will remain at present
levels. In addition, third-party payors can deny reimbursement if they determine
that treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or was experimental or for other reasons. Any
material decrease in payments received from such third-party payors could have a
material adverse effect on the operating results and financial condition of the
Company.
RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS
OIG Settlement and Related Claims. Caremark agreed in June 1995 to settle
with the Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS"), the United States
Department of Justice (the "DOJ"), the Veteran's Administration, the Federal
Employee Health Benefits Program ("FEHBP"), the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS") and related state investigative
agencies in all 50 states and the District of Columbia a four-year-long
investigation of Caremark (the "OIG Settlement"). Under the terms of the OIG
Settlement, which covered allegations dating back to 1986, a subsidiary of
Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and
Ohio -- resulting in the payment of civil penalties and criminal fines. The
basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS, FEHBP and federally funded healthcare benefit programs
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. See "Business -- Legal Proceedings".
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory
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<PAGE> 16
violations, Caremark is required to report such violations to the OIG and DOJ.
Caremark is, therefore, subject to increased regulatory scrutiny and, in the
event it commits legal or regulatory violations, Caremark may be subject to an
increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services, which would have a material adverse
effect on the operating results and financial condition of the Company.
In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs or liabilities may be incurred in connection with future
disposition of non-governmental claims or litigation. Such additional costs or
liabilities, if incurred, could have a material adverse effect on the operating
results and financial condition of the Company. See "Business -- Legal
Proceedings".
In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act and the Exchange Act, and
fraud and negligence in connection with public disclosures by Caremark regarding
Caremark's business practices and the status of the OIG investigation discussed
above. The complaints seek unspecified damages, declaratory and equitable
relief, and attorneys' fees and expenses. In June 1996, the complaint filed by
one group of stockholders alleging violations of the Exchange Act only, was
certified as a class. The parties continue to engage in discovery proceedings.
The Company intends to defend these cases vigorously. Management is unable at
this time to estimate the impact, if any, of the ultimate resolution of these
matters.
In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, a subsidiary of Caremark,
and two other corporations in the United States District Court for the District
of Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practices statute. The complaint seeks
unspecified treble damages, and attorneys' fees and expenses. MedPartners
intends to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.
Private Payor Settlements. In March 1996, Caremark agreed to settle all
disputes with a number of private payors. These disputes relate to businesses
that were covered by the OIG Settlement. The settlements resulted in an
after-tax charge of approximately $43.8 million. In addition, Caremark paid
$24.1 million after tax to cover the private payors' pre-settlement and
settlement-related expenses. An after-tax charge for the above amounts was
recorded in first quarter 1996 discontinued operations.
Coram Litigation. In September 1995, Coram Healthcare Corporation
("Coram") filed a complaint in the San Francisco Superior Court against
Caremark, its subsidiary, Caremark Inc., and others. The complaint, which arose
from Caremark's sale to Coram of Caremark's home infusion therapy business in
April 1995 for approximately $209.0 million in cash and $100.0 million in
securities, alleged breach of the sale agreement and made other related claims
seeking compensatory damages, in the aggregate, of $5.2 billion. Caremark filed
counterclaims against Coram and also filed a lawsuit in the United States
District Court in Chicago against Coram, claiming securities fraud. On July 1,
1997, the parties to the Coram litigation announced that a settlement had been
reached pursuant to which Caremark will return for cancellation all of the
securities issued by Coram in connection with the acquisition and will pay to
Coram $45 million in cash on or before September 1, 1997. The settlement
agreement also provides for the termination and resolution of all disputes and
issues between the parties and for the exchange of mutual releases. The
settlement will result in a second quarter after-tax charge from discontinued
operations of approximately $75 million.
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RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Although the Company does
not engage in the practice of medicine or provide medical services, and does not
control the practice of medicine by its affiliated physicians or the compliance
with regulatory requirements directly applicable to the affiliated physicians
and physician groups, there can be no assurance that the Company will not become
involved in such litigation in the future. Through the ownership and operation
of Pioneer Hospital ("Pioneer Hospital"), U.S. Family Care Medical Center
("USFMC") and Friendly Hills Hospital ("Friendly Hills"), acute care hospitals
located in Artesia, Montclair and La Habra, California, respectively, and its
hospital-based operations, the Company is subject to allegations of negligence
and wrongful acts by its hospital-based physicians or arising out of providing
nursing care, hospital-based medical care, credentialing of medical staff
members and other activities incident to the operation of an acute care
hospital. In addition, through its management of clinic locations and provision
of non-physician health care personnel, the Company could be named in actions
involving care rendered to patients by physicians employed by or contracting
with affiliated medical organizations and physician groups.
The Company maintains professional and general liability insurance and
other coverage deemed necessary by the Company. Nevertheless, certain types of
risks and liabilities are not covered by insurance and there can be no assurance
that the limits of coverage will be adequate to cover losses in all instances.
In addition, the Company's practice management agreements require the affiliated
physicians to maintain professional liability and workers' compensation
insurance coverage on the practice and on each employee and agent of the
practice, and the Company generally is indemnified under each of the practice
management agreements by the affiliated physicians for liabilities resulting
from the performance of medical services. However, there can be no assurance
that a future claim or claims will not exceed the limits of these available
insurance coverages or that indemnification will be available for all such
claims. See "Business -- Corporate Liability and Insurance".
RISKS RELATING TO GOVERNMENT REGULATION
Federal and state laws regulate the relationships among providers of
healthcare services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company's affiliated physicians, could result in significant loss of
reimbursement.
Moreover, the laws of many states, including California (from which a
significant portion of the Company's revenues are derived), prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. The Company believes that it has perpetual and unilateral control
over the assets and operations of the various affiliated professional
corporations. There can be no assurance that regulatory authorities will not
take the position that such control conflicts with state laws regarding the
practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could
16
<PAGE> 18
adversely affect their operations or that the healthcare regulatory environment
will not change so as to restrict existing operations or expansion thereof. In
the event of action by any regulatory authority limiting or prohibiting the
Company or any affiliate from carrying on its business or from expanding the
operations of the Company and its affiliates to certain jurisdictions,
structural and organizational modifications of the Company may be required,
which could have a material adverse effect on the operating results and
financial condition of the Company.
In addition to the regulations referred to above, significant aspects of
MedPartners' operations are subject to state and federal statutes and
regulations governing workplace health and safety, the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances and the
disposal of medical waste. MedPartners' operations may also be affected by
changes in ethical guidelines and operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association and the Joint Commission on Accreditation of Healthcare
Organizations. Accordingly, changes in existing laws and regulations, adverse
judicial or administrative interpretations of such laws and regulations or
enactment of new legislation could have a material adverse effect on the
operating results and financial condition of MedPartners. See "-- Risks Relating
to Pharmacy Licensing and Operation".
As of March 31, 1997, approximately 13% of the revenues of the Company's
affiliated physician groups are derived from payments made by
government-sponsored healthcare programs (principally, Medicare and state
reimbursement programs). As a result, any change in reimbursement regulations,
policies, practices, interpretations or statutes could adversely affect the
operations of MedPartners. There are also state and federal civil and criminal
statutes imposing substantial penalties (including civil penalties and criminal
fines and imprisonment) on healthcare providers that fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
Company believes it is in material compliance with such laws, but there can be
no assurance that MedPartners' activities will not be challenged or scrutinized
by governmental authorities or that any such challenge or scrutiny would not
have a material adverse effect on the operating results and financial condition
of the Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss of reimbursement for the Company, up to a maximum of 13%
of the revenues of the Company's affiliated physician groups, which could have a
material adverse effect on the operating results and financial condition of the
Company. Although the Company believes that it is not in violation of the
Anti-Kickback Statute or similar state statutes, its operations do not fit
within any of the existing or proposed federal safe harbors.
Significant prohibitions against physician referrals were enacted by the
federal Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups. Some states have also enacted similar self-referral laws,
and the Company believes it is likely that more states will follow. MedPartners
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the operations of MedPartners into certain
jurisdictions may require structural and organizational modifications of
MedPartners' relationships with physician groups to comply with new or revised
state
17
<PAGE> 19
statutes. Such structural and organizational modifications could have a material
adverse effect on the operating results and financial condition of the Company.
The Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
and the regulations promulgated thereunder subject entities which are licensed
as healthcare service plans in California to substantial regulation by the
California Department of Corporations (the "DOC"). In addition, licensees under
the Knox-Keene Act are required to file periodic financial data and other
information (which generally become available to the public), maintain
substantial tangible net equity on their balance sheets and maintain adequate
levels of medical, financial and operational personnel dedicated to fulfilling
the licensee's statutory and regulatory requirements. The DOC is empowered by
law to take enforcement actions against licensees that fail to comply with such
requirements. In March 1996, the DOC issued to Pioneer Provider Network, Inc., a
wholly-owned subsidiary of MedPartners, a healthcare service plan license (the
"Restricted License"). Non-compliance by Pioneer Network with the Knox-Keene Act
or other applicable laws and regulations could have a material adverse effect on
the operating results and financial condition of the Company.
The assumption of risk on a prepaid basis is being reviewed by various
state insurance commissioners as well as the National Association of Insurance
Commissioners ("NAIC") to determine whether the practice constitutes the
business of insurance. Any such determination could result in significant
additional regulation of the Company's business. See "Business -- Government
Regulation".
RISKS RELATING TO PHARMACY LICENSING AND OPERATION
The Company is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require the Company to register
its pharmacies with the United States Drug Enforcement Administration and comply
with security, record-keeping, inventory control and labeling standards in order
to dispense controlled substances. State controlled substance laws require
registration and compliance with the licensing, registration or permit standards
of the state pharmacy licensing authority. State pharmacy licensing,
registration and permit laws impose standards on the qualifications of the
applicant's personnel, the adequacy of its prescription fulfillment and
inventory control practices and the adequacy of its facilities. In general,
pharmacy licenses are renewed annually. Pharmacists must also satisfy state
licensing requirements. Any failure to satisfy such pharmacy licensing statutes
and regulations could have a material adverse effect on the operating results
and financial condition of the Company.
RISKS RELATING TO HEALTHCARE REFORM; PROPOSED LEGISLATION
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been, and other proposals may be, introduced in the United States Congress
and state legislatures relating to healthcare reform. There can be no assurance
as to the ultimate content, timing or effect of any healthcare reform
legislation, nor is it possible at this time to estimate the impact of potential
legislation, which may be material, on the Company.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Third Restated Certificate of
Incorporation, as amended (the "MedPartners Certificate of Incorporation"), the
Company's Second Amended and Restated Bylaws (the "MedPartners Bylaws") and the
General Corporation Law of the State of Delaware (the "Delaware General
Corporation Law" or "DGCL") could, together or separately, discourage potential
acquisition proposals or delay or prevent a change in control of the Company.
These provisions include a classified Board of Directors and the issuance,
without further stockholder approval, of preferred stock with rights and
privileges which could be senior to the Company's Common Stock. The Company also
is subject to Section 203 of the DGCL, which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
In addition, the Company has a stockholders' rights plan, which provides for
discount purchase rights to certain stockholders of MedPartners upon certain
acquisitions
18
<PAGE> 20
of 10% or more of the outstanding shares of the Company's Common Stock, may also
inhibit a change in control of MedPartners.
INVESTMENT IN THE SECURITIES WILL BECOME INVESTMENT IN COMMON STOCK
Although holders of the Securities will be the beneficial owners of the
underlying Treasury Notes prior to the Final Settlement Date, unless a holder of
Securities settles the underlying Purchase Contracts either through the early
delivery of cash to the Purchase Contract Agent in the manner described below or
otherwise, or unless the Purchase Contracts are terminated (upon the occurrence
of certain events of bankruptcy, insolvency or reorganization with respect to
the Company), principal of the Treasury Notes, when paid at maturity, will
automatically be applied to the purchase of a specified number of shares of
Common Stock on behalf of such holders. Thus, following the Final Settlement
Date, holders will own shares of Common Stock rather than a beneficial interest
in Treasury Notes. See "Description of the Securities -- General". There can be
no assurance that such amount receivable by the holder on the Final Settlement
Date will be equal to or greater than the Stated Amount of the Securities. If
the Applicable Market Value of the Common Stock is less than the Stated Amount,
such amount receivable by the holder on the Final Settlement Date will be less
than the Stated Amount paid for the Securities, in which case an investment in
the Securities will result in a loss. Accordingly, a holder of the Securities
assumes the risk that the market value of the Common Stock may decline, and that
such decline could be substantial.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
Securities is less than the opportunity for equity appreciation afforded by a
direct investment in the Common Stock, because the amount receivable by a holder
of Securities on the Final Settlement Date will only exceed the Stated Amount of
such Securities if the Applicable Market Value of the Common Stock exceeds the
Threshold Appreciation Price (which represents an appreciation of % over
the Stated Amount). Moreover, holders of the Securities will only be entitled to
receive on the Final Settlement Date % (the percentage equal to the Stated
Amount divided by the Threshold Appreciation Price) of any appreciation of the
value of Common Stock in excess of the Threshold Appreciation Price.
FACTORS AFFECTING TRADING PRICES OF THE SECURITIES AND THE COMMON STOCK
The trading prices of the Securities in the secondary market will be
directly affected by the trading prices of the Common Stock in the secondary
market. It is impossible to predict whether the price of Common Stock will rise
or fall, and there may be significant volatility in the market price of the
Common Stock. Trading prices of the Common Stock will be influenced by the
Company's operating results and prospects, developments in the healthcare
industry, including developments affecting MedPartners or its competitors, and
economic, financial and other factors and market conditions that can affect the
capital markets generally, including the level of, and fluctuations in, the
trading prices of stocks generally and sales of substantial amounts of Common
Stock in the market subsequent to the offering of the Securities or the
perception that such sales could occur. In addition, in recent years, the stock
market and, in particular, the healthcare industry segment, has experienced
significant price and volume fluctuations. This volatility has affected the
market prices of securities issued by many companies for reasons unrelated to
their operating performance.
It is expected that any secondary market for the Securities will be
affected by a number of factors, including, but not limited to, the
creditworthiness of the Company, the volatility of the Common Stock, the time
remaining to the Final Settlement Date of the Securities and market interest
rates.
NO STOCKHOLDER RIGHTS
Holders of the Securities will not be entitled to any rights with respect
to the Common Stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions in respect thereof) unless and
until such time as the Company shall have delivered shares of Common Stock for
Securities on the Final Settlement Date and unless the applicable record date,
if any, for the exercise of such rights occurs after
19
<PAGE> 21
the Final Settlement Date. For example, in the event that an amendment is
proposed to the Company's Certificate of Incorporation and the record date for
determining the stockholders of record entitled to vote on such amendment occurs
prior to such delivery, holders of the Securities will not be entitled to vote
on such amendment even if the date on which the vote is to be cast is after the
delivery of the Common Stock to holders of the Securities on the Final
Settlement Date.
DILUTION OF COMMON STOCK
The number of shares of Common Stock that holders of the Securities are
entitled to receive on the Final Settlement Date is subject to adjustment for
certain events such as stock splits and combinations, stock dividends and
certain other actions of the Company that modify its capital structure. See
"Description of the Securities -- Anti-Dilution Adjustments". Such number of
shares of Common Stock to be received by the holders of the Securities on the
Final Settlement Date will not be adjusted for other events, such as offerings
of Common Stock for cash or in connection with acquisitions. The Company is not
restricted from issuing additional Common Stock during the term of the
Securities and has no obligation to consider the interests of the holders of the
Securities for any reason. Additional issuances may materially and adversely
affect the price of the Common Stock, and, because of the relationship of the
number of shares to be received on the Final Settlement Date to the price of the
Common Stock, such other events may adversely affect the trading price of the
Securities.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the Securities will trade in the
secondary market or whether such market will be liquid or illiquid. The
Securities are novel securities, and there is currently no secondary market for
the Securities. Application will be made to list the Securities on the NYSE.
However, there can be no assurance that an active trading market for the
Securities will develop or that such listing will provide the holders of the
Securities with liquidity of investment.
TREASURY NOTES ENCUMBERED
Although holders of Securities will be beneficial owners of the underlying
Treasury Notes, those Treasury Notes will be pledged with the Collateral Agent
to secure the obligations of the holders under the Purchase Contracts. Thus,
rights of the holders to their Treasury Notes will be subject to the Company's
security interest, and no holder will be permitted to withdraw Treasury Notes
except in connection with the early settlement or termination of the related
Purchase Contracts. Additionally, upon the automatic termination of the Purchase
Contracts in the event that the Company becomes the subject of a case under the
United States Bankruptcy Code (the "Bankruptcy Code"), the delivery of the
Treasury Notes to holders of the Securities may be delayed by the imposition of
the automatic stay of Section 362 of the Bankruptcy Code. During the period of
any such delay, the Treasury Notes will continue to accrue interest, payable by
the United States Government, until their maturity.
SUBORDINATION OF YIELD ENHANCEMENT PAYMENTS
The Company's obligations with respect to Yield Enhancement Payments are
subordinate and junior in right of payment to all liabilities of the Company and
pari passu with the most senior preferred stock directly issued from time to
time, if any, by the Company. There are no terms in the Purchase Contract
Agreement or the Purchase Contracts that limit the Company's ability to incur
obligations that rank senior to the Yield Enhancement Payments.
RIGHT TO DEFER YIELD ENHANCEMENT PAYMENTS
The Company may, at its option, defer the payment of Yield Enhancement
Payments on the Purchase Contracts until the Final Settlement Date. However,
deferred installments of Yield Enhancement Payments will bear additional Yield
Enhancement Payments at the rate of % per annum (compounding on each
succeeding Payment Date) until paid (such deferred installments of Yield
Enhancement Payments together with the additional Yield Enhancement Payments
shall be referred to herein as the "Deferred Yield
20
<PAGE> 22
Enhancement Payments"). Yield Enhancement Payments may not be deferred beyond
the Final Settlement Date. If the Purchase Contracts are settled early or
terminated (upon the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company), the right to receive additional
Yield Enhancement Payments and Deferred Yield Enhancement Payments will
terminate.
In the event that the Company elects to defer the payment of Yield
Enhancement Payments on the Purchase Contracts until the Final Settlement Date,
each holder will receive on the Final Settlement Date, in lieu of a cash
payment, a number of shares of Common Stock (in addition to a number of shares
of Common Stock equal to the Settlement Rate) equal to (x) the aggregate amount
of Deferred Yield Enhancement Payments payable to a holder of Securities divided
by (y) the Applicable Market Value. See "Description of the Purchase
Contracts -- Yield Enhancement Payments".
PURCHASE CONTRACT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF PURCHASE CONTRACT AGENT
The Purchase Contract Agreement will not be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the
Purchase Contract Agent will not be required to qualify as a trustee thereunder.
Accordingly, holders of the Securities will not have the benefits of the
protections of the Trust Indenture Act. Under the terms of the Purchase Contract
Agreement, the Purchase Contract Agent will have only limited obligations to the
holders of the Securities. See "Certain Provisions of the Purchase Contract
Agreement and the Pledge Agreement -- Information Concerning the Purchase
Contract Agent".
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Securities will be
used by the Underwriters to purchase, at the direction of the Company for the
benefit of the holders of the Securities, the underlying Treasury Notes, which
are being transferred to holders pursuant to the terms of the Securities, and
the Company will receive no proceeds from the sale of the Securities. The
proceeds to be received by the Company upon settlement of the Purchase Contracts
are expected to be used for general corporate purposes, which may include
repayment of debt, capital expenditures, acquisitions, investments in
subsidiaries, working capital and other business opportunities.
Concurrently with the offering made hereby, the Company is offering for
sale to the public (the "Note Offering") $350,000,000 aggregate principal amount
of its % Senior Subordinated Notes due 2000 (the "Notes"). The net proceeds
from the Note Offering will be used for repayment of outstanding debt under the
Credit Facility. There can be no assurance that the sale of the Notes will be
consummated; however, neither the sale of the Securities nor the sale of the
Notes is dependent on the consummation of the other sale.
21
<PAGE> 23
PRICE RANGE OF COMMON STOCK
Prior to February 21, 1995, the effective date of the initial public
offering of the Company, there was no public market for the Company's Common
Stock. The Company's Common Stock traded on the Nasdaq National Market under the
symbol "MPTR" from February 21, 1995 until February 21, 1996. On February 22,
1996, the Company's Common Stock was listed on the NYSE under the symbol "MDM".
The following table sets forth for the quarterly periods indicated the high
and low reported bid prices for the Company's Common Stock through February 21,
1996, as reported on the Nasdaq National Market. After February 21, 1996, the
table sets forth the high and low last sale price as reported on the NYSE
Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter (from February 21)............................ $24.00 $14.75
Second Quarter.............................................. 24.50 17.75
Third Quarter............................................... 30.00 18.00
Fourth Quarter.............................................. 33.00 26.00
1996
First Quarter............................................... $34.75 $28.50
Second Quarter.............................................. 30.25 20.13
Third Quarter............................................... 23.13 16.63
Fourth Quarter.............................................. 24.50 19.88
1997
First Quarter............................................... $24.63 $18.63
Second Quarter.............................................. 22.38 18.00
Third Quarter (through July 7).............................. 24.06 22.50
</TABLE>
There were approximately 43,210 holders of record of the Company's Common
Stock as of May 1, 1997.
DIVIDEND POLICY
The Company has never paid or declared a dividend on its Common Stock. The
Company's present intention is to retain its earnings to finance the growth and
development of its business, and the Company does not anticipate paying
dividends in the foreseeable future. Moreover, restrictions contained in the
Credit Facility prohibit the payment of non-stock dividends on the Company's
Common Stock without the prior consent of a specified percentage of the lenders
thereunder.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth as of March 31, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization that gives
effect to the acquisition of InPhyNet (see "Pro Forma Condensed Combined
Financial Information" included elsewhere in this Prospectus), and (iii) the pro
forma as adjusted capitalization that gives effect to the offering made hereby
and the Note Offering.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current portion of long-term debt... $ 24,224 $ 24,758 $ 24,758
Senior subordinated notes due 2000...................... -- -- 350,000
7 3/8% Senior Notes due 2006............................ 450,000 450,000 450,000
Credit Facility(1)...................................... 266,000 266,000 --
Other long-term debt.................................... 47,893 48,202 48,202
Stockholders' equity:
Preferred stock, $.001 par value, 95,000 shares
authorized; no shares issued and outstanding....... -- -- --
Series C Junior Participating Preferred Stock, $.001
par value; 500 shares authorized; no share issued
and outstanding.................................... -- -- --
Common Stock, $.001 par value; 400,000 shares
authorized; 171,537, 191,275, and 191,275 shares
issued and outstanding, respectively(2)............ 172 191 191
Additional paid-in capital............................ 822,472 893,004 893,004
Shares held in trust.................................. (150,200) (150,200) (150,200)
Notes receivable from stockholders.................... (1,590) (1,590) (1,590)
Retained earnings..................................... 138,220 122,871 122,871
---------- ---------- ----------
Total stockholders' equity.................... 809,074 864,276 864,276(3)
---------- ---------- ----------
Total capitalization.......................... $1,597,191 $1,653,236 $1,737,236
========== ========== ==========
</TABLE>
- ---------------
(1) Excludes approximately $117.0 million borrowed since March 31, 1997 under
the Credit Facility.
(2) Excludes approximately 18.7 million shares of Common Stock reserved for
issuance pursuant to outstanding stock options as of March 31, 1997.
(3) Excludes the addition to stockholders' equity that will occur upon issuance
of Common Stock of the Company at the Final Settlement Date and excludes the
reduction to stockholders' equity that will occur upon the execution of the
Purchase Contract Agreement. The amount of such addition will be equal to
the aggregate Stated Amount (approximately $350 million) and the amount of
such reduction will be approximately $0.5 million for each five basis points
of Yield Enhancement Payments.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company for, and as of the
end of, each of the periods indicated in the five-year period ended December 31,
1996, have been derived from the audited consolidated financial statements of
the Company (without giving effect to the acquisition of InPhyNet). The selected
consolidated financial data for each of the three months ended March 31, 1996
and 1997, and as of March 31, 1997, have been derived from the unaudited
consolidated financial statements of the Company (without giving effect to the
acquisition of InPhyNet), which reflect, in the opinion of management of the
Company, all adjustments (which include only normal recurring adjustments)
necessary for the fair presentation of the financial data for such periods. The
results for such interim periods are not necessarily indicative of the results
for the full year. The selected financial data should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
which have been incorporated by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue.............. $1,287,526 $1,756,762 $2,638,654 $3,583,377 $4,813,499 $1,149,812 $1,332,271
Income (loss) from
continuing
operations............. $ 20,417 $ 47,881 $ 54,144 $ 20,901 $ (89,831) $ 2,752 $ 40,486
Income (loss) from
discontinued
operations............. $ 5,858 $ 30,808 $ 25,902 $ (136,528) $ (68,698) $ (68,698) $ --
Net income (loss)........ $ 26,275 $ 78,689 $ 80,046 $ (115,627) $ (158,529) $ (65,946) $ 40,486
Income (loss) per share
from continuing
operations(1).......... $ 0.21 $ 0.40 $ 0.41 $ 0.15 $ (0.58) $ 0.02 $ 0.25
Income (loss) per share
from discontinued
operations(1).......... $ 0.06 $ 0.26 $ 0.20 $ (0.97) $ (0.44) $ (0.46) $ --
Net income (loss) per
share(1)............... $ 0.27 $ 0.66 $ 0.61 $ (0.82) $ (1.02) $ (0.44) $ 0.25
Number of shares used in
net income (loss) per
share.................. 98,798 119,380 131,783 140,364 155,364 150,422 164,841
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 22,312 $ 43,367 $ 99,679 $ 86,276 $ 123,779 $ 141,578
Working capital..................... 139,642 240,023 150,977 234,630 170,313 236,331
Total assets........................ 777,632 1,049,258 1,585,643 1,840,914 2,265,969 2,366,605
Long-term debt, less current
portion........................... 80,378 164,040 385,258 531,774 715,657 763,893
Total stockholders' equity.......... 381,481 481,177 612,781 592,074 739,497 809,074
</TABLE>
- ---------------
(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.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations. This discussion does
not give retroactive effect to the Company's acquisition of InPhyNet. This
discussion should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto incorporated herein by
reference. See "-- Recent Developments".
GENERAL
In February and September of 1996, the Company combined with PPSI and
Caremark, respectively. These business combinations were accounted for as
poolings of interests. The financial information referred to in this discussion
reflects the combined operations of these entities and several additional
immaterial entities accounted for as poolings of interests.
The Company is the largest PPM company in the United States. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and IPA physicians, the Company provides
primary and specialty healthcare services to prepaid enrollees and fee-for-
service patients in the United States. The Company also operates independent PBM
programs and furnishes disease management services and therapies for patients
with certain chronic conditions.
The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to prepaid payor systems. The Company enhances clinic operations
by centralizing administrative functions and introducing management tools such
as clinical guidelines, utilization review and outcomes measurement. The Company
provides affiliated physicians with access to capital and advanced management
information systems. The Company's PPM revenue is derived primarily from the
contracts with HMOs that compensate the Company and its affiliated physicians on
a prepaid basis. In the prepaid arrangements, the Company typically is paid by
the HMO a fixed amount per member ("enrollee") per month ("professional
capitation") or a percentage of the premium per member per month ("percent of
premium") paid by employer groups and other purchasers of healthcare coverage to
the HMOs. In return, the Company is responsible for substantially all of the
medical services required by enrollees. In many instances, the Company and its
affiliated physicians accept financial responsibility for hospital and ancillary
healthcare services in return for payment from HMOs on a capitated or percent of
premium basis ("institutional capitation"). In exchange for these payments
(collectively, "global capitation"), the Company, through its affiliated
physicians, provides the majority of covered healthcare services to enrollees
and contracts with hospitals and other healthcare providers for the balance of
the covered services. These relationships provide physicians with the
opportunity to operate under a variety of payor arrangements and increase their
patient flow.
The Company offers medical group practices and independent physicians a
range of affiliation models which are described in Note 1 of the accompanying
consolidated financial statements of the Company. These affiliations are carried
out by the acquisition of PPM entities or practice assets, either for cash or
through equity exchange, or by affiliation on a contractual basis. In all
instances, the Company enters into long-term practice management agreements with
the affiliated physicians that provide for both the management of their
practices by the Company and the clinical independence of the physicians.
The Company also organizes and manages physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician groups.
Under contracts with hospitals and other clients, the Company identifies and
recruits physicians and other healthcare professionals for admission to a
client's medical staff, monitors the quality of care and proper utilization of
services and coordinates the ongoing scheduling of staff physicians who provide
clinical coverage in designated areas of care.
25
<PAGE> 27
The Company also manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses approximately 44,000 prescriptions daily through four mail
service pharmacies and manages patients' immediate prescription needs through a
network of national retail pharmacies. The Company is integrating its PBM
program with the PPM business by providing PBM services to the affiliated
physicians, clinics and HMOs. The Company's 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. The Company currently provides therapies and services for
individuals with such conditions as hemophilia, growth disorders, immune
deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
RESULTS OF OPERATIONS
Through the Company's network of affiliated group and IPA physicians, the
Company provides primary and specialty healthcare services to prepaid enrollees
and fee-for-service patients. The Company also fills in excess of 50 million
prescriptions on an annual basis through its mail service and retail pharmacies
and provides services and therapies to patients with certain chronic conditions,
primarily hemophilia and growth disorders. The following table sets forth the
earnings summary by service area for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Physician Services
Net revenue........... $1,053,519 $1,663,728 $2,555,642 $614,054 $715,100
Operating income...... 27,121 73,586 125,015 26,329 46,790
Margin................ 2.6% 4.4% 4.9% 4.3% 6.5%
Pharmaceutical Services
Net revenue........... $1,097,315 $1,432,250 $1,784,319 $422,691 $500,839
Operating income...... 46,236 56,022 75,788 16,465 19,297
Margin................ 4.2% 3.9% 4.2% 3.9% 3.9%
Specialty Services
Net revenue........... $ 487,820 $ 487,399 $ 473,538 $113,067 $116,332
Operating income...... 75,139 70,762 56,006 13,937 13,235
Margin................ 15.4% 14.5% 11.8% 12.3% 11.4%
Corporate Services
Operating loss........ $ (35,212) $ (24,668) $ (20,881) $ (6,438) $ (4,225)
Percentage of total
net revenue........ (1.3)% (0.7)% (0.4)% (0.6)% (0.3)%
</TABLE>
Physician Practice Management Services
The Company's PPM revenues have increased substantially over the past three
years primarily due to growth in prepaid enrollment, existing practice growth
and new practice affiliations. Of the total 1996 PPM revenue, $1.7 billion can
be attributed to acquisitions (accounted for as either poolings of interests or
purchase transactions) made during the year. The Company's PPM operations in the
western region of the country function in a predominantly prepaid environment.
MedPartners' PPM operations in the other regions of the country are in
predominantly fee-for-service environments with limited but increasing managed
care
26
<PAGE> 28
penetration. The following table sets forth the breakdown of net revenue for the
PPM services area for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Prepaid......................... $ 620,701 $ 982,128 $1,401,837 $333,096 $373,370
Fee-for-Service................. 408,832 661,974 1,139,265 276,049 337,939
Other........................... 23,986 19,626 14,540 4,909 3,791
---------- ---------- ---------- -------- --------
Total net revenue from
PPM service area.... $1,053,519 $1,663,728 $2,555,642 $614,054 $715,100
========== ========== ========== ======== ========
</TABLE>
The Company's prepaid revenue reflects the number of HMO enrollees for whom
it receives monthly capitation payments. The Company receives professional
capitation to provide physician services and institutional capitation to provide
hospital care and other non-professional services. The table below reflects the
growth in enrollment for professional and global capitation:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------- ---------------------
1994 1995 1996 1996 1997
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Professional enrollees............. 548,821 603,391 1,025,763 915,272 1,027,230
Global enrollees (professional and
institutional)................... 255,188 477,208 603,892 605,042 659,752
------- --------- --------- --------- ---------
Total enrollees.......... 804,009 1,080,599 1,629,655 1,520,314 1,686,982
======= ========= ========= ========= =========
</TABLE>
During 1996, prepaid revenues increased 42.7% while prepaid enrollees
increased 50.8%. The reason for this difference relates to the mix of
professional capitation enrollment to total enrollment (which includes
institutional capitation). Therefore, the higher percentage of professional
capitation enrollment accounts for the lower percentage increase in prepaid
revenue as compared to the percentage increase in total enrollment. The
percentage of professional capitation enrollment to total enrollment was 63% at
December 31, 1996 compared to 56% at December 31, 1995. Revenue per enrollee for
professional capitation is substantially lower than global capitation as
discussed below.
The Company has consolidated the majority of its acquisitions into its
management infrastructure, eliminating substantial overhead expenses and
improving integration of medical, administrative and operational management. The
integration of various acquisitions into existing networks has allowed the
conversion of thousands of prepaid enrollees from professional capitation to
global capitation. This integration has been a significant factor in increasing
operating margins in the PPM service area from 2.6% in 1994 to 6.5% in the first
quarter of 1997.
The Company has developed strong relationships with many of the national
and regional managed care organizations and has demonstrated its ability to
deliver high-quality, cost-effective care. The Company is strategically
positioned to capitalize on the industry's continued evolution toward a prepaid
environment, specifically by increasing the number of prepaid enrollees and
converting existing enrollees from professional to global capitation. These
changes have resulted in significant internal growth. During the first quarter
of 1997, the Company converted approximately 56,000 lives from professional
capitation to global capitation. An additional 180,000 lives are expected to be
converted in the second quarter of 1997, exclusive of lives which will be added
as a result of the Company's alliance with Aetna U.S. Healthcare in May 1997.
The Company has continued to acquire high-quality groups of emergency
physicians and radiologists who believe in the value of providing increasingly
cost-effective care. The reputation and strong local presence of new and
existing hospital-based groups provide a substantial advantage in the
competition for contracts with emergency room and radiology departments. The
excellent reputation and leadership of these groups continue to provide
opportunities for new contracts.
27
<PAGE> 29
In addition to the increased revenues and operational efficiencies realized
through acquisition and consolidation, the Company is profiting from synergies
produced by the exchange of ideas among physicians and managers across
geographical boundaries and varied areas of specialization. The PPM service
area, for example, has established medical management committees that meet
monthly to discuss implementation of the best medical management techniques to
assist the Company's affiliated physicians in delivering the highest quality of
care at lower costs in a consistent fashion. The Company is capitalizing on the
knowledge of its Western groups, which have significant experience operating in
a prepaid environment, to transfer the best practices to other groups in markets
with increasing managed care penetration. Through interaction between physicians
and managers from various medical groups, significant cost savings continue to
be identified at several of the Company's larger affiliated groups.
The PPM service area has also created a medical advisory committee, which
is developing procedures for the identification, packaging and dissemination of
the best clinical practices within the Company's medical groups. The committee
also provides the Company's affiliated physicians a forum to discuss innovative
ways to improve the delivery of healthcare.
The Company has also initiated integration efforts between the PPM, PBM and
disease management areas. A project is in process to integrate patient care data
from several of the Company's affiliated clinics with the PBM's healthcare
information system. Through this database, which combines medical and claims
data with the prescription information tracked by the PBM area, the Company will
have access to the industry's most complete and detailed collection of
information on successful treatment patterns. Another synergy arising from
integration is the opportunity which the existing PBM infrastructure affords to
affiliated physician groups to further expand services by providing pharmacy
services ranging from fee-for-service retail claims processing to full drug
capitation programs. The Company is also beginning to integrate the disease
management area's expertise in an effort to formulate and implement disease
management programs for the Company.
Pharmacy Benefit Management Services
Pharmaceutical Services revenues continue to exhibit sustained growth
reflecting increases in both mail and retail related services. Net revenue for
the quarter ended March 31, 1997 increased 18.5% over the same period in 1996 as
a result of increased pharmacy transaction volume (8.0%), drug cost inflation,
product mix and pricing (9.9%) and growth of clinical and other programs (0.6%).
Key factors contributing to this growth include high customer retention,
additional penetration of retained customers and new customer contracts. These
growth factors were partially offset in 1995 and 1996 by selective non-renewal
of certain accounts not meeting threshold profitability levels. Pharmaceutical
Services' largest single client contract, the National Association of Letter
Carriers, went into effect on January 1, 1997. The majority of Pharmaceutical
Services revenue is earned on a fee-for-service basis through contracts covering
one to three-year periods. Revenues for selected types of services are earned
based on a percentage of savings achieved or on a per-enrollee or per-member
basis; however, these revenues are not material to total revenues.
Operating income increased 17.2% in the first quarter of 1997 compared to
the first quarter of 1996. Operating margins in the first quarter of 1997 were
consistent with the first quarter of 1996. Retail service revenue continues to
grow at a faster rate than mail related revenue, and reductions in operating
expenses offset any impact on operating margins and have contributed to the
overall growth in operating income.
Operating income experienced accelerated growth in 1995 and 1996 while
margins fell slightly from 4.2% in 1994 to 3.9% in 1995 but returned to a 4.2%
level in 1996. Operating income and margins in 1996 were enhanced by reduced
information systems costs achieved through renegotiation of a contract with an
outsource service vendor, continued improvements in the acquisition costs of
drugs, increased penetration of higher margin value-oriented services and an
overall 13% reduction in selling and administrative expenses. Partially
offsetting these cost reductions were continued declines in prices to customers.
Margins in Pharmaceutical Services are also affected by the mix between
mail and retail service revenues. Margins on mail-related service revenues
currently are higher than those on retail service revenues. Revenues in both
mail and retail services continue to grow; although, the growth rate of retail
services in 1995
28
<PAGE> 30
and 1996 was greater than the growth rate of mail services. In 1996, retail
service revenues grew to represent nearly 49% of PBM revenues. The Company has
little or no influence over certain other factors, including demographics of the
population served and plan design, which, can affect the mix between mail and
retail services. Consequently, margin percentage trends alone are not a
sufficient indication of progress. The Company's pricing and underwriting
strategies are closely linked to its working capital and asset management
strategies and focus on return on investment and overall improvements in return
on capital deployed in the business.
The Company has recently reorganized its sales and corporate accounts
management activities into eight geographic and two additional specialty areas.
This will enable the Company to improve its account retention, client service
and growth initiatives even further as a result of increased accountability and
focus. As mentioned under Physician Practice Management Services, the Company is
pursuing a number of PPM and PBM integration opportunities.
Specialty Services
Specialty Services concentrates on providing high quality products and
services in the home. Domestically, these services focus on low incidence
chronic diseases. Internationally, the Company has established home care
businesses in Canada, Germany, the Netherlands, the United Kingdom and Japan,
where it is expanding into new services in response to transforming healthcare
delivery systems in these countries. Margins for specialty services have
declined slightly as a result of managed care pricing pressures, restructuring
of benefit plans by payors and reduced reimbursement from Medicaid and other
state agency payors. For the hemophilia business, federal government programs
providing special pricing to qualified organizations who may be competitors have
impacted margins negatively. In addition to pricing pressures, particularly in
growth deficiency therapy, operating expenses and cost of service expenses rose
due to programs targeted at launching the Company's new multiple sclerosis
("MS") therapy service, an expanded payor marketing initiative and an initiative
targeted at attaining accreditation by the Joint Committee on Accreditation of
Healthcare Organizations for the nationwide system of pharmacies. To offset
these declines, the Company launched new products and services including the
opening of a PBM in the Netherlands and an MS therapy service in the U.S.
Discontinued Operations
During 1995, Caremark divested its Caremark Orthopedic Services, Inc.
subsidiary as well as its clozaril patient management system, home infusion
business and oncology management services business. The Company's consolidated
financial statements present the operating income and net assets of these
discontinued operations separately from continuing operations. Prior periods
have been restated to conform with this presentation. Discontinued operations
for 1995 reflect the net after-tax gain on the disposal of the clozaril patient
management system, the home infusion business and a $154.8 million after-tax
charge for the settlement discussed in Note 13 of the accompanying audited
consolidated financial statements related to the OIG investigation. Discontinued
operations for 1996 reflects a $67.9 million after-tax charge related to
settlements with private payors discussed in Note 13 of the accompanying audited
consolidated financial statements and an after-tax gain on disposition of the
nephrology services business, net of disposal costs, of $2.5 million.
Results of Operations -- Three Months Ended March 31, 1997 and 1996
For the three months ended March 31, 1997, net revenue was $1,332.3
million, compared to $1,149.8 million for the same period in 1996, an increase
of 15.9%. The increase in net revenue primarily resulted from affiliations with
new physician practices and the increase in pharmaceutical services net revenue,
which accounted for $26.9 million and $78.1 million of the increase in net
revenue, respectively. The increase in pharmaceutical services net revenue is
attributable to pharmaceutical price increases, the addition of new customers,
further penetration of existing customers and the sale of new products.
29
<PAGE> 31
Operating income grew 77.7% and 17.2% in the first quarter of 1997, as
compared to the same period of 1996, for the physician services and
pharmaceutical services areas, respectively. The increase in the physician
services area is the result of higher net revenue and increases in operating
margins resulting from the spreading of fixed overhead expenses over a larger
revenue base and continued integration of operations. The pharmaceutical
services area's increase in operating income was primarily due to reductions in
operating expenses and higher net revenue. Operating income and margins declined
in the corresponding periods for the specialty services area as a result of
lower volumes in the hemophilia business and continued pricing pressures for its
growth hormone products.
Net income for the first quarter of 1997 was $40.5 million, as compared to
a loss of $65.9 million for the same period of 1996. Net loss for the first
quarter of 1996 included merger charges totaling $34.4 million relating to the
business combination with PPSI and the loss from discontinued operations of
$68.7 million discussed previously.
Results of Operations for the Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, net revenue was $4,813.5 million,
compared to $3,583.4 million for 1995, an increase of 34.3%. The increase in net
revenue resulted primarily from affiliations with new physician practices and
the increase in PBM net revenue, which accounted for $339.9 million and $352.1
million of the increase in net revenue, respectively. The most significant
physician practice acquisition during this period was the CIGNA Medical Group
which was acquired in January 1996. This acquisition accounted for 92% of the
new practice revenue. The increase in PBM net revenue is attributable to
pharmaceutical price increases, the addition of new customers, further
penetration of existing customers and the sale of new products.
Operating income for the PPM and PBM services areas increased 69.9% and
35.3%, respectively, for 1996 compared to 1995. This growth was the result of
higher net revenues in both areas and increases in operating margins resulting
from the spreading of fixed overhead expenses over a larger revenue base and
continued integration of operations in the PPM services area. Operating income
and margins declined in the corresponding periods for the specialty services
area as a result of lower volumes in the hemophilia business and continued
pricing pressures for growth hormone products.
Included in the pre-tax loss for 1996 were merger expenses totaling $308.7
million related to the business combinations with Caremark, PPSI and several
other entities, the major components of which are listed in Note 11 of the
accompanying audited consolidated financial statements.
Results of Operations for the Years Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 was $3,583.4 million, an
increase of $944.7 million, or 35.8%, over the year ended December 31, 1994. The
increase in net revenue resulted primarily from affiliation with new physician
practices, the increase in prepaid enrollees at existing affiliated physician
practices and the increase in PBM net revenue, which accounted for $240.1
million, $295.8 million, and $334.9 million of the increase in net revenue,
respectively. The most significant physician practice acquisition affecting this
period was the Friendly Hills Healthcare Network which was acquired in May 1995.
This acquisition accounted for 53% of the new practice revenue. The increase in
PBM net revenue resulted from increases in covered lives due to new customer
contracts and greater penetration of existing customers.
Operating income grew 171.3% and 21.2% for 1995, compared to 1994, for the
PPM and PBM service areas, respectively. This growth is the result of higher net
revenues in both areas. The PPM service area also had a significant increase in
operating margin, 2.6% in 1994 to 4.4% in 1995, which resulted from the
leveraging of fixed overhead expenses over a substantially larger revenue base,
integration of operations and the impact of the varying margins of new physician
practice affiliations. Operating income and margins declined in the
corresponding periods for the specialty services areas as a result of pricing
pressures for growth hormone products.
30
<PAGE> 32
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results and financial condition of the Company are
dependent on the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. The future operating results and financial condition of the Company may
be affected by a number of additional factors, including: the Company's growth
strategy, which involves the ability to raise the capital required to support
growth, competition for expansion opportunities, integration risks and
dependence on HMO enrollee growth; efforts to control healthcare costs; exposure
to professional liability; and pharmacy licensing, healthcare reform and
government regulation. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.
The Company completed the acquisition of Caremark in September 1996. There
are various Caremark legal matters which, if materially adversely determined,
could have a material adverse effect on the Company's operating results and
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 and December 31, 1996, the Company had working capital
of $236.3 and $170.3 million, respectively, including cash and cash equivalents
of $141.6 and $123.8 million, respectively. For the periods ending March 31,
1997 and 1996, and December 31, 1996, 1995 and 1994, cash flow from continuing
operations was $45.3 million, $34.7 million, $159.8 million, $152.8 million and
$43.6 million, respectively.
For the periods ended March 31, 1997 and December 31, 1996, respectively,
the Company invested $43.1 and $157.4 million, respectively, in acquisitions of
the assets of physician practices and $16.8 and $122.1 million, respectively, in
property and equipment. These expenditures were funded by approximately $24.5
and $270.2 million, respectively, derived from equity proceeds and $41.4 and
$133.6 million, respectively, in net incremental borrowings. For the three
months ended March 31, 1996 the Company invested $76.0 million in acquisitions
of the assets of physician practices and $30.8 million in property and
equipment. These expenditures were funded by a portion of the $224.1 million
derived from a secondary stock offering in March 1996. For the year ended
December 31, 1995, the Company invested $205.1 million in acquisitions of the
assets of physician practices and $124.5 million in property and equipment.
These expenditures were funded by approximately $83.4 million derived from
equity proceeds and $71.2 million in net incremental borrowings. For the year
ended December 31, 1994, the Company's investing activities totaled $248.3
million, which was composed primarily of $126.7 million related to practice
acquisitions and $102.7 million related to the purchase of property and
equipment. These expenditures were funded by $128.1 million derived from equity
proceeds and $232.4 million in net incremental borrowings. Investments in
acquisitions and property and equipment are anticipated to continue to be
substantial uses of funds in future periods.
The Company entered into the $1 billion Credit Facility, which became
effective simultaneously with the closing of the Caremark acquisition, on
September 5, 1996, replacing its then existing credit facility. At the Company's
option, pricing on the Credit Facility is based on either a debt to cash flow
test or the Company's senior debt ratings. No principal is due on the facility
until its maturity date of September 2001. As of March 31, 1997, there was $266
million outstanding under the facility. The Credit Facility contains affirmative
and negative covenants which include requirements that the Company 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, the
Company 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 the Company. As of
March 31, 1997, the Company was in compliance with the covenants in the Credit
Facility.
Effective October 8, 1996, the Company completed a $450 million senior note
offering. These ten-year notes carry a coupon rate of 7 3/8%. The notes are not
redeemable by the Company prior to maturity and are not entitled to the benefit
of any mandatory sinking fund. The notes are general unsecured obligations of
the Company ranking senior in right of payment to all existing and future
subordinated indebtedness of the
31
<PAGE> 33
Company and pari passu in right of payment with all existing and future
unsubordinated and unsecured obligations of the Company. The notes are
effectively subordinated to all existing and future indebtedness and other
liabilities of the Company's subsidiaries. The notes are rated BBB/Baa3 by
Standard & Poors and Moody's Investor Services, respectively. The Company is the
only physician practice management company to earn an investment grade debt
rating. Net proceeds from the offering were used to reduce amounts under the
Credit Facility.
On October 30, 1996, the Company completed its tender offer for Caremark's
$100 million 6 7/8% notes due August 15, 2003. Of the $100 million principal
amount of such notes outstanding, $99.9 million principal amount were tendered
and purchased. The total consideration for each $1,000 principal amount of
outstanding notes tendered was $1,017.72.
The Company's growth strategy requires substantial capital for the
acquisition of PPM businesses and assets of physician practices, and for their
effective integration, operation and expansion. Affiliated physician practices
may also require capital for renovation, expansion and additional medical
equipment and technology. The Company believes that its existing cash resources,
the use of the Company's Common Stock for selected practice and other
acquisitions and available borrowings under the $1.0 billion Credit Facility or
any successor credit facility, will be sufficient to meet the Company's
anticipated acquisition, expansion and working capital needs for the next twelve
months. The Company expects from time to time to raise additional capital
through the issuance of long-term or short-term indebtedness or the issuance of
additional equity securities in private or public transactions, at such times as
management deems appropriate and the market allows in order to meet the capital
needs of the Company. There can be no assurance that acceptable financing for
future acquisitions or for the integration and expansion of existing networks
can be obtained. Any of such financings could result in increased interest and
amortization expense, decreased income to fund future expansion and dilution of
existing equity positions.
RECENT DEVELOPMENTS
In June 1997, the Company acquired InPhyNet, a publicly traded PPM company
based in Fort Lauderdale, Florida and specializing in HBP operations and
correctional care in exchange for approximately 19.3 million shares of the
Company's Common Stock having a total value of approximately $413 million,
creating the largest HBP group in the United States with over 2,200 physicians.
In June 1997, the Company also acquired Fischer Mangold, a California-based
contract management group providing administrative management and physician
staffing to 28 hospital clients in 11 states. This acquisition is being
accounted for as a pooling of interests.
In May 1997, the Company acquired the business assets and assumed the
liabilities of most of the operations of APMC, a PPM Company and affiliate of
Aetna Inc. based in Glastonbury, Connecticut. For accounting purposes, this
acquisition is being treated as an asset purchase. As a part of this
acquisition, the Company entered into a 10-year Master Network Agreement with
Aetna U.S. Healthcare, pursuant to which the members of the Company's networks
of affiliated physicians will be authorized providers for many of the 14 million
members of Aetna U.S. Healthcare's health plan.
On July 1, 1997, the Company announced that a settlement had been reached
in the Coram litigation pursuant to which Caremark will return for cancellation
all of the securities issued by Coram in connection with its acquisition of
Caremark's home infusion therapy business and will pay to Coram $45 million in
cash on or before September 1, 1997. The settlement agreement also provides for
the termination and resolution of all disputes and issues between the parties
and for the exchange of mutual releases. The settlement will result in a second
quarter after-tax charge from discontinued operations of approximately $75
million. See "Business -- Legal Proceedings".
32
<PAGE> 34
QUARTERLY RESULTS (UNAUDITED)
The following tables set forth certain unaudited quarterly financial data
for 1995 and 1996. In the opinion of the Company's management, this unaudited
information has been prepared on the same basis as the audited information and
includes all adjustments (consisting of normal recurring items) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- --------- ------------- ------------ ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue.......... $806,396 $ 887,121 $919,750 $ 970,110 $1,149,812 $1,196,226 $1,199,679
Operating expenses... 770,599 846,889 871,279 918,908 1,099,519 1,143,107 1,139,178
Net interest
expense.......... 6,254 2,213 5,350 3,804 6,741 4,021 5,257
Merger expenses.... -- 1,051 3,473 62,040 34,448 -- 263,000
Losses on
investments...... -- -- -- 86,600 -- -- --
Other, net......... (406) 5 (27) 236 (144) (229) (37)
-------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes....... 29,949 36,963 39,675 (101,478) 9,248 49,327 (207,719)
Income tax expense
(benefit)........ 10,903 13,904 15,156 (55,755) 6,496 16,926 (55,465)
-------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
continuing
operations......... 19,046 23,059 24,519 (45,723) 2,752 32,401 (152,254)
Discontinued
operations:
Income (loss) from
discontinued
operations....... (2,605) (144,011) (5,791) (15,935) (71,221) -- --
Net gains (losses)
on sales of
discontinued
operations....... 10,895 (3,810) -- 24,729 2,523 -- --
-------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
discontinued
operations......... 8,290 (147,821) (5,791) 8,794 (68,698) -- --
-------- --------- -------- --------- ---------- ---------- ----------
Net income
(loss)....... $ 27,336 $(124,762) $ 18,728 $ (36,929) $ (65,946) $ 32,401 $ (152,254)
======== ========= ======== ========= ========== ========== ==========
<CAPTION>
QUARTER ENDED
-------------------------
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Net revenue.......... $1,267,782 $1,332,271
Operating expenses... 1,195,767 1,257,174
Net interest
expense.......... 7,911 9,686
Merger expenses.... 11,247 --
Losses on
investments...... -- --
Other, net......... (1,159) --
---------- ----------
Income (loss) from
continuing
operations before
income taxes....... 54,016 65,411
Income tax expense
(benefit)........ 26,746 24,925
---------- ----------
Income (loss) from
continuing
operations......... 27,270 40,486
Discontinued
operations:
Income (loss) from
discontinued
operations....... -- --
Net gains (losses)
on sales of
discontinued
operations....... -- --
---------- ----------
Income (loss) from
discontinued
operations......... -- --
---------- ----------
Net income
(loss)....... $ 27,270 $ 40,486
========== ==========
</TABLE>
The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to December 31,
1996 that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q were filed prior to the
Mergers and thus, differ from the amounts for the quarters included herein. The
differences caused solely by the operation of the merged companies are
summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996
----------------------- ----------------------- ------------------------
FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED
--------- ----------- --------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue................. $332,549 $1,149,812 $360,398 $1,196,226 $1,182,015 $1,199,679
Income (loss) from
continuing operations
before income taxes....... (21,435) 9,248 16,153 49,327 (207,168) (207,719)
Income tax expense
(benefit)................. (5,935) 6,496 6,129 16,926 (55,634) (55,465)
Loss from discontinued
operations................ -- (68,698) -- -- -- --
Net income (loss)........... (15,500) (65,946) 10,024 32,401 (151,534) (152,254)
</TABLE>
33
<PAGE> 35
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected pro forma financial information for the Company
gives effect to the acquisition of InPhyNet as a pooling of interests. All of
the following selected pro forma financial information should be read in
conjunction with the pro forma financial information, including the notes
thereto, incorporated herein by reference. The pro forma financial information
set forth below is not necessarily indicative of the results that actually would
have occurred had the acquisition of InPhyNet been consummated on the date
indicated or that may be obtained in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $2,909,024 $3,908,717 $5,222,019 $1,237,715 $1,454,778
Operating expenses:
Clinic expenses.......................................... 1,200,291 1,785,564 2,683,107 637,117 747,171
Non-clinic goods and services............................ 1,365,203 1,688,075 2,019,895 477,264 555,818
General and administrative expenses...................... 169,273 172,896 173,428 46,032 44,587
Depreciation and amortization............................ 44,384 62,394 86,579 20,651 26,610
Net interest expense..................................... 16,214 19,114 24,715 7,030 9,781
Merger expenses.......................................... -- 69,064 308,945 34,448 --
Loss on investments...................................... -- 86,600 -- -- --
Other, net............................................... (143) (192) (1,075) (107) (39)
---------- ---------- ---------- ---------- ----------
Net operating expenses............................. 2,795,222 3,883,515 5,295,594 1,222,435 1,383,928
---------- ---------- ---------- ---------- ----------
Income (loss) before pro forma income taxes and
discontinued operations.................................. 113,802 25,202 (73,575) 15,280 70,850
Pro forma income tax expense (benefit)..................... 50,292 (6,987) 3,215 8,878 27,074
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations................... 63,510 32,189 (76,790) 6,402 43,776
Loss (income) from discontinued operations................. (25,902) 136,528 68,698 68,698 --
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)................................ $ 89,412 $ (104,339) $ (145,488) $ (62,296) $ 43,776
========== ========== ========== ========== ==========
Pro forma net income (loss) per share(1)................... $ 0.61 $ (0.66) $ (0.83) $ (0.37) $ 0.24
========== ========== ========== ========== ==========
Number of shares used in pro forma net income (loss) per
share calculations(1)(2)................................. 146,773 158,109 174,269 169,381 184,579
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 148,375
Working capital............................................. 257,173
Total assets................................................ 2,515,376
Long-term debt, less current portion........................ 764,202
Total stockholders' equity.................................. 864,276
</TABLE>
- ---------------
(1) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common equivalent shares outstanding during the
periods in accordance with the applicable rules of the SEC. All stock
options and warrants issued have been considered as outstanding common
share equivalents for all the periods presented, even if anti-dilutive,
under the treasury stock method. Shares of MedPartners Common Stock issued
in February 1995 upon conversion of the then outstanding MedPartners
convertible preferred stock are assumed to be common share equivalents for
all periods presented.
(2) Number of shares used in pro forma net income (loss) per share gives effect
to the acquisition of InPhyNet by using the fixed Exchange Ratio of 1.18
shares of Common Stock for each share of common stock of InPhyNet.
34
<PAGE> 36
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 141,578 $ 6,797 $ -- $ 148,375
Accounts receivable less allowance for bad
debts.................................... 610,675 88,658 -- 699,333
Inventory................................... 131,403 419 -- 131,822
Prepaid expenses and other current assets... 77,556 17,465 -- 95,021
Income tax receivable....................... 1,223 -- -- 1,223
Deferred tax assets......................... 34,030 763 -- 34,793
---------- -------- -------- ----------
Total current assets................ 996,465 114,102 -- 1,110,567
Property and equipment........................ 507,878 12,770 (7,700)(A) 512,948
Intangible assets, net........................ 681,720 28,090 -- 709,810
Deferred tax assets........................... 10,243 (860) -- 9,383
Other assets.................................. 170,299 2,369 -- 172,668
---------- -------- -------- ----------
Total assets........................ $2,366,605 $156,471 $ (7,700) $2,515,376
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 305,974 $ 10,035 $ 42,300(A) $ 358,309
Accrued medical claims payable.............. 95,817 20,975 -- 116,792
Other accrued expenses and liabilities...... 334,119 19,416 -- 353,535
Current portion of long-term debt........... 24,224 534 -- 24,758
---------- -------- -------- ----------
Total current liabilities........... 760,134 50,960 42,300 853,394
Long-term debt, net of current portion........ 763,893 309 -- 764,202
Other long-term liabilities................... 33,504 -- -- 33,504
Stockholders' equity:
Common stock................................ 172 164 (145)(B) 191
Additional paid-in capital.................. 822,472 70,387 145(B) 893,004
Shares held in trust........................ (150,200) -- (150,200)
Notes receivable from shareholders.......... (1,590) -- (1,590)
Accumulated earnings........................ 138,220 34,651 (50,000)(A) 122,871
---------- -------- -------- ----------
Total stockholders' equity.......... 809,074 105,202 (50,000) 864,276
---------- -------- -------- ----------
Total liabilities and stockholders'
equity............................ $2,366,605 $156,471 $ (7,700) $2,515,376
========== ======== ======== ==========
</TABLE>
35
<PAGE> 37
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue..................................... $1,332,271 $122,507 $ -- $1,454,778
Operating expenses:
Clinic expenses............................... 640,623 106,548 -- 747,171
Non-clinic goods and services................. 555,818 -- -- 555,818
General and administrative expenses........... 35,399 9,188 -- 44,587
Depreciation and amortization................. 25,334 1,276 -- 26,610
Net interest expense.......................... 9,686 95 -- 9,781
Other, net.................................... -- (39) -- (39)
---------- -------- ------ ----------
Net operating expenses................ 1,266,860 117,068 -- 1,383,928
---------- -------- ------ ----------
Income before pro form income taxes............. 65,411 5,439 -- 70,850
Pro forma income tax expense.................... 24,925 2,149 -- 27,074
---------- -------- ------ ----------
Pro forma net income............................ $ 40,486 $ 3,290 $ -- $ 43,776
========== ======== ====== ==========
Pro forma net income per share.................. $ 0.25 $ 0.20 $ 0.24
========== ======== ==========
Number of shares used in pro forma net income
per share calculations........................ 164,841 16,727 3,011(C) 184,579
========== ======== ====== ==========
</TABLE>
36
<PAGE> 38
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue....................................... $1,149,812 $87,903 $ -- $1,237,715
Operating expenses:
Clinic expenses................................. 563,224 73,893 -- 637,117
Non-clinic goods and services................... 477,264 -- -- 477,264
General and administrative expenses............. 39,439 6,593 -- 46,032
Depreciation and amortization................... 19,592 1,059 -- 20,651
Net interest expense............................ 6,741 289 -- 7,030
Merger expenses................................. 34,448 -- -- 34,448
Other, net...................................... (144) 37 -- (107)
---------- ------- ------ ----------
Net operating expenses.................. 1,140,564 81,871 -- 1,222,435
---------- ------- ------ ----------
Income before pro forma income taxes and
discontinued operations......................... 9,248 6,032 -- 15,280
Pro forma income tax expense...................... 6,496 2,382 -- 8,878
---------- ------- ------ ----------
Income from continuing operations................. 2,752 3,650 -- 6,402
Loss from discontinued operations................. 68,698 -- -- 68,698
---------- ------- ------ ----------
Pro forma net (loss) income....................... $ (65,946) $ 3,650 $ -- $ (62,296)
========== ======= ====== ==========
Pro forma net (loss) income per share............. $ (0.44) $ 0.23 $ (0.37)
========== ======= ==========
Number of shares used in pro forma net (loss)
income per share calculations................... 150,422 16,067 2,892(C) 169,381
========== ======= ====== ==========
</TABLE>
37
<PAGE> 39
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO PRO
---------------------- FORMA FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue....................................... $4,813,499 $408,520 $ -- $5,222,019
Operating expenses:
Clinic expenses................................. 2,332,958 350,149 -- 2,683,107
Non-clinic goods and services................... 2,019,895 -- -- 2,019,895
General and administrative expenses............. 142,789 30,639 -- 173,428
Depreciation and amortization................... 81,929 4,650 -- 86,579
Net interest expense............................ 23,930 785 -- 24,715
Merger expenses................................. 308,695 250 -- 308,945
Other, net...................................... (1,569) 494 -- (1,075)
---------- -------- ------- ----------
Net operating expenses.................. 4,908,627 386,967 -- 5,295,594
---------- -------- ------- ----------
(Loss) income before pro forma income taxes and
discontinued operations......................... (95,128) 21,553 -- (73,575)
Pro forma income tax (benefit) expense............ (5,297) 8,512 -- 3,215
---------- -------- ------- ----------
(Loss) income from continuing operations.......... (89,831) 13,041 -- (76,790)
Loss from discontinued operations................. (68,698) -- -- (68,698)
---------- -------- ------- ----------
Pro forma net (loss) income....................... $ (158,529) $ 13,041 $ -- $ (145,488)
========== ======== ======= ==========
Pro forma net (loss) income per share............. $ (1.02) $ 0.81 $ (0.83)
========== ======== ==========
Number of shares used in pro forma net (loss)
income per share calculations................... 155,364 16,021 2,884(C) 174,269
========== ======== ======= ==========
</TABLE>
38
<PAGE> 40
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO
---------------------- FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue........................................ $3,583,377 $325,340 $ -- $3,908,717
Operating expenses:
Clinic expenses.................................. 1,512,380 273,184 -- 1,785,564
Non-clinic goods and services.................... 1,688,075 -- -- 1,688,075
General and administrative expenses.............. 148,515 24,381 -- 172,896
Depreciation and amortization.................... 58,705 3,689 -- 62,394
Net interest expense............................. 17,621 1,493 -- 19,114
Merger expenses.................................. 66,564 2,500 -- 69,064
Loss on investments.............................. 86,600 -- -- 86,600
Other, net....................................... (192) -- -- (192)
---------- -------- ------ ----------
Net operating expenses................... 3,578,268 305,247 -- 3,883,515
---------- -------- ------ ----------
Income before pro forma income taxes and
discontinued operations.......................... 5,109 20,093 -- 25,202
Pro forma income tax (benefit) expense............. (15,792) 8,805 -- (6,987)
---------- -------- ------ ----------
Income from continuing operations.................. 20,901 11,288 -- 32,189
Loss from discontinued operations.................. (136,528) -- -- (136,528)
---------- -------- ------ ----------
Pro forma net (loss) income........................ $ (115,627) $ 11,288 $ -- $ (104,339)
========== ======== ====== ==========
Pro forma net (loss) income per share.............. $ (0.82) $ 0.75 $ (0.66)
========== ======== ==========
Number of shares used in pro forma net (loss)
income per share calculations.................... 140,364 15,038 2,707(C) 158,109
========== ======== ====== ==========
</TABLE>
39
<PAGE> 41
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO
---------------------- FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue........................................ $2,638,654 $270,370 $ -- $2,909,024
Operating expenses:
Clinic expenses.................................. 969,345 230,946 -- 1,200,291
Non-clinic goods and services.................... 1,365,203 -- -- 1,365,203
General corporate expenses....................... 148,990 20,283 -- 169,273
Depreciation and amortization.................... 41,832 2,552 -- 44,384
Net interest expense............................. 15,235 979 -- 16,214
Other, net....................................... (143) -- -- (143)
---------- -------- ----- ----------
Net operating expenses................... 2,540,462 254,760 -- 2,795,222
Income before pro forma income taxes and
discontinued operations.......................... 98,192 15,610 -- 113,802
Pro forma income tax expense....................... 44,048 6,244 -- 50,292
---------- -------- ----- ----------
Income from continuing operations.................. 54,144 9,366 -- 63,510
Income from discontinued operations................ 25,902 -- -- 25,902
---------- -------- ----- ----------
Pro forma net income............................... $ 80,046 $ 9,366 $ -- $ 89,412
========== ======== ===== ==========
Pro forma net income per share..................... $ 0.61 $ 0.74 $ 0.61
========== ======== ==========
Number of shares used in pro forma net income per
share calculations............................... 131,783 12,703 2,287(C) 146,773
========== ======== ===== ==========
</TABLE>
40
<PAGE> 42
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
The acquisition of InPhyNet was consummated on June 26, 1997 and was
accounted for as a pooling of interests. The pro forma combined statements of
operations assumed that the acquisition of InPhyNet was consummated at the
beginning of the earliest period presented. The pro forma condensed combined
balance sheet assumes that the transaction was consummated on March 31, 1997.
The pro forma financial information contains no adjustments to conform the
accounting policies of the companies because any such adjustments have been
determined to be immaterial.
The following adjustments are necessary to reflect the acquisition of
InPhyNet (in thousands):
A. The pro forma combined statements of operations do not reflect
nonrecurring costs and charges resulting directly from the acquisition of
InPhyNet. These costs and charges are estimated as follows:
<TABLE>
<CAPTION>
PROPERTY TOTAL
AND ACCOUNTS ACCUMULATED MERGER
EQUIPMENT PAYABLE EARNINGS CHARGE
--------- -------- ----------- -------
<S> <C> <C> <C> <C>
InPhyNet...................................... $(7,700) $42,300 $(50,000) $50,000
</TABLE>
The following is a detail of the estimated merger expense:
<TABLE>
<S> <C>
Severance and related benefits.............................. $ 7,000
Operational restructuring................................... 17,000
Lease abandonment........................................... 1,500
Non-compatible technology................................... 6,000
Brokerage fees.............................................. 9,000
Professional fees........................................... 3,000
Other transaction related costs............................. 3,200
Transition costs............................................ 3,000
Filing fees................................................. 300
-------
$50,000
=======
</TABLE>
The non-compatible technology primarily relates to computer hardware and
software that will be abandoned after the acquisition of InPhyNet. These assets
were utilized in the operations of InPhyNet but are not compatible with the
planned operations for MedPartners. Severance and related benefits represent
anticipated payments to identified employees, as required by their respective
employment agreements, who will be terminated after the acquisition of InPhyNet
and certain other payments anticipated to be made to certain employees. The
operational restructuring and transitional costs of $17,000 and $3,000,
respectively, represent management's best estimate of the costs to consolidate
operations of the thirty-five existing MedPartners physician practices in
Florida with the operations of certain practices of InPhyNet. This plan was
formulated by MedPartners' and InPhyNet's management in order to more
efficiently provide services in markets where multiple locations will exist as a
result of the acquisition of InPhyNet. The plan of consolidation calls for
affected operations to be merged over a period of twelve to twenty-four months.
These costs also include costs associated with the merging of InPhyNet's and
MedPartners' hospital based operations including the combining of systems,
facilities and management resources as well as costs associated with the
formation of a regional operating and reporting infrastructure.
B. To reflect the exchange of approximately 19,318 shares of Common Stock
for all the issued and outstanding shares of InPhyNet common stock.
C. To adjust pro forma amounts based on historical share amounts,
converting each outstanding share of InPhyNet common stock into Common Stock
based on the fixed exchange ratio of 1.18.
41
<PAGE> 43
BUSINESS
GENERAL
The Company is the largest PPM company in the United States, based on
revenues. The Company 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 approximately 12,460 physicians. The Company
also 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. As of March 31, 1997,
the Company operated its PBM program in all 50 states.
The Company 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. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and to
advanced management information systems. In addition, the Company contracts with
health maintenance organizations and other third-party payors that compensate
the Company and its affiliated physicians on a prepaid basis (collectively
"HMOs"), 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 to increase their patient flow.
The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through an
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements that provide for
the management of the affiliated physicians by the Company while assuring the
clinical independence of the physicians.
The Company's PPM revenue is derived from contracts with HMOs that
compensate the Company and its affiliated physicians on a prepaid basis and from
the provision of fee-for-service medical services. In the prepaid arrangements,
the Company, through its affiliated physicians, typically is paid by the HMO a
fixed amount per member ("enrollee") per month ("professional capitation") or a
percentage of the premium per member per month ("percent of premium") paid by
employer groups and other purchasers of healthcare coverage to the HMOs. In
return, the Company, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, the Company and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), the Company, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services. In March 1996, the DOC issued the Restricted License to Pioneer
Network, in accordance with the requirements of the Knox-Keene Act which
authorizes Pioneer Network to operate as a healthcare service plan in the state
of California. The Company intends to utilize the Restricted License for a broad
range of healthcare services. See "-- Government Regulation".
The Company operates the largest HBP group in the country with over 2,200
physicians providing services at over 300 sites, primarily hospitals,
nationwide. The Company provides emergency medicine, radiology, anesthesiology,
primary care and other hospital-based physician services. The Company also
provides comprehensive medical services to inmates in various state and local
correctional institutions. As of March 31, 1997, the Company had contracts with
45 correctional institutions providing healthcare services to approximately
42,300 inmates at 65 sites. The Company provides physicians, nurses and clerical
support services for active duty and retired military personnel and their
dependents in emergency departments, ambulatory care centers and primary care
clinics operated by the Department of Defense. At March 31, 1997, the Company's
military medical services were provided under 15 contracts with the Department
of Defense.
42
<PAGE> 44
The Company manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses 44,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a national
network of retail pharmacies. The Company is in the process of integrating the
PBM program with the PPM business by providing pharmaceutical services to
affiliated physicians, clinics and HMOs. The Company's 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 comprising drug therapy, physician support
and patient education. The Company currently provides therapies and services for
individuals with such conditions as hemophilia, growth disorders, immune
deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
ACQUISITION PROGRAM
The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In connection with
pursuing its strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, the Company
utilizes sophisticated information systems to improve the operational efficiency
of, and reduce the costs associated with, operating the Company's network and
the practices of the affiliated physicians. The Company's principal methods of
expansion are acquisitions of PPM businesses and affiliations with physician and
medical groups.
In November 1995, MedPartners acquired MME in exchange for 13.5 million
shares of Common Stock having a total value of approximately $413 million. The
acquisition of MME was accounted for as a pooling-of-interests. MME was a
significant factor in the Southern California managed care market and provided
MedPartners with its first steps towards global capitations.
In February 1996, the Company acquired PPSI, a publicly traded PPM company
based in Redlands, California, in exchange for approximately 11.0 million shares
of Common Stock having a total value of approximately $342 million. The
acquisition of PPSI was accounted for as a pooling of interests. PPSI, through
its previously acquired subsidiary Team Health, established MedPartners in the
HBP and hospital contract management industry.
In September 1996, the Company acquired Caremark International Inc., a
publicly traded PPM and PBM company based in Northbrook, Illinois, in exchange
for approximately 90.5 million shares of Common Stock having a total value of
approximately $1.8 billion (the "Caremark Acquisition"), creating the largest
PPM company in the United States and providing MedPartners with its initial PBM
operations. The Caremark Acquisition was accounted for as a pooling of
interests.
In May 1997, the Company acquired the business assets and assumed the
liabilities of most of the operations of APMC, a PPM company and affiliate of
Aetna Inc. based in Glastonbury, Connecticut. For accounting purposes, this
acquisition is being treated as an asset purchase. As a part of this
acquisition, the Company entered into a 10-year nationwide master network
agreement with Aetna U.S. Healthcare, pursuant to which the members of the
Company's networks of affiliated physicians will be authorized providers for
many of the 14 million members of Aetna U.S. Healthcare's health plan.
In June 1997, the Company acquired InPhyNet, a publicly traded PPM company
based in Fort Lauderdale, Florida and specializing in HBP operations and
correctional care, in exchange for approximately 19.3 million shares of Common
Stock having a total value of approximately $413 million, creating the largest
HBP group in the United States. The acquisition of InPhyNet is being accounted
for as a pooling of interests.
43
<PAGE> 45
The Company's successful pursuit of new growth opportunities will depend on
many factors including, among others, the Company's ability to identify suitable
targets and to integrate its acquired practices and businesses. The Company's
efforts in this regard could be adversely affected by competition from other PPM
businesses and companies as well as hospital management companies, hospitals and
insurers who are also expanding into the PPM market. The Company's rapid
consolidation makes integration a significant challenge. The dedication of
management resources to integration may detract attention from the day-to-day
operations of the Company. There can be no assurance that the Company will be
able to continue its growth or successfully integrate its acquisitions. Such
failures could have a material adverse effect on the operating results and
financial condition of the Company.
The Company's major acquisitions since January 1995 have been structured as
poolings of interests. As a result, the Company's operating income has been
reduced by the related merger expenses resulting in a net loss for the year
ended December 31, 1996. Such merger expenses as well as integration costs may
result in future losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Through December 31, 1994, the Company had affiliated with 190 physicians
(without giving effect to physicians who became affiliated with the Company
pursuant to acquisitions that were accounted for as poolings of interests). The
Company is currently affiliated with approximately 12,460 physicians.
INDUSTRY
The Health Care Financing Administration ("HCFA") estimates that national
healthcare spending in 1995 was in excess of $1 trillion, with physicians
controlling more than 80 percent of the overall expenditures. The American
Medical Association reports that approximately 613,000 physicians are actively
involved in patient care in the United States, with a growing number
participating in multi-specialty or single-specialty groups. Expenditures
directly attributable to physicians are estimated at $246 billion.
Concerns over the cost of healthcare have resulted in the rapid growth of
managed care in the past several years. As markets evolve from traditional
fee-for-service medicine to managed care, HMOs and healthcare providers confront
market pressures to provide high quality healthcare in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and other matters
that are fundamental to consumer satisfaction. The increasing focus on
cost-containment has placed small to mid-sized physician groups and solo
practices at a disadvantage. They typically have higher operating costs and
little purchasing power with suppliers, they often lack the capital to purchase
new technologies that can improve quality and reduce costs and they do not have
the cost accounting and quality management systems necessary for entry into
sophisticated risk-sharing contracts with payors.
Industry experts expect that the healthcare delivery system may evolve to
the point where the primary care physician manages and directs healthcare
expenditures. Consequently, primary care physicians have increasingly become the
conduit for the delivery of medical care by acting as "case managers" and
directing referrals to certain specialists, hospitals, alternate-site facilities
and diagnostic facilities. By contracting directly with payors, organizations
such as the Company that control primary care physicians are able to reduce the
administrative overhead expenses incurred by HMOs and insurers and thereby
reduce the cost of delivering medical services.
As HMO enrollment and physician membership in group medical practices have
continued to increase, healthcare providers have sought to reorganize themselves
into healthcare delivery systems that are better suited to the managed care
environment. Physician groups and IPAs are joining with hospitals, pharmacies
and other institutional providers in various arrangements to create vertically
integrated delivery systems that provide medical and hospital services ranging
from community-based primary medical care to specialized inpatient services.
These healthcare delivery systems contract with HMOs to provide hospital and
medical services to enrollees pursuant to full risk contracts. Under these
contracts, providers assume the obligation to provide both the professional and
institutional components of covered healthcare services to the HMO enrollees.
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In order to compete effectively in this evolving environment, the Company
believes many physicians are concluding that they must obtain control over the
delivery and financial impact of a broader range of healthcare services through
global capitation. To this end, groups of independent physicians and medium to
large medical groups are taking steps to assume the responsibility and the risk
associated with healthcare services that they do not provide, such as
hospitalization and pharmacy services. Physicians are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations
such as the Company that offer skilled and innovative management, sophisticated
information systems and significant capital resources. Many payors and their
intermediaries, including governmental entities and HMOs, are also looking to
outside providers of physician and pharmacy services to develop and maintain
quality outcomes, management programs and patient care data. In addition, such
payors and their intermediaries look to share the risk of providing healthcare
services through capitation arrangements that fix payments for patient care at a
specified amount over a specified period of time. Medical groups and independent
physicians seem to be concluding that while the acceptance of greater
responsibility and risk affords the opportunity to retain and enhance market
share and to operate at a higher level of profitability, the acceptance of
global capitation carries with it significant requirements for enhanced
infrastructure, information systems, capital, network resources and financial
and medical management. As a result, physicians are turning to organizations
such as the Company to provide the resources necessary to function effectively
in a managed care environment.
STRATEGY
The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The key elements of this strategy are
as follows:
Expansion of Existing Markets. The Company's principal strategy for
expanding its existing markets is through the acquisition of, or
affiliation with, physicians and medical groups within those markets. The
Company seeks to acquire or otherwise affiliate with physician groups, IPAs
and other providers that have significant market share in their local
markets and have established reputations for providing quality medical
care. The Company also develops multi-specialty physician networks that are
designed to meet the specific medical needs of a targeted geographic
market. The Company seeks to further enhance its existing market share by
increasing enrollment and fee-for-service business and by moving to global
capitation where possible in its existing affiliated practices and IPAs.
The Company anticipates further internal growth by expanding more of its
payor contracts to global capitation through Pioneer Network and otherwise.
Moreover, the Company believes that increasing marketing activities,
enhancing patient service and improving the accessibility of care will also
increase the Company's market share.
Expansion into New Markets. The Company expands into new markets
through the acquisition of or affiliation with other PPM entities and
medical groups. The Company believes that the acquisition of MME was the
first major consolidation in the industry. That acquisition was followed by
the merger with PPSI, Caremark and, most recently, the acquisitions of
InPhyNet, Fischer Mangold and APMC. As a result of the consolidation of
physician practices and the entry of other PPM companies into the market,
the Company's management has determined that it is important for the
Company to continue its rate of expansion through acquisitions and mergers.
The Company believes that by concentrating on larger acquisitions and by
continuing to expand its core of physician groups and IPAs, as well as its
affiliations with hospitals, it will create vertically integrated
healthcare delivery systems that enhance its competitive position. The
Company continually reviews potential acquisitions and physician
affiliations and is currently in preliminary negotiations with various
candidates.
Movement to Global Capitation. The Company, which has been providing
healthcare services for capitated payments (through its predecessors) since
the mid-1970's, possesses significant experience and expertise in the
managed care business. The Company intends to leverage this experience and
the managed care systems developed in its western operations in all of its
markets as it continues to develop its comprehensive integrated healthcare
delivery system. The Company has capitated agreements with over 46 payors
and intends to pursue a strategy toward the implementation of global
capitation in all of its
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markets. This will be accomplished through the conversion of
fee-for-service arrangements to capitation, the conversion of professional
capitation to global capitation, where practicable, and the entry into new
capitation arrangements with payors. In this connection, the Company has a
national network agreement with Aetna, Inc. and is pursuing the
establishment of national and regional capitated provider agreements with
other payors. The Company has also embarked on a program called "best
clinical practices" pursuant to which it will help its affiliated physician
develop the most cost efficient protocols that provide the most favorable
patient outcomes and will make them available to all of its affiliated
practices.
Integration of PPM and PBM Services. The Company believes that there
is significant opportunity for growth through the integration of the PBM
program and the PPM business. The Company expects PBM activity to increase
as payors seek to shift the responsibility for pharmacy services to PPM
entities and physician groups, and those entities look to prescription
benefit managers to control pharmaceutical costs. The Company expects its
PBM program to grow as enrollees and fee-for-service patients use the
Company's mail-order and retail pharmacy networks. In addition, the Company
expects to expand its PBM contracts with managed care organizations to
provide capitated pharmaceutical services for its prepaid enrollees.
Strategic Alliances. The Company believes that strategic alliances
with hospitals and health plans improve the delivery of managed healthcare.
The Company has entered into arrangements with various hospitals under
which a portion of the capitation revenue received from HMOs for
institutional care of enrollees assigned to designated Company clinics and
IPA physicians is deposited into "subcapitated risk pools" managed by the
Company. The Company believes that such arrangements can be enhanced
through the implementation of the Restricted License held by Pioneer
Network. Under these arrangements, the hospital is at risk in the event
that the costs of institutional care exceed the available funds, and the
Company shares in cost savings and revenue enhancements. The Company
believes that through these and other similar alliances, providers will
devote greater resources to ensuring the wellness of HMO enrollees, to
enhancing high-quality and cost-effective care and to retaining and
expanding their respective market shares. As a result, it is anticipated
that the overall cost of delivering healthcare services will be contained,
rendering both the Company and the participating providers more appealing
to both HMOs and medical care consumers. The Company and its affiliated
physicians have also established relationships with HMOs pursuant to which
the Company and the HMOs share proportionately in the risks and rewards of
local market factors.
Sophisticated Information Systems. The Company believes that
information technology is critical to the growth of integrated healthcare
delivery systems and that the availability of detailed clinical data is
fundamental to quality control and cost containment. The Company develops
and maintains sophisticated management information systems that collect and
analyze clinical and administrative data. These systems allow the Company
to control overhead expenses, maximize reimbursement and provide
utilization management more effectively. The Company evaluates the
administrative and clinical functions of affiliated practices and
re-engineers these functions as appropriate in conjunction with the
implementation of the Company's management information systems to maximize
the benefits of those systems.
The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide an effective method for distributing and
administering drugs and drug therapies.
Increased Operational Efficiencies and Cost Reductions. The Company
is seeking to increase its operating efficiency through expansion of its
market area and number of HMO enrollees, increased specialization,
development of additional in-house services and increased emphasis on
outpatient care. The Company is also refining its utilization management
programs that deliver information used by participating physicians to
monitor and improve their practice patterns. The Company's physician
networks attempt to achieve economies of scale through centralizing
billing, scheduling, information management and other functions.
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OPERATIONS
Prior to the acquisition of MME in November 1995, the Company concentrated
its PPM development efforts in the southeastern United States, affiliating
primarily with physician groups that practiced on a fee-for-service basis. The
Company acquired additional business models specifically designed to operate
efficiently in the capitated environment with the acquisition of the MME, PPSI,
Caremark and InPhyNet organizations. These business models, which are replicable
and flexible, allow the Company to take advantage of the full range of market
opportunities in the PPM industry and enable the Company to build integrated
physician networks attractive to payors of all types. The Company currently has
networks under development in 34 states.
To meet payor demand for price competitive, quality services, the Company
utilizes a market-based approach that incorporates primary care and specialty
physicians into a network of providers serving a targeted geographic area. The
Company engages in research and market analysis to determine the best network
configuration for a particular market. Primary care includes family practice,
internal medicine, pediatrics and obstetrics/gynecology. Key specialties include
orthopedics, cardiology, oncology, radiology, neurosciences, urology, surgery,
ophthalmology and ear, nose and throat. At certain locations, affiliated
physicians and support personnel operate centers for diagnostic imaging, urgent
care, cancer management, mental health treatment and health education. Network
physicians also treat fee-for-service patients on a per-occurrence basis.
After-hours care is available in several of the Company's clinics. Each network
is configured to contain, when complete, the physician services necessary to
capture at least a ten percent market share and to provide at least 90 percent
of the physician services required by payors. The Company markets its networks
to managed care and third-party payors, referring physicians and hospitals.
Affiliated Physicians. The relationship between the Company and its
affiliated physicians is set forth in asset purchase and practice management
agreements. Through the asset purchase agreements, the Company acquires the
assets utilized in the practices and may also assume certain leases and other
contracts of the physician practices. Under the practice management agreements,
the Company provides administrative, management and support functions to
physician practices as necessary in connection with their respective medical
practices. The Company also provides its physician practices with the equipment
and facilities necessary for the medical practices, manages practice operations
and employs substantially all of the practices' non-physician personnel, except
certain allied health professionals, such as nurses and physical therapists.
The Company consolidates physician practices that have directly entered
into contracts with HMOs or that have the right to receive payment directly from
HMOs for the provision of medical services in the Company's clinics, because it
obtains a controlling financial interest solely by virtue of a long-term
practice management agreement with physician practices. The revenue earned by
these physician practices represented 32% of PPM revenue (19% of consolidated
revenue) during the first quarter of 1997. The balance of the Company's PPM
revenue (68%) is derived from contracts directly between the Company, or a
wholly owned subsidiary, and HMOs. Practice management agreements with physician
practices that hold HMO contracts or the right to receive payment directly from
HMOs provide three general types of financial arrangements regarding the
compensation of the physician-stockholders of those physician practices:
(i) Physician practices that contributed 9% of PPM revenues (5% of
consolidated revenue) during the first quarter of 1997 have practice
management agreements that provide the physician-stockholders a negotiated
fixed dollar amount. The physicians may be eligible to receive a
discretionary bonus based on performance criteria and goals. The amount of
any such bonus is determined solely by the Company's management and is not
directly correlated to clinic revenue or gross profit. To the extent the
clinic's net revenue increases or decreases under these practice management
agreements, physician compensation will also increase or decrease, pro
rata, based on the practices' compensation as a percentage of the clinic's
net revenue;
(ii) Physician practices that contributed 14% of PPM revenue (9% of
consolidated revenue) during the first quarter of 1997 have practice
management agreements that compensate the physician-stockholder on a
fee-for-service basis. The respective clinics generally earn revenue on a
fee-for-service basis, and physician compensation typically represents
between 40 and 70 percent of the clinic's net revenue; or
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(iii) Physician practices that contributed 9% of PPM revenue (5% of
consolidated revenue) during the first quarter of 1997 provided
physician-stockholders with a salary, plus bonus, and a profit-sharing
payment of a percentage of the clinic's net income (i.e., contractual
revenue less base physician compensation, bonus and clinic expenses).
Under these various types of agreements, revenue is assigned to the Company
by the physician practice. The Company is responsible for the billing and
collection of all revenue for services provided at its clinics, as well as for
paying all expenses, including physician compensation. The Company is not
reimbursed for the clinic expenses, rather it is responsible and at risk for all
such expenses. In effect the Company retains any residual from operations of its
physician practices (and funds any deficit). No earnings accumulate in its
physician practices or are available for the payment of dividends to the
physician-stockholders. In addition, the legal owners of its physician practices
do not have a substantive capital investment that is at risk and the Company has
substantially all of the capital at risk. Based on the terms of the practice
management agreement, in almost all cases, there is no economic value
attributable to the capital stock of those physician practices.
The Company's practice management agreements with its physician practices
are long-term and provide the Company with unilateral control over its physician
practices. The practice management agreements include the following provisions:
(i) the initial term is 20 to 40 years; (ii) renewal provisions call for
automatic and successive extension periods; (iii) the physician practices cannot
unilaterally terminate their agreements with the Company unless the Company
fails to cure a breach of its contractual responsibilities thereunder within 30
days after notification of such breach; (iv) the Company is obligated to
maintain a continuing investment of capital; (v) the Company employes the
non-physician personnel of its physician practices; and (vi) the Company assumes
full responsibility for the operating expenses of the physician practice in
return for an assignment of the physician practice's revenue.
The Company works closely with affiliated physicians in targeting and
recruiting additional physicians and in merging sole practices or single
specialty practices into the already-affiliated physician practices. The Company
seeks to recognize and develop opportunities to provide services throughout a
market by positioning its practices so that the entire market is covered
geographically. This approach provides patients with convenient medical
facilities and services and responds to coverage criteria that are essential to
payors.
IPAs. The Company's networks include approximately 6,900 primary care and
specialist IPA physicians serving approximately 357,000 HMO enrollees. An IPA
allows individual practitioners to access patients in their respective areas
through contracts with HMOs without having to join a group practice or sign
exclusive contracts. An IPA also coordinates utilization review and quality
assurance programs for its affiliated physicians. Additionally, an IPA offers
other benefits to physicians seeking to remain independent, including economies
of scale in the marketplace, enhanced risk-sharing arrangements and access to
other strategic alliances. The Company identifies IPAs that need access to
capitated HMO contracts, and such IPA organizations typically agree to assign
their existing HMO contracts to the Company. The Company believes that the
expansion of its IPAs will enable it to increase its market share with
relatively low risk due to the low incremental investment required to recruit
additional physicians.
HMOs. The Company, through its affiliated physicians, began contracting
with HMOs to provide healthcare on a capitated reimbursement basis in 1975
(through predecessors). Under these contracts, which typically are automatically
renewed on an annual basis, the Company provides virtually all covered medical
services and receives a fixed monthly capitation payment from HMOs for each
member who chooses an affiliated physician as his or her primary care physician.
The capitation amount may be fixed, based upon a percentage of premium, or
adjustable based on the age and/or sex of the HMO enrollee. Contracts for
prepaid healthcare with HMOs accounted for approximately 30% of the Company's
net revenue for the quarter ended March 31, 1997.
To the extent that enrollees require more care than is anticipated or
require supplemental medical care that is not otherwise reimbursed by HMOs or
other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained, which mitigates the effect of occasional high utilization of
healthcare services. As of March 31, 1997, approximately 1.8 million prepaid HMO
enrollees were covered beneficiaries for services in the Company's networks.
These
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patients are covered under either commercial (typically employer-sponsored) or
senior (Medicare-funded) HMOs. Higher capitation rates are typically received
for senior patients because their medical needs are generally greater.
Consequently, the cost of their covered care is higher. As of March 31, 1997,
the Company's HMO enrollees comprised approximately 1.5 million commercial
enrollees and approximately 125,000 senior (over age 65) enrollees and
approximately 165,000 Medicaid and other enrollees. As of March 31, 1997, the
Company was receiving institutional capitation payments for approximately
660,000 enrollees. The Company is largely dependent on continued growth in the
number of HMO enrollees. This growth may come from the acquisition of other PPM
entities, affiliation with additional physicians or increased enrollment in
HMO's currently contracting with the Company. There can be no assurance that the
Company will be successful in continuing the growth of HMO enrollees.
Hospitals. The Company operates Pioneer Hospital ("Pioneer Hospital"), a
99-bed acute care hospital located in Artesia, California, U.S. Family Care
Medical Center ("USFMC"), a 102-bed acute care hospital in Montclair,
California, and Friendly Hills Hospital ("Friendly Hills"), a 274-bed acute care
hospital in La Habra, California. Many of the physicians on the professional
staff rosters of these hospitals are either employed by an affiliated
professional corporation or are under contract with the Company's IPAs. Other
physicians that are traditionally hospital-based, such as emergency room
physicians, anesthesiologists, pathologists, radiologists and cardiologists
provide services through contractual arrangements with the Company. Several of
the Company's medical clinics are located sufficiently close to hospitals where
these physicians are based to allow enrollees who use the clinics to also use
those hospitals. Under the HMO contracts, the Company, through its affiliated
medical practices or Knox-Keene licensee, is obligated to pay for inpatient
hospitalization and related services. Over 50 percent of Pioneer Hospital's,
approximately 85 percent of USFMC's and approximately 87 percent of Friendly
Hills' daily censuses are made up of the Company's affiliated medical group
enrollees. In April 1997, the Company and Tenet signed a letter of intent
pursuant to which the parties intend to form a complete healthcare contracting
network in southern California. Under the terms of the proposed agreement, Tenet
will acquire Pioneer Hospital. The Company, through its Knox-Keene licensee or
affiliated medical groups, has entered into agreements with other hospitals in
California for the delivery of hospital services to the remainder of its
enrollees. In each instance, the institutional capitation payments received from
HMOs are placed at risk for the benefit of the applicable hospital, the Company
and its affiliated physicians, to the extent such services have not reached a
stop-loss threshold. The Company and these providers split any savings realized
if hospital utilization declines due to the success of the Company's programs
for early intervention, wellness and outpatient treatment.
Hospital-Based Physician Operations. The Company's HBP operations organize
and manage physicians and other healthcare professionals engaged in the delivery
of emergency, radiology and teleradiology services, other hospital-based
services and temporary staffing and support services to hospitals, clinics,
managed care organizations and physician groups. Team Health currently provides
services at over 300 sites including hospital emergency and radiology
departments in 28 states. Under contracts with hospitals and other clients, the
Company's HBP operations identify and recruit physicians and other healthcare
professionals for admission to a client's medical staff, monitor the quality of
care and proper utilization of services and coordinate the ongoing scheduling of
staff physicians who provide clinical coverage in designated areas of care.
Hospitals have found it increasingly difficult to recruit, schedule, retain and
appropriately compensate hospital-based physician specialists required to
operate hospital emergency, radiology and other departments. As a consequence, a
large number of hospitals have turned to contract management firms, such as Team
Health, as a more cost-effective and reliable alternative to the development of
in-house physician staffing.
Correctional Care. The Company provides comprehensive medical services,
including mental health and dental services, to inmates in various state and
local correctional institutions. The Company provides primary care physician
services directly and typically subcontracts other services with hospitals and
medical specialists on either a capitated or discounted fee-for-service basis.
At March 31, 1997, the Company had contracts with 45 correctional institutions
and managed the healthcare services provided to approximately 42,300 inmates at
65 sites. Under correctional care contracts, the Company is paid monthly on the
basis of each correctional institution's average daily inmate population.
Typically, the Company is also entitled to additional reimbursement for any
healthcare related expenditures incurred above a certain dollar amount of
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outside medical expenses per inmate per year, as well as reimbursement for the
cost of treating inmates in connection with certain extraordinary events.
Department of Defense. The Company provides physicians, nurse and clerical
support services for active duty and retired military personnel and their
dependents in emergency departments, ambulatory care centers and primary care
clinics operated by the Department of Defense. Under Department of Defense
contracts, the Company is generally paid a fixed amount, per patient visit or
per hour of service, without regard to the scope of professional services
provided. Under per patient fixed fee arrangements, the Company assumes the risk
if patient volume is below expectations. At March 31, 1997, the Company's
military medical services were provided under 15 contracts with the Department
of Defense.
Pharmaceutical Services. The Company manages outpatient PBM programs
throughout the United States for corporations, insurance companies, unions,
government employee groups and managed care organizations. Prescription drug
benefit management involves the design and administration of programs for
reducing the costs and improving the safety, effectiveness and convenience of
prescription drugs. The Company has one of the nation's largest independent PBM
programs, dispensing 44,000 prescriptions daily from four mail service
pharmacies. The Company also manages patients' immediate prescription needs
through a national network of retail pharmacies. Under the Company's PBM quality
assurance program, the Company maintains rigorous quality assurance and
regulatory policies and procedures. A computerized order processing system
reviews each prescription order for a variety of potential concerns, including
reactions with other drugs known to be prescribed to that patient, reactions
with a patient's known allergies, duplication of therapies, appropriateness of
dosage and early refill requests that may indicate overutilization or fraud.
Each prescription is verified by a licensed pharmacist before shipment. The
Company has retained the services of an independent national advisory panel of
physician specialists that advises it on the clinical analyses of its
intervention strategies and on cost-effective clinical procedures. The Company
offers a full range of drug cost and clinical management services, including
clinical case management, drug utilization review, formulary management and
customized prescription programs for senior citizens. The pharmacy business is
subject to heavy government regulation. Any failure to satisfy pharmacy
licensing requirements could have a material adverse effect on the operating
results and financial condition of the Company.
Disease Management. The Company delivers comprehensive long-term support
for high-cost, chronic illnesses in an effort to improve outcomes for patients
and to lower costs. The Company believes that these programs efficiently provide
for a patient's entire healthcare needs. The programs utilize advanced protocols
and eliminate unnecessary procedural steps. The Company provides therapies and
services to individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
The Company estimates that there are over 200,000 patients in the United States
suffering from these diseases. The Company's disease management services utilize
the Company's integrated health data to develop therapies to manage the high
cost of treating these patients.
International. The Company also has operations in several European
countries, Canada and Japan.
INFORMATION SYSTEMS
The Company develops and maintains integrated information systems to
support its growth and acquisition plans. The Company's overall information
systems design is open, modular and flexible. The Company is implementing a
flexible individual patient electronic medical record ("EMR") that is
continually updated to complement primary practice management and billing
functions. The Company has configured its systems to give affiliated physicians
and their staff efficient and rapid access to complex clinical data. The
Company's use of the EMR enhances operational efficiencies through automation of
many routine clinical functions, as well as the capacity to link
"physician-specific" treatment protocols by diagnosis. This allows physicians to
have treatments checked against pre-defined protocols at the time of service.
The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide a safe and effective method for distributing and
administering drugs and drug therapies.
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Effective and efficient access to key clinical patient and pharmaceutical
data is critical in obtaining quality outcomes and improving costs as the
Company enters into more capitation contracts. The Company utilizes its existing
information systems to measure patient care satisfaction and outcomes of care,
improve productivity, manage complex reimbursement procedures and integrate
information from multiple facilities throughout the care spectrum. These systems
allow the Company to analyze clinical and cost data to determine thresholds of
profitability under various capitation arrangements.
COMPETITION
The PPM industry is highly competitive and is subject to continuing changes
in the provision of services and the selection and compensation of providers.
The Company competes for acquisition, affiliation and other expansion
opportunities with national, regional and local PPM companies and other PPM
entities including HBP groups and hospital contract management companies. In
addition, certain companies, including hospitals and insurers, are expanding
their presence in the PPM market. The Company also competes with prescription
drug benefit programs, prescription drug claims processors, regional claims
processors, providers of disease management services and insurance companies.
GOVERNMENT REGULATION
General. As a participant in the healthcare industry, the Company's
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state and local levels. The
Company believes its operations are in material compliance with applicable laws.
Nevertheless, because the structure of the relationship with the physician
groups is unique, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation. Thus, there can
be no assurance that a review of the Company's or the affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or of
its affiliated physicians. Nor can there be any assurance that the healthcare
regulatory environment will not change so as to restrict the Company's or the
affiliated physicians' existing operations or their expansion. Any significant
restriction could have a material adverse effect on the operating results and
financial condition of the Company.
Federal Reimbursement, Fraud and Abuse and Referral Laws. Approximately 13
percent of the revenues of the Company's affiliated physician practices are
derived from payments made by government-sponsored healthcare programs
(principally, medicare and state reimbursement programs). As a result, the
Company is subject to the laws and regulations that govern reimbursement under
Medicare and Medicaid. Any change in reimbursement regulations, policies,
practices, interpretations or statutes could adversely affect the operations of
the Company. There are also state and federal civil and criminal statutes
imposing substantial penalties (including civil penalties and criminal fines and
imprisonment) on healthcare providers that fraudulently or wrongfully bill
governmental or other third-party payors for healthcare services. The Company
believes it is in material compliance with such laws, but there can be no
assurance that the Company's activities will not be challenged or scrutinized by
governmental authorities or that any such challenge or scrutiny would not have a
material adverse effect on the operating results and financial condition of the
Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss
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of reimbursement for the Company, up to a maximum of the approximately 13
percent of the revenues of the Company's affiliated physician groups, which
could have a material adverse effect on the operating results and financial
condition of the Company. Although the Company believes that it is not in
violation of the Anti-Kickback Statute or similar state statutes, its operations
do not fit within any of the existing or proposed federal safe harbors.
Federal law prohibits, with some exceptions, an entity from filing a claim
for reimbursement under the Medicare or Medicaid programs for certain designated
services if the entity has a financial relationship with the referring
physician. Federal law (the "Medicare Referral Payments Law") also prohibits the
solicitation or receipt of remuneration in exchange for, or the offer or payment
of remuneration to induce, the referral of Medicare or Medicaid beneficiaries.
Significant prohibitions against physician referrals were enacted by the United
States Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to
certain exemptions, a physician is prohibited from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest or with which the
physician has entered into a compensation arrangement. The provisions of the
Anti-Kickback Statute and the Medicare Referral Payments Law are complex, and
the future interpretations of these provisions and their applicability to the
Company's operations cannot be predicted or analyzed in such a way as to predict
with certainty the effect of such rules and regulations on the Company. Although
the Company seeks to arrange its business relationships to comply with these
healthcare rules and regulations, its operations do not fit within any of the
existing or published proposed federal safe harbors. As a result, there can be
no assurance that the Company's present or future operations will not be
challenged under such provisions. The Company does not believe it is in
violation of the Anti-Kickback Statute of the Medicare Referral Payment law and
associated regulations because the revenues which are assigned to the Company
pursuant to the management agreements between the Company and its affiliated
physician practices represent payments made by the HMO to satisfy claims
submitted through the Company on behalf of the affiliated physician for the
furnishing of healthcare services by the physician to an individual. The monies
retained by the Company do not exceed the aggregate amount due the Company for
the reasonable and necessary physician practice management services provided by
the Company pursuant to the management agreement between the Company and the
affiliated physician or physician practice, i.e., transfer agreement or
management services agreement. The Company believes that such payments do not
fall within the scope or the intent of such rules and regulations. Further, the
Company does not believe it is in violation of the Anti-Kickback Statute and the
Medicare Referral Payment Law because the Company does not refer, or influence
the referral of, patients or services reimbursed under governmental programs to
the physician practices. While the Company believes it is in compliance with
such legislation, future regulations and interpretations of existing regulations
could require the Company to modify the form of its relationship with physician
groups which could have a material adverse effect on the operating results and
financial condition of the Company.
The OIG of the DHHS has promulgated regulatory "safe harbors" under the
Medicare Referral Payments Law that describe payment practices between
healthcare providers and referral sources that will not be subject to criminal
prosecution and that will not provide the basis for exclusion from the Medicare
and Medicaid programs. The Company retains healthcare professionals to provide
advice and non-medical services to the Company in return for compensation
pursuant to employment, consulting or service contracts. The Company also enters
into contracts with hospitals under which the Company provides products and
administrative services for a fee. Many of the parties with whom the Company
contracts refer or are in a position to refer patients to the Company. The
breadth of these federal laws, the paucity of court decisions interpreting these
laws, the limited nature of regulatory interpretations and the absence of court
decisions interpreting the safe harbor regulations have resulted in ambiguous
and varying interpretations of these federal laws and regulations. The OIG or
the DOJ could seek a determination that the Company's past or current policies
and practices regarding contracts and relationships with healthcare providers
violate federal law. In such event, no assurance can be given that the Company's
interpretation of these laws will prevail, except with respect to those matters
that were the subject of the OIG investigation. See "-- Legal Proceedings". The
failure of the Company's interpretation of these laws to prevail could
materially adversely affect the operating results and financial condition of the
Company.
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Caremark agreed, in its settlement agreement with the OIG and DOJ prior to
the Caremark Acquisition, to continue to enforce certain compliance-related
oversight procedures. Should the oversight procedures reveal violations of
federal law, Caremark would be required to report such violations to the OIG and
DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the
event that Caremark commits legal or regulatory violations, it may be subject to
an increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services which could have a material adverse
effect on the operating results and financial condition of the Company.
State Referral Payment Laws. The Company is also subject to state statutes
and regulations that prohibit payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. State statutes and regulations generally apply to services
reimbursed by both governmental and private payors. Violations of these laws may
result in prohibition of payment for services rendered, loss of pharmacy or
health provider licenses as well as fines and criminal penalties. State statutes
and regulations that may affect the referral of patients to healthcare providers
range from statutes and regulations that are substantially the same as the
federal laws and the safe harbor regulations to a simple requirement that
physicians or other healthcare professionals disclose to patients any financial
relationship the physicians or healthcare professionals have with a healthcare
provider that is being recommended to the patients. These laws and regulations
vary significantly from state to state, are often vague, and, in many cases,
have not been interpreted by courts or regulatory agencies. Management believes
the Company's operations are in material compliance with existing law, but there
can be no assurance that the Company's existing business arrangements will not
be successfully challenged in one or more states. The Company is not materially
dependent upon revenues derived from any single state. Adverse judicial or
administrative interpretations of such laws in several states, taken together,
could, however, have a material adverse effect on the operating results and
financial condition of the Company. In addition, expansion of the Company's
operations to new jurisdictions could require structural and organizational
modifications of the Company's relationships with physician groups in order to
comply with new or revised state statutes. Such structural and organizational
modifications could have a material adverse effect on the operating results and
financial condition of the Company.
Corporate Practice of Medicine Laws. The laws of many states prohibit
physicians from splitting fees with non-physicians and prohibit non-physician
entities from practicing medicine. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. The Company believes that it has perpetual and unilateral
control over the assets and operations of the various affiliated professional
corporations. However, there can be no assurance that regulatory authorities
will not take the position that such control conflicts with state laws regarding
the practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.
Antitrust Laws. In connection with the corporate practice of medicine laws
referred to above, the physician practices with which the Company is affiliated
necessarily are organized as separate legal entities. As such, the physician
practice entities may be deemed to be persons separate both from the Company and
from each other under the antitrust laws and, accordingly, subject to a wide
range of laws that prohibit anticompetitive conduct among separate legal
entities. The Company believes it is in compliance with these laws and intends
to comply with any state and federal laws that may affect its development of
integrated
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healthcare delivery networks. There can be no assurance, however, that a review
of the Company's business by courts or regulatory authorities would not
adversely affect the operations of the Company and its affiliated physician
groups.
Insurance Laws. The assumption of risk on a prepaid basis by health
provider networks is occurring with increasing frequency, and the practice is
being reviewed by various state insurance commissioners as well as the NAIC to
determine whether the practice constitutes the business of insurance. The
Company believes that it is currently in material compliance with the insurance
laws in the states where it is operating, and it intends to comply with
interpretative and legislative changes as they may develop. There can be no
assurance, however, that the Company's activities will not be challenged or
scrutinized by governmental authorities or that future interpretations of the
insurance laws by such governmental authorities will not require licensure or
restructuring of some or all of the Company's operations in any such state. In
the event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
operating results and financial condition while the licensure process is
pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which the Company may not be able to meet.
Further, once licensed, the Company would be subject to continuing oversight by
and reporting to the respective regulatory agency.
The NAIC recently adopted the Managed Care Plan Network Adequacy Model Act
(the "Model Act") which is intended to establish standards for the creation and
maintenance of networks by health carriers. The Model Act is also intended to
establish requirements for written agreements between health carriers offering
managed care plans, participating providers and intermediaries, like the
Company, which negotiate provider contracts. An NAIC model insurance act does
not carry the force of law unless it is adopted by applicable state
legislatures. The Company does not know which states, if any, will adopt the
Model Act. There can be no assurance that the Company will be able to comply
with the Model Act if it is adopted in any state in which the Company does
business.
Other State and Local Regulation. In March 1996, the DOC issued the
Restricted License to Pioneer Network in accordance with the requirements of the
Knox-Keene Act. The Restricted License authorizes Pioneer Network to operate as
a healthcare service plan in the State of California. The Company, through
Pioneer Network, utilizes the Restricted License to contract with HMOs for a
broad range of healthcare services, including both institutional and
professional medical services. The Knox-Keene Act and the regulations
promulgated thereunder subject entities that are licensed as healthcare service
plans in California to substantial regulation by the DOC. In addition, licensees
under the Knox-Keene Act must file periodic financial data and other information
(that generally become available to the public), maintain substantial tangible
net equity on their balance sheets and maintain adequate levels of medical,
financial and operational personnel dedicated to fulfilling the licensee's
statutory and regulatory requirements. The DOC is empowered to take enforcement
actions against licensees that fail to comply with such requirements.
The operation of Pioneer Hospital, USFMC and Friendly Hills is highly
regulated, and each is accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Accreditation from the Joint Commission on
Accreditation of Healthcare Organizations allows Pioneer Hospital to serve
Medicare patients and provides authorization from the California Department of
Health Services and the Los Angeles County Department of Health to operate as a
licensed hospital facility. Each of Pioneer Hospital, USFMC and Friendly Hills
is licensed and regulated as a general acute care hospital by the State of
California Department of Health Services. Additionally, each of Pioneer
Hospital, USFMC and Friendly Hills has a clinical laboratory license from the
State of California Department of Health Services, a clinical laboratory license
for its cardio-pulmonary laboratory and a pharmacy license for its inpatient
pharmacy.
Pharmacy Licensing and Operation. The Company is subject to federal and
state laws and regulations governing pharmacies. Federal controlled substance
laws require the Company to register its pharmacies with the United States Drug
Enforcement Administration and comply with security, record-keeping, inventory
control and labeling standards in order to dispense controlled substances. State
controlled substance laws require registration and compliance with the
licensing, registration or permit standards of the state pharmacy
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licensing authority. State pharmacy licensing, registration and permit laws
impose standards on the qualifications of an applicant's personnel, the adequacy
of its prescription fulfillment and inventory control practices and the adequacy
of its facilities. In general, pharmacy licenses are renewed annually.
Pharmacists employed by each branch must also satisfy state licensing
requirements.
Several states have enacted legislation that requires mail service
pharmacies located outside such state to register with the state board of
pharmacy prior to mailing drugs into the state and to meet certain operating and
disclosure requirements. These statutes generally permit a mail service pharmacy
to operate in accordance with the laws of the state in which it is located. In
addition, various pharmacy associations and state boards of pharmacy have
promoted enactment of laws and regulations directed at restricting or
prohibiting the operation of out-of-state mail service pharmacies by, among
other things, requiring compliance with all laws of certain states into which
the mail service pharmacy dispenses medications whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent that such laws or regulations are found to be applicable to the Company's
operations, the Company would be required to comply with them. Some states have
enacted laws and regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to plan sponsors that offer
mail service prescription programs. The United States Department of Labor has
commented that such laws and regulations are pre-empted by the Employee
Retirement Income Security Act of 1974, as amended. The Attorney General in one
state has reached a similar conclusion and has raised additional constitutional
issues. Finally, the Bureau of Competition of the Federal Trade Commission
("FTC") has concluded that such laws and regulations may be anticompetitive and
not in the best interests of consumers. To date, there have been no formal
administrative or judicial efforts to enforce any of such laws against the
Company. To the extent that any of the foregoing laws or regulations prohibit or
restrict the operation of mail service pharmacies and are found to be applicable
to the Company, they could have an adverse effect on the Company's prescription
mail service operations. United States Postal Service regulations expressly
permit the transmission of prescription drugs through the postal system. The
United States Postal Service has authority to restrict such transmission.
The PBM and disease management services of the Company are subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances, reimbursement
under federal and state medical assistance programs, financial relationships
between healthcare providers and potential referral sources, medical waste
disposal, risk sharing by non-insurance companies and workplace health and
safety. The Company's operations may also be affected by changes in ethical
guidelines and changes in operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association, the National Committee for Quality Assurance and the Joint
Commission on Accreditation of Healthcare Organizations.
Future Legislation, Regulation and Interpretation. As a result of the
continued escalation of healthcare costs and the inability of many individuals
to obtain health insurance, numerous proposals have been or may be introduced in
the United States Congress and state legislatures relating to healthcare reform.
There can be no assurance as to the ultimate content, timing or effect of any
healthcare reform legislation, nor it is possible at this time to estimate the
impact of potential legislation, which may be material, on the Company. Further,
although the Company exercises care in structuring its arrangements with
physicians to comply in all material respects with the above-referenced laws,
there can be no assurance that (i) government officials charged with
responsibility for enforcing such laws will not assert that the Company or
certain transactions in which the Company is involved are in violation thereof
and (ii) such laws will ultimately be interpreted by the courts in a manner
consistent with the Company's interpretation.
EMPLOYEES
As of March 31, 1997, the Company, including its affiliated professional
entities, employed approximately 24,000 people on a full-time equivalent basis.
CORPORATE LIABILITY AND INSURANCE
The Company's business entails an inherent risk of claims of physician
professional liability. In recent years participants in the healthcare industry
have become increasingly subject to large claims based on
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theories of medical malpractice that entail substantial defense costs. Through
the ownership and operation of Pioneer Hospital, USFMC and Friendly Hills, all
acute care hospitals, the Company could also be subject to allegations of
negligence and wrongful acts. To protect its overall operations from such
potential liabilities, the Company has a multi-tiered corporate structure and
preserves the operational integrity of each of its operating subsidiaries. In
addition, the Company maintains professional liability insurance, general
liability and other customary insurance on a claims-made and modified occurrence
basis, in amounts deemed appropriate by management based upon historical claims
and the nature and risks of the business, for many of the affiliated physicians,
practices and operations. There can be no assurance that a future claim will not
exceed the limits of available insurance coverage or that such coverage will
continue to be available.
Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability and workers'
compensation insurance coverage. Such insurance may provide additional coverage,
subject to policy limits, in the event the Company were held liable as a
co-defendant in a lawsuit for professional malpractice against a physician. In
addition, generally, the Company is indemnified under the practice management
agreements by the affiliated physician groups for liabilities resulting from the
performance of medical services. However, there can be no assurance that any
future claim or claims will not exceed the limits of these available insurance
coverages or that indemnification will be available for all such claims.
PROPERTIES
The Company's corporate headquarters is located at 3000 Galleria Tower in
Birmingham, Alabama. Additionally, the Company has corporate offices in Long
Beach, California, Knoxville, Tennessee, Fort Lauderdale, Florida and
Northbrook, Illinois. The Company currently owns or leases facilities providing
medical services in 34 states, Puerto Rico and five other countries. The Company
also leases, subleases or occupies, pursuant to certain acquisition agreements,
the clinic facilities of the affiliated physician groups. The Company
anticipates that as the affiliated practices continue to grow and add new
services, expanded corporate facilities will be required.
LEGAL PROCEEDINGS
The Company is named as a defendant in various legal actions arising
primarily out of services rendered by physicians and others employed by its
affiliated physician entities and Pioneer Hospital, USFMC and Friendly Hills, as
well as personal injury and employment disputes. In addition, certain of its
affiliated medical groups are named as defendants in numerous actions alleging
medical negligence on the part of their physicians. In certain of these actions,
the Company's and the medical group's insurance carrier has either declined to
provide coverage or has provided a defense subject to a reservation of rights.
Management does not view any of these actions as likely to result in an
uninsured award which would have a material adverse effect on the operating
results and financial condition of the Company.
In June 1995, Caremark agreed to settle an investigation with the DOJ, OIG,
the Veterans Administration, the Federal Employee Health Benefits Program
("FEHBA"), the Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") and related state investigative agencies in all 50 states and the
District of Columbia (the "OIG Settlement"). Under the terms of the OIG
Settlement, which covered allegations dating back to 1986, a subsidiary of
Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and
Ohio. The basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS and FEHBP, federally funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. The OIG Settlement allows Caremark to continue participating
in Medicare, Medicaid and other government healthcare programs. Under the OIG
Settlement, Caremark agreed to make civil payments of $85.3 million to the
federal government in installments and $44.6 million to the states. The plea
agreement imposed $29.0 million in federal criminal fines. In addition, Caremark
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. Caremark took an after-tax
charge of $154.8 million in 1995 for these settlement payments, costs to defend
ongoing derivative, security and other lawsuits, and other related costs. This
charge has been reflected in Caremark's discontinued operations and will not
materially affect the Company's ability to pursue its long-term business
strategy. There can be no assurance,
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however, that the ultimate costs related to the OIG Settlement will not exceed
these estimates or that additional costs, claims and damages will not occur, or
if they occur, will not have a material adverse effect on the operating results
and financial condition of the Company.
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.
In March 1996, Caremark agreed to settle all disputes with a number of
private payors. These disputes relate to businesses that were covered by the OIG
Settlement. The settlements resulted in an after-tax charge of approximately
$43.8 million. In addition, Caremark paid $24.1 million after tax to cover the
private payors' pre-settlement and settlement-related expenses. An after-tax
charge for the above amounts was recorded in first quarter 1996 discontinued
operations.
In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs or liabilities may be incurred in connection with future
disposition of non-governmental claims or litigation. Such additional costs or
liabilities, if incurred, could have a material adverse effect on the operating
results and financial condition of the Company.
In August and September 1994, stockholders of Caremark, each purporting to
represent a class, filed complaints against Caremark and certain officers and
employees of Caremark in the United States District Court for the Northern
District of Illinois, alleging violations of the Securities Act and the Exchange
Act and fraud and negligence and various state law claims in connection with
public disclosures by Caremark regarding Caremark's business practices and the
status of the OIG investigation. The complaints seek unspecified damages,
declaratory and equitable relief, and attorneys fees and expenses. In June 1996,
the complaint filed by one group of stockholders alleging violations of the
Exchange Act only, was certified as a class. The parties continue to engage in
discovery proceedings. The Company intends to defend these cases vigorously.
Although management believes, based on information currently available, that the
ultimate resolution of this matter is not likely to have a material adverse
effect on the operating results and financial condition of the Company, there
can be no assurance that the ultimate resolution of this matter, if adversely
determined, would not have a material adverse effect on the operating results
and financial condition of the Company.
In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys fees and expenses. In July 1996, these plaintiffs also
served a separate lawsuit in the Minnesota State Court in the County of Hennepin
against a subsidiary of Caremark purporting to be on behalf of a class and
alleging all of the claims contained in the complaint filed with the Minnesota
federal court other than the federal claims contained therein. The state
complaint seeks unspecified damages, attorneys' fees and expenses and an award
of punitive damages. In November 1996, in response to a motion by the
plaintiffs, the Court dismissed the United States District Court cases without
prejudice. On March 27, 1996, the Minnesota state court lawsuit was dismissed
with prejudice. In July 1995, another patient of this same physician filed a
separate complaint in the District Court of South Dakota against the physician,
Caremark and another
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corporation alleging violations of the federal laws prohibiting payment of
remuneration to induce referral of Medicare and Medicaid beneficiaries, and the
federal mail fraud and conspiracy statutes. The complaint also alleges the
intentional infliction of emotional distress and seeks trebling of at least
$15.9 million in general damages, attorneys fees and costs, and an award of
punitive damages. In August 1995, the parties to the case filed in South Dakota
agreed to a stay of all proceedings until final judgment has been entered in a
criminal case that is presently pending against this physician. The Company
intends to defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.
In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, a subsidiary of Caremark,
and two other corporations in the United States District Court for the District
of Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practices statute. The complaint seeks
unspecified treble damages and attorneys' fees and expenses. The Company intends
to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.
In September 1995, Coram filed a complaint in the San Francisco Superior
Court against Caremark, its subsidiary, Caremark Inc., and others. The
complaint, which arose from Caremark's sale to Coram of Caremark's home infusion
therapy business in April 1995, for approximately $209.0 million in cash and
$100.0 million in securities, alleged breach of the sale agreement and made
other related claims seeking compensatory damages, in the aggregate, of $5.2
billion. Caremark filed counterclaims against Coram and also filed a lawsuit in
the U.S. District Court in Chicago against Coram claiming securities fraud. On
July 1, 1997, the parties to the Coram litigation announced that a settlement
had been reached pursuant to which Caremark will return for cancellation all of
the securities issued by Coram in connection with the acquisition and will pay
to Coram $45 million in cash on or before September 1, 1997. The settlement
agreement also provides for the termination and resolution of all disputes and
issues between the parties and for the exchange of mutual releases. The
settlement will result in a second quarter after-tax charge from discontinued
operations of approximately $75 million. See "Business -- Legal Proceedings".
Beginning in September 1994, Caremark was named as a defendant in a series
of lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The lawsuits, filed in federal district
courts in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers in violation of the Robinson-Patman Act. Each complaint seeks
unspecified treble damages, declaratory and equitable relief and attorneys fees
and expenses. All of these actions have been transferred by the Judicial Panel
for Multidistrict Litigation to the United States District Court for the
Northern District of Illinois for coordinated pretrial procedures. Caremark was
not named in the class action. In April 1995, the Court entered a stay of
pretrial proceedings as to certain Robinson-Patman Act claims in this
litigation, including the Robinson-Patman Act claims brought against Caremark,
pending the conclusion of a first trial of certain of such claims brought by a
limited number of plaintiffs against five defendants not including Caremark. On
July 1, 1996, the district court directed entry of a partial final order in the
class action approving an amended settlement with certain of pharmaceutical
manufacturers. The amended settlement provides for a cash payment by the
defendants in that action of approximately $351.0 million to class members in
settlement of conspiracy claims
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as well as a commitment from the settling manufacturers to abide by certain
injunctive provisions. All class action claims against non-settling
manufacturers as well as all opt out and other claims generally, including all
Robinson-Patman Act claims against Caremark, remain unaffected by the
settlement. The district court also certified to the court of appeals for
interlocutory review certain orders relating to non-settled conspiracy claims
against the pharmaceutical manufacturers and wholesalers. These interlocutory
orders do not relate to any of the claims brought against Caremark. The Company
intends to defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.
In December 1994, Caremark was notified by the FTC that it was conducting a
civil investigation of the PBM industry concerning whether acquisitions,
alliances, agreements or activities between prescription benefit managers and
pharmaceutical manufacturers, including Caremark's alliance agreements with
certain drug manufacturers, violate Sections 3 or 7 of the Clayton Act or
Section 5 of the Federal Trade Commission Act. The specific nature, scope,
timing and outcome of the investigation are not currently determinable. Under
the statutes, if violations are found, the FTC could seek remedies in the form
of injunctive relief to set aside or modify Caremark's alliance agreements and
an order to cease and desist from certain marketing practices and from entering
into or continuing with certain types of agreements. Although management
believes, based on information currently available, that the ultimate resolution
of this matter is not likely to have a material adverse effect on the operating
results and financial condition of the Company, there can be no assurance that
the ultimate resolution of this matter, if adversely determined, would not have
a material adverse effect on the operating results and financial condition of
the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
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, 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
Richard J. Kramer........................... 54 Director
C.A. Lance Piccolo(2)....................... 56 Director
Roger L. Headrick(1)........................ 60 Director
Harry M. Jansen Kraemer, Jr................. 42 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Larry R. House has been Chief Executive Officer of the Company 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 the Company
since June 1997. From January 1996 until June 1997, Mr. Wagar was
President -- Western Operations of the Company. 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 enrollees in California, Oregon and Washington, from
January 1993 through February 1994, was a Vice
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President of CIGNA HealthCare of California, an HMO. From November 1989 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 the
Company 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 the Company since November 1994. Mr. Knight was Senior Vice President
of Finance and Treasurer of the Company from August 1993 to November 1994, and
from March 1993 to August 1993, Mr. Knight served as Vice President of Finance
of the Company. 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 the Company in
June 1997 and has been Executive Vice President of the Company 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
the Company since September 1996. Prior to joining the Company, 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 which 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
the Company 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 1995, 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 the Company 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 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.
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Charles C. Clark has been Senior Vice President and Chief Tax Officer of
the Company 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
the Company 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 the
Company 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 the Company's 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 the Company's 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 the Company's 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 founder and
Chairman of the Mid-Atlantic Venture Association, which was organized in 1988.
Ted H. McCourtney has been a member of the Company's 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 the Company's
Board of Directors since November 1995. Dr. Mullikin was 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 Health Net, a publicly traded HMO, and was
one of the founders and a past chairman of the Unified Medical Group
Association.
John S. McDonald, J.D. has been a member of the Company's 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 Unified Medical Group Association.
Rosalio J. Lopez, M.D. has been a member of the Company's Board of
Directors since November 1995 and became Chief Medical Officer of the Company in
June 1997. Mr. Lopez had been a director of the general 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
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acted as a director and a Vice President of MME's principal professional
corporation. He is also a director and stockholder of MIPA.
Richard J. Kramer has been a member of the Company's Board of Directors
since November 1995. Mr. Kramer is President/Chief Executive Officer and a
director of Catholic Healthcare West ("CHW"). Before joining CHW in September
1989, Mr. Kramer served as the Executive Vice President of LifeSpan, Inc., a
multi-hospital/healthcare system headquartered in Minneapolis, which he joined
in 1971, serving in a variety of capacities, including Vice President of
Planning and Marketing and administrator for Abbott-Northwestern Hospital. Mr.
Kramer is currently a member of the Board of Directors of the California
Association of Hospitals and Health Systems and the Hospital Council of Northern
and Central California, the Board of Directors of the California Chamber of
Commerce, the Governing Council of the American Hospital Association Section on
Health Systems and the House of Delegates of the American Hospital Association,
the Advisory Council for the Center for Clinical Integration and the Board of
Directors of the Alumni Association of the University of Minnesota Program in
Health Care Administration.
C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. 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 the Company's 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 the Company's 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 Controller 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.
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DESCRIPTION OF THE SECURITIES
The summaries of certain provisions of documents described below do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of such documents (including the
definitions therein of certain terms), forms of which are on file with the SEC.
Wherever particular sections of, or terms defined in, such documents are
referred to herein, such sections or defined terms are incorporated by reference
herein.
GENERAL
Each Security will have a Stated Amount of $ and will be issued
under the Purchase Contract Agreement between the Company and the Purchase
Contract Agent. Each Security will consist of (a) a Purchase Contract under
which (i) the holder of the Security will purchase from the Company on the Final
Settlement Date of July 31, 2000, for an amount in cash equal to the Stated
Amount, a number of shares of Common Stock equal to the Settlement Rate
described below and (ii) the Company will pay Yield Enhancement Payments to the
holder of the Security, and (b) Treasury Notes having a principal amount equal
to the Stated Amount and maturing on the Final Settlement Date. If the aggregate
fair market value of the Treasury Notes at the time of their purchase exceeds
their aggregate principal amount, the Company shall, for the benefit of holders
of the Securities, provide the amount of such excess as the additional purchase
price necessary to acquire Treasury Notes having a principal amount equal to the
Stated Amount (such amounts, "Initial Premium Payments"). Holders of the
Securities will not directly receive any cash as a result of any Initial Premium
Payments. The Treasury Notes will be pledged with the Collateral Agent to secure
the obligations of holders of the Securities under the Purchase Contracts to
purchase Common Stock. Unless a holder of Securities settles the underlying
Purchase Contracts either through the early delivery of cash to the Purchase
Contract Agent in the manner described below or otherwise, or unless the
Purchase Contracts are terminated (upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to the Company), principal
of the Treasury Notes underlying such Securities, when paid at maturity, will
automatically be applied to satisfy in full the obligations of holders of
Securities to purchase Common Stock under the Purchase Contracts. For so long as
a Purchase Contract remains in effect, such Purchase Contract and the Treasury
Notes securing it will not be separable and may be transferred only as an
integrated Security.
The semi-annual payments on the Securities set forth on the cover page of
this Prospectus will consist of interest on the Treasury Notes payable by the
United States Government at the rate of % of the Stated Amount per annum
and unsecured, subordinated Yield Enhancement Payments payable semiannually on
each Payment Date by the Company at the rate of % of the Stated Amount per
annum. The Company's obligations with respect to Yield Enhancement Payments are
subordinated and junior in right of payment to all other liabilities of the
Company and pari passu with the most senior preferred stock directly issued,
from time to time, if any, by the Company.
On January 31, 1998, the first Payment Date with respect to the Securities,
the persons in whose names Securities are registered on the Record Date (as
hereinafter defined) with respect thereto will be entitled to receive interest
payable with respect to the Treasury Notes for the period from the date of
initial issuance of the Securities until January 31, 1998 ("Holders' Accrued
Interest"), together with Yield Enhancement Payments from the date of initial
issuance through January 31, 1998. Interest payable with respect to the Treasury
Notes which accrued prior to the date of initial issuance of the Securities and
which is payable on the first interest payment date with respect to the Treasury
Notes following completion of this offering ("Treasury Accrued Interest") will
be remitted by the Collateral Agent to the Purchase Contract Agent on such
interest payment date, which will then promptly remit such Treasury Accrued
Interest to the Company. If this offering is completed prior to July 31, 1997,
then that portion of the semi-annual interest payment due on the Treasury Notes
on July 31, 1997 representing Holders' Accrued Interest will be, upon receipt by
the Purchase Contract Agent from the Collateral Agent, promptly invested by the
Purchase Contract Agent in Permitted Investments (as defined) on behalf of the
holders of Securities until the first Payment Date, at which time such amount
and any reinvestment income thereon, net of expenses associated therewith, will
be paid to the persons in whose names Securities are registered on the Record
Date with respect thereto, together with the remainder of Holders' Accrued
Interest represented by the regularly scheduled semi-annual interest payment on
the Treasury Notes.
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The Yield Enhancement Payments payable on the first Payment Date with respect to
the Securities will be adjusted so that the Yield Enhancement Payments payable
on such date will be the equivalent of % per annum accruing from the
date of initial issuance of the Securities to January 31, 1998.
The Company may, at its option, defer the payment of Yield Enhancement
Payments on the Purchase Contracts. However, deferred installments of Yield
Enhancement Payments will bear additional Yield Enhancement Payments at the rate
of % per annum (compounding on each succeeding Payment Date) until paid.
Yield Enhancement Payments may not be deferred beyond the Final Settlement Date.
If the Purchase Contracts are terminated (upon the occurrence of certain events
of bankruptcy, insolvency or reorganization with respect to the Company), the
right to receive additional Yield Enhancement Payments and Deferred Yield
Enhancement Payments will terminate. In the event that the Company elects to
defer the payment of Yield Enhancement Payments on the Purchase Contracts until
the Final Settlement Date, each holder will receive on the Final Settlement
Date, in lieu of cash payment, a number of shares of Common Stock (in addition
to a number of shares of Common Stock equal to the Settlement Rate) equal to (x)
the aggregate amount of Deferred Yield Enhancement Payments payable to a holder
of Securities divided by (y) the Applicable Market Value. See "Description of
the Purchase Contracts -- Yield Enhancement Payments".
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
Each Purchase Contract underlying a Security (unless earlier terminated or
settled at the option of the holder of the Security) will obligate the holder of
the Security to purchase, and the Company to sell, on the Final Settlement Date,
for an amount in cash equal to the Stated Amount, a number of new shares of
Common Stock equal to the Settlement Rate. The Settlement Rate will be
calculated as follows (subject to adjustment under certain circumstances): (a)
if the Applicable Market Value is greater than the Threshold Appreciation Price
of $ , the Settlement Rate will be , (b) if the Applicable
Market Value is less than or equal to the Threshold Appreciation Price but
greater than the Stated Amount, the Settlement Rate will equal the Stated Amount
divided by the Applicable Market Value and (c) if the Applicable Market Value is
less than or equal to the Stated Amount, the Settlement Rate will be one.
"Applicable Market Value" means the average of the Closing Prices (as defined)
per share of Common Stock on each of the twenty consecutive Trading Days (as
defined) ending on the second Trading Day immediately preceding the Final
Settlement Date.
No fractional shares of Common Stock will be issued by the Company pursuant
to the Purchase Contracts. In lieu of fractional shares otherwise issuable in
respect of Purchase Contracts being settled by a holder of Securities, the
holder will be entitled to receive an amount of cash equal to the value of such
fractional shares at the Closing Price per share on the second Trading Day
immediately preceding the date of purchase.
Unless a holder of Securities settles the underlying Purchase Contracts
prior to the Final Settlement Date through the delivery of cash to the Purchase
Contract Agent in the manner described under "-- Early Settlement" below or an
event described under "-- Termination" below occurs, principal of the Treasury
Notes underlying such Securities, when paid at maturity, will automatically be
transferred to the Company to satisfy in full the holder's obligation to
purchase Common Stock under the Purchase Contracts. Such stock will then be
issued and delivered to such holder or such holder's designee, upon presentation
and surrender of the certificate evidencing such Securities (a "Security
Certificate") and payment by the holder of any transfer or similar taxes payable
in connection with the issuance of the stock to any person other than such
holder.
Prior to the date on which shares of Common Stock are issued in settlement
of a Purchase Contract, the Common Stock underlying the related Security will
not be deemed to be outstanding for any purpose and the holder thereof will not
have any voting rights, rights to dividends or other distributions or other
rights or privileges of a stockholder by virtue of holding such Security.
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Each holder of Securities, by acceptance thereof, will under the terms of
the Purchase Contract Agreement and the Securities be deemed to have (a)
irrevocably agreed to be bound by the terms of the related Purchase Contracts
for so long as such holder remains a holder of such Securities and (b) duly
appointed the Purchase Contract Agent as such holder's attorney-in-fact to enter
into and perform the related Purchase Contracts on behalf of and in the name of
such holder.
EARLY SETTLEMENT
A holder of Securities may settle the underlying Purchase Contracts prior
to the Final Settlement Date by presenting and surrendering the Security
Certificate evidencing such Securities at the offices of the Purchase Contract
Agent with the form of "Election to Settle Early" on the reverse side of the
certificate completed and executed as indicated, accompanied by payment in
immediately available funds of an amount equal to the Stated Amount times the
number of Purchase Contracts being settled. So long as the Securities are
evidenced by one or more global security certificates deposited with the
Depositary (as defined below), procedures for early settlement will also be
governed by standing arrangements between the Depositary and the Purchase
Contract Agent. HOLDERS MAY SETTLE SECURITIES EARLY ONLY IN INTEGRAL MULTIPLES
OF SECURITIES.
Upon early settlement of Purchase Contracts underlying any Securities, (a)
the holder will receive of a share of Common Stock per Security
(regardless of the market price of the Common Stock on the date of purchase),
subject to adjustment under certain circumstances, (b) the Treasury Notes
underlying such Securities will thereupon be transferred to the holder free and
clear of the Company's security interest therein, (c) the holder's right to
receive Deferred Yield Enhancement Payments, if any, on the Purchase Contracts
being settled will be forfeited and (d) the holder's right to receive additional
Yield Enhancement Payments will terminate and, except as contemplated by clause
(a) above, no adjustment will be made to or for the holder on account of current
or deferred amounts accrued in respect thereof.
If the Purchase Contract Agent receives the Security Certificate,
accompanied by the completed Election to Settle Early and requisite funds, from
a holder of Securities by 5:00 p.m., New York City time, on a Business Day, that
day will be considered the settlement date. If the Purchase Contract Agent
receives the foregoing after 5:00 p.m., New York City time, on a Business Day or
at any time on a day that is not a Business Day, the next Business Day will be
considered the settlement date.
Upon early settlement of Purchase Contracts in the manner described above,
presentation and surrender of the Security Certificate evidencing the related
Securities and payment of any transfer or similar taxes payable by the holder in
connection with the issuance of the stock to any person other than the holder of
such Securities, the Company will cause the shares of Common Stock being
purchased to be issued, and the Treasury Notes securing such Purchase Contracts
to be released from the pledge under the Pledge Agreement described below and
transferred, within three Business Days following the settlement date, to the
purchasing holder or such holder's designee.
YIELD ENHANCEMENT PAYMENTS
Yield Enhancement Payments will be payable semi-annually on each Payment
Date to the persons in whose names the related Securities are registered at the
close of business on the Business Day (as defined below) immediately preceding
such Payment Date (the "Record Date"). Yield Enhancement Payments will be
computed on the basis of actual days elapsed in a year of 365 or 366 days, as
the case may be. If a Payment Date falls on a day that is not a Business Day,
the Yield Enhancement Payment may be paid on the next succeeding Business Day
with the same force and effect as if made on such Payment Date, and no
additional amounts will accrue as a result of such delayed payment. "Business
Day" means any day that is not a Saturday, a Sunday or a day on which the NYSE
or banking institutions or trust companies in The City of New York are
authorized or obligated by law or executive order to be closed.
The Company's obligations with respect to Yield Enhancement Payments are
subordinate and junior in right of payment to all other liabilities of the
Company and pari passu with the most senior preferred stock directly issued,
from time to time, if any, by the Company.
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The Company may, at its option and upon prior written notice to the holders
of Securities and the Purchase Contract Agent, defer the payment of Yield
Enhancement Payments on the Purchase Contracts. However, deferred installments
of Yield Enhancement Payments will bear additional Yield Enhancement Payments at
the rate of % per annum (compounding on each succeeding Payment Date) until
paid. Yield Enhancement Payments may not be deferred beyond the Final Settlement
Date. If the Purchase Contracts are terminated (upon the occurrence of certain
events of bankruptcy, insolvency or reorganization with respect to the Company),
the right to receive additional Yield Enhancement Payments and Deferred Yield
Enhancement Payments will terminate.
In the event that the Company elects to defer the payment of Yield
Enhancement Payments on the Purchase Contracts until the Final Settlement Date,
each holder will receive on the Final Settlement Date, in lieu of a cash
payment, a number of shares of Common Stock (in addition to a number of shares
of Common Stock equal to the Settlement Rate) equal to (x) the aggregate amount
of Deferred Yield Enhancement Payments payable to a holder of Securities divided
by (y) the Applicable Market Value.
No fractional shares of Common Stock will be issued by the Company with
respect to the payment of Deferred Yield Enhancement Payments on the Final
Settlement Date. In lieu of fractional shares otherwise issuable with respect to
such payment of Deferred Yield Enhancement Payments, the holder will be entitled
to receive an amount in cash equal to the value of such fractional shares at the
Closing Price per share on the second Trading Day immediately preceding the
Final Settlement Date.
In the event the Company exercises its option to defer the payment of Yield
Enhancement Payments, then, until the Deferred Yield Enhancement Payments have
been paid, (a) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plans
or the satisfaction by the Company of its obligations pursuant to any contract
or security requiring the Company to purchase shares of Common Stock, (ii) as a
result of a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock or (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged) or make any guarantee payments with respect to the
foregoing) and (b) the Company shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees) issued by the Company that rank pari passu with or junior
to such Yield Enhancement Payments and (c) the Company shall not make any
guarantee payments with respect to the foregoing.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate will be subject to
adjustment upon the occurrence of certain events, including: (a) the payment of
dividends (and other distributions) of Common Stock on Common Stock; (b) the
issuance to all holders of Common Stock of rights, warrants or options entitling
them, for a period of up to 45 days, to subscribe for or purchase Common Stock
at less than the Current Market Price (as defined) thereof; (c) subdivisions,
splits and combinations of Common Stock; (d) distributions to all holders of
Common Stock of evidences of indebtedness of the Company, shares of capital
stock, securities, cash or property (excluding any dividend or distribution
covered by clause (a) or (b) above and any dividend or distribution paid
exclusively in cash); (e) distributions consisting exclusively of cash to all
holders of Common Stock in an aggregate amount that, together with (i) other
all-cash distributions made within the preceding 12 months and (ii) any cash and
the fair market value, as of the expiration of the tender or exchange offer
referred to below, of consideration payable in respect of any tender or exchange
offer by the Company or a subsidiary for the Common Stock concluded within the
preceding 12 months, exceeds 15% of the Company's aggregate market
capitalization (such aggregate market capitalization being the product of the
Current Market Price (as defined) of the Common Stock multiplied by the number
of shares of Common Stock then outstanding) on the date of such distribution;
and (f) the successful completion of a tender or exchange offer made by the
Company or any subsidiary for the Common Stock which involves an aggregate
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consideration that, together with (i) any cash and the fair market value of
other consideration payable in respect of any tender or exchange offer by the
Company or a subsidiary for the Common Stock concluded within the preceding 12
months and (ii) the aggregate amount of any all-cash distributions to all
holders of the Company's Common Stock made within the preceding 12 months,
exceeds 15% of the Company's aggregate market capitalization on the expiration
of such tender or exchange offer.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or property, each
Purchase Contract then outstanding would, without the consent of the holders of
Securities, become a contract to purchase only the kind and amount of
securities, cash and other property receivable upon consummation of the
transaction by a holder of the number of shares of Common Stock which would have
been received by the holder of the related Security immediately prior to the
date of consummation of such transaction if such holder had then settled such
Purchase Contract.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (i.e., distributions of evidences of indebtedness or
assets of the Company, but generally not stock dividends or rights to subscribe
to capital stock) and, pursuant to the Settlement Rate adjustment provisions of
the Purchase Contract Agreement, the Settlement Rate is increased, such increase
may be deemed to be the receipt of taxable income to holders of Securities. See
"Certain Federal Income Tax Consequences -- Adjustment of Settlement Rate".
In addition, the Company may make such increases in the Settlement Rate as
the Board of Directors of the Company deems advisable to avoid or diminish any
income tax to holders of shares of Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the Settlement Rate shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the Settlement Rate; provided, however, that any adjustments which by
reason of the foregoing are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
The Company will be required, within ten Business Days following the
occurrence of an event that requires or permits an adjustment in the Settlement
Rate, to provide written notice to the Purchase Contract Agent of the occurrence
of such event and a statement in reasonable detail setting forth the method by
which the adjustment to the Settlement Rate was determined and setting forth the
revised Settlement Rate.
Each adjustment to the Settlement Rate will result in a corresponding
adjustment to the number of shares of Common Stock issuable upon early
settlement of a Purchase Contract.
TERMINATION
The Purchase Contracts, and the rights and obligations of the Company and
of the holders of the Securities thereunder (including the right to receive
accrued or deferred Yield Enhancement Payments and the right and obligation to
purchase Common Stock), will automatically terminate upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to the
Company. Upon such termination, the Collateral Agent will release the Treasury
Notes held by it to the Purchase Contract Agent for distribution to the holders.
Upon such termination, however, such release and termination may be subject to a
limited delay. In the event that the Company becomes the subject of a case under
the Bankruptcy Code, such delay may occur as a result of the automatic stay
under the Bankruptcy Code and continue until such automatic stay has been
lifted. During the period of any such delay, the Treasury Notes will continue to
accrue interest, payable by the United States Government, until their maturity.
TREASURY NOTES AND PLEDGE AGREEMENT; INTEREST ON TREASURY NOTES
The Treasury Notes underlying the Securities will be pledged to the
Collateral Agent, for the benefit of the Company, pursuant to a pledge
agreement, to be dated as of , 1997 (the "Pledge
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Agreement"), to secure the obligations of the holders to purchase Common Stock
under the Purchase Contracts. The rights of holders of Securities to the
underlying Treasury Notes will be subject to the Company's security interest
therein created by the Pledge Agreement; no holder of Securities will be
permitted to withdraw the Treasury Notes underlying such Securities from the
pledge arrangement except upon the termination or early settlement of the
related Purchase Contracts. Subject to such security interest, however, holders
of Securities will have full beneficial ownership of the underlying Treasury
Notes. The Company will have no interest in the Treasury Notes other than its
security interest.
The Collateral Agent will, upon receipt of interest payments on the
Treasury Notes, distribute such payments to the Purchase Contract Agent, who
will in turn distribute those payments to the persons in whose names the related
Securities are registered at the close of business on the Record Date
immediately preceding the date of such distribution, except that interest on the
Treasury Notes accruing prior to January 31, 1998 shall be paid as described
under "Description of the Securities -- General".
THE TREASURY NOTES WILL BE OBLIGATIONS OF THE UNITED STATES GOVERNMENT AND
NOT OF THE COMPANY.
BOOK-ENTRY SYSTEM
DTC (the "Depositary") will act as securities depositary for the
Securities. The Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (the Depositary's nominee). One or more
fully-registered global security certificates ("Global Security Certificates"),
representing the total aggregate number of Securities, will be issued and will
be deposited with the Depositary and will bear a legend regarding the
restrictions on exchanges and registration of transfer thereof referred to
below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the Securities so
long as such Securities are represented by Global Security Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its participants ("Participants")
deposit with the Depositary. The Depositary also facilitates the settlement
among Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). The Depositary is owned by a number of
its Direct Participants and by the New York Stock Exchange, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the Depositary system is also available to others, such as securities brokers
and dealers, banks and trust companies that clear transactions through or
maintain a direct or indirect custodial relationship with a Direct Participant
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Securities and Exchange
Commission.
No Securities represented by Global Security Certificates may be exchanged
in whole or in part for Securities registered, and no transfer of Global
Security Certificates in whole or in part may be registered, in the name of any
person other than the Depositary or any nominee of the Depositary unless the
Depositary has notified the Company that it is unwilling or unable to continue
as depositary for such Global Security Certificates or has ceased to be
qualified to act as such as required by the Purchase Contract Agreement or there
shall have occurred and be continuing a default by the Company in respect of its
obligations under one or more Purchase Contracts. All Securities represented by
one or more Global Security Certificates or any portion thereof will be
registered in such names as the Depositary may direct.
As long as the Depositary, or its nominee, is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case may
be, will be considered the sole record owner and holder of the
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Global Security Certificates and all Securities represented thereby for all
purposes under the Securities and the Purchase Contract Agreement. Except in the
limited circumstances referred to above, owners of beneficial interests in
Global Security Certificates will not be entitled to have such Global Security
Certificates or the Securities represented thereby registered in their names,
will not receive or be entitled to receive physical delivery of Security
Certificates in exchange therefor and will not be considered to be record owners
or holders of such Global Security Certificates or any Securities represented
thereby for any purpose under the Securities or the Purchase Contract Agreement.
All payments on the Securities represented by the Global Security Certificates
and all transfers and deliveries of Treasury Notes and Common Stock with respect
thereto will be made to the Depositary or its nominee, as the case may be, as
the holder thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests through
institutions that have accounts with the Depositary or its nominee. Ownership of
beneficial interests in Global Security Certificates will be shown only on, and
the transfer of those ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to Participants'
interests) or any such Participant (with respect to interests of persons held by
such Participants on their behalf). Procedures for settlement of Purchase
Contracts on the Final Settlement Date or upon Early Settlement will be governed
by arrangements among the Depositary, Participants and persons that may hold
beneficial interests through Participants designed to permit such settlement
without the physical movement of certificates. Payments, transfers, deliveries,
exchanges and other matters relating to beneficial interests in Global Security
Certificates may be subject to various policies and procedures adopted by the
Depositary from time to time. None of the Company, the Purchase Contract Agent
or any agent of the Company or the Purchase Contract Agent will have any
responsibility or liability for any aspect of the Depositary's or any
Participant's records relating to, or for payments made on account of,
beneficial interests in Global Security Certificates, or for maintaining,
supervising or reviewing any of the Depositary's records or any participant's
records relating to such beneficial ownership interests.
CERTAIN PROVISIONS OF THE PURCHASE CONTRACT AGREEMENT
AND THE PLEDGE AGREEMENT
PAYMENT OF INTEREST AND YIELD ENHANCEMENT PAYMENTS; TRANSFER OF SECURITIES;
DELIVERY OF COMMON STOCK OR TREASURY NOTES
Interest on the Treasury Notes and Yield Enhancement Payments will be
payable, Purchase Contracts (and documents related thereto) will be settled and
transfers of the Securities will be registrable at the office of the Purchase
Contract Agent in the Borough of Manhattan, The City of New York. In addition,
in the event that the Securities do not remain in book-entry form, payment of
interest on the Treasury Notes and Yield Enhancement Payments may be made, at
the option of the Company, by check mailed to the address of the person entitled
thereto as shown on the Security Register.
Payments in respect of principal of the Treasury Notes on the Final
Settlement Date will be applied in satisfaction of the obligations of the
holders of the Securities under the Purchase Contracts and shares of Common
Stock will be delivered, or, if the Purchase Contracts have terminated, Treasury
Notes will be delivered potentially after a limited delay (see "Description of
the Purchase Contracts -- Termination"), in each case upon presentation and
surrender of the Security Certificates evidencing the related Securities at the
office of the Purchase Contract Agent.
If a holder of outstanding Securities fails to present and surrender the
Security Certificate evidencing such Securities to the Purchase Contract Agent
on the Final Settlement Date, the shares of Common Stock issuable in settlement
of the applicable Purchase Contract and in payment of any Deferred Yield
Enhancement Payments will be registered in the name of the Purchase Contract
Agent and, together with any distributions thereon, shall be held by the
Purchase Contract Agent as agent for the benefit of such holder, until such
Security Certificate is presented and surrendered or the holder provides
satisfactory evidence that such certificate has been destroyed, lost or stolen,
together with any indemnity that may be required by the Purchase Contract Agent
and the Company.
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If the Purchase Contracts have terminated prior to the Final Settlement
Date, the Treasury Notes have been transferred to the Purchase Contract Agent
for distribution to the holders entitled thereto and a holder fails to present
and surrender the Security Certificate evidencing such holder's Securities to
the Purchase Contract Agent, the Treasury Notes delivered to the Purchase
Contract Agent and payments thereon shall be held by the Purchase Contract Agent
as agent for the benefit of such holder, until such Security Certificate is
presented or the holder provides the evidence and indemnity described above.
The Purchase Contract Agent will have no obligation to invest or to pay
interest on any amounts held by the Purchase Contract Agent pending
distribution, as described above, except under certain limited circumstances in
the event this offering is completed prior to July 31, 1997.
No service charge will be made for any registration of transfer or exchange
of the Securities, except for any tax or other governmental charge that may be
imposed in connection therewith.
MODIFICATION
The Purchase Contract Agreement and the Pledge Agreement will contain
provisions permitting the Company and the Purchase Contract Agent or Collateral
Agent, as the case may be, with the consent of the holders of not less than
66 2/3% of the Securities at the time outstanding, to modify the terms of the
Purchase Contracts, the Purchase Contract Agreement and the Pledge Agreement,
except that no such modification may, without the consent of the holder of each
outstanding Security affected thereby, (a) change any Payment Date, (b) change
the amount or type of Treasury Notes underlying a Security, impair the right of
the holder of any Security to receive interest payments on the underlying
Treasury Notes or otherwise adversely affect the holder's rights in or to such
Treasury Notes, (c) change the place or currency of payment or reduce any Yield
Enhancement Payments or any Deferred Yield Enhancement Payments, (d) impair the
right to institute suit for the enforcement of any Purchase Contract, (e) reduce
the amount of Common Stock purchasable under any Purchase Contract, increase the
price to purchase Common Stock on settlement of any Purchase Contract, change
the Final Settlement Date or otherwise adversely affect the holder's rights
under any Purchase Contract or (f) reduce the above-stated percentage of
outstanding Securities, the consent of whose holders is required for the
modification or amendment of the provisions of the Purchase Contracts, the
Purchase Contract Agreement or the Pledge Agreement.
NO CONSENT TO ASSUMPTION
Each holder of Securities, by acceptance thereof, will under the terms of
the Purchase Contract Agreement and the Securities be deemed expressly to have
withheld any consent to the assumption (i.e., affirmance) of the Purchase
Contracts by the Company or its trustee in the event that the Company becomes
the subject of a case under the Bankruptcy Code.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company will covenant in the Purchase Contract Agreement that it will
not merge or consolidate with any other entity or sell, assign, transfer, lease
or convey all or substantially all of its properties and assets to any person,
firm or corporation unless the Company is the continuing corporation or the
successor corporation is a corporation organized under the laws of the United
States of America or a state thereof and such corporation expressly assumes the
obligations of the Company under the Purchase Contracts, the Purchase Contract
Agreement and the Pledge Agreement, and the Company or such successor
corporation is not, immediately after such merger, consolidation, sale,
assignment, transfer, lease or conveyance, in default in the performance of any
of its obligations thereunder.
TITLE
The Company, the Purchase Contract Agent and the Collateral Agent may treat
the registered owner of any Security as the absolute owner thereof for the
purpose of making payment and settling the Purchase Contracts and for all other
purposes.
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REPLACEMENT OF SECURITY CERTIFICATES
Any mutilated Security Certificate will be replaced by the Company at the
expense of the holder upon surrender of such certificate to the Purchase
Contract Agent. Security Certificates that become destroyed, lost or stolen will
be replaced by the Company at the expense of the holder upon delivery to the
Company and the Purchase Contract Agent of evidence of the destruction, loss or
theft thereof satisfactory to the Company and the Purchase Contract Agent. In
the case of a destroyed, lost or stolen Security Certificate, an indemnity
satisfactory to the Purchase Contract Agent and the Company may be required at
the expense of the holder of the Securities evidenced by such certificate before
a replacement will be issued.
Notwithstanding the foregoing, the Company will not be obligated to issue
any Security on or after the Final Settlement Date or after the Purchase
Contracts have terminated. The Purchase Contract Agreement will provide that, in
lieu of the delivery of a replacement Security Certificate following the Final
Settlement Date, the Purchase Contract Agent, upon delivery of the evidence and
indemnity described above, will deliver the Common Stock issuable pursuant to
the Purchase Contracts included in the Securities evidenced by such certificate,
or, if the Purchase Contracts have terminated prior to the Final Settlement
Date, transfer the principal amount of the Treasury Notes included in the
Securities evidenced by such certificate.
GOVERNING LAW
The Purchase Contract Agreement, the Pledge Agreement and the Purchase
Contracts will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
will be the Purchase Contract Agent. The
Purchase Contract Agent will act as the agent for the holders of Securities from
time to time. The Purchase Contract Agreement will not obligate the Purchase
Contract Agent to exercise any discretionary actions in connection with a
default under the terms of the Securities or the Purchase Contract Agreement.
The Purchase Contract will contain provisions limiting the liability of the
Purchase Contract Agent. The Purchase Contract Agreement will contain provisions
under which the Purchase Contract Agent may resign or be replaced. Such
resignation or replacement would be effective upon the appointment of a
successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
will be the Collateral Agent. The Collateral Agent
will act solely as the agent of the Company and will not assume any obligation
or relationship of agency or trust for or with any of the holders of the
Securities except for the obligations owed by a pledgee of property to the owner
thereof under the Pledge Agreement and applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which the
Collateral Agent may resign or be replaced. Such resignation or replacement
would be effective upon the appointment of a successor.
VOTING RIGHTS
Holders of the Securities will have no voting rights.
LISTING OF THE SECURITIES
Application will be made to have the Securities approved for listing on the
New York Stock Exchange under the symbol " ", subject to official notice of
issuance.
NYSE SYMBOL OF COMMON STOCK
The Common Stock of the Company is listed on the NYSE under the symbol
"MDM".
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company Certificate of Incorporation currently provides that the
Company may issue 9,500,000 shares of Preferred Stock, par value $.001 per share
(the "Company Preferred Stock"), 500,000 shares of Series C Preferred Stock, par
value $.001 per share (the "Company Series C Preferred Stock"), and 400,000,000
shares of the Common Stock.
COMMON STOCK
Holders of the Company Common Stock are entitled to one vote for each share
held of record on all matters to be submitted to a vote of the stockholders and
do not have preemptive rights. Subject to preferences that may be applicable to
any outstanding shares of the Company Preferred Stock, holders of the Company
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Company's Board of Directors out of funds
legally available therefor. All outstanding shares of the Company Common Stock
are fully paid and nonassessable. In the event of any liquidation, dissolution
or winding-up of the affairs of the Company, holders of the Company Common Stock
will be entitled to share ratably in the assets of the Company remaining after
payment or provision for payment of all of the Company's debts and obligations
and liquidation payments to holders of any outstanding shares of the Company
Preferred Stock.
PREFERRED STOCK
The Company's Board of Directors, without further stockholder
authorization, is authorized to issue shares of the Company Preferred Stock in
one or more series and to determine and fix the rights, preferences and
privileges of each series, including dividend rights and preferences over
dividends on the Company Common Stock and one or more series of the Company
Preferred Stock, conversion rights, voting rights (in addition to those provided
by law), redemption rights and the terms of any sinking fund therefor, and
rights upon liquidation, dissolution or winding up, including preferences over
the Company Common Stock and one or more series of the Company Preferred Stock.
Although the Company has no present plans to issue any shares of the Company
Preferred Stock, the issuance of shares of the Company Preferred Stock, or the
issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change in control of the Company or an unsolicited
acquisition proposal.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND THE DGCL
Classified Board of Directors. The Company Certificate of Incorporation
and the Company Bylaws provide for the Company's Board of Directors to be
divided into three classes of directors, as nearly equal in number as is
reasonably possible, serving staggered terms so that directors' terms expire
either at the 1998, 1999 or 2000 annual meeting of stockholders of the Company.
The Company believes that a classified board of directors will help to
assure the continuity and stability of the Company's Board of Directors and the
Company's business strategies and policies as determined by the Company's Board
of Directors, since a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this, in
turn, will permit the Company's Board of Directors to more effectively represent
the interests of stockholders.
With a classified board of directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
the majority of the Company's Board of Directors. As a result, a provision
relating to a classified Company's Board of Directors may discourage proxy
contests for the election of directors or purchases of a substantial block of
the Company Common Stock because its provisions could operate to prevent
obtaining control of the Company's Board of Directors in a relatively short
period of time. The classification provision could also have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of the Company. Under the DGCL, unless the certificate of
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incorporation otherwise provides, a director on a classified board may be
removed by the stockholders of the corporation only for cause. The Company
Certificate of Incorporation does not provide otherwise.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The Company Bylaws establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Company's Board of Directors or a committee thereof, of candidates for
election as directors (the "Nomination Procedure") and with regard to other
matters to be brought by stockholders before an annual meeting of stockholders
of the Company (the "Business Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Company's Board of
Directors to the Corporate Secretary of the Company. The requirements as to the
form and timing of that notice are specified in the Company Bylaws. If the
Chairman of the Company's Board of Directors determines that a person was not
nominated in accordance with the Nomination Procedure, such person will not be
eligible for election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Corporate Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company Bylaws. If the Chairman of
the Company's Board of Directors determines that the other business was not
properly brought before such meeting in accordance with the Business Procedure,
such business will not be conducted at such meeting.
Although the Company Bylaws do not give the Company's Board of Directors
any power to approve or disapprove stockholder nominations for the election of
directors or of any other business desired by stockholders to be conducted at an
annual or any other meeting, the Company Bylaws (i) may have the effect of
precluding a nomination for the election of directors or precluding the conduct
of business at a particular annual meeting if the proper procedures are not
followed or (ii) may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company, even if the conduct of such
solicitation or such attempt might be beneficial to the Company and its
stockholders.
Delaware Takeover Statute. The Company is subject to Section 203 of the
DGCL which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or after such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
STOCKHOLDER RIGHTS PLAN
The following is a description of the Company's Stockholders' Rights Plan
(the "Company Rights Plan"). The description thereof set forth below is
qualified in its entirety by reference to the Company Rights Plan, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. See "Available Information".
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The Company Rights Plan provides that one right (a "Right") will be issued
with each share of the Company Common Stock (whether originally issued or from
the Company's treasury) prior to the Rights Distribution Date (as defined
therein). The Rights are not exercisable until the Rights Distribution Date and
will expire at the close of business on the date which is 10 years from the date
of the distribution unless previously redeemed by the Company as described
below. When exercisable, each Right will entitle the owner to purchase from the
Company one one-hundredth of a share of the Company Series C Preferred Stock at
a purchase price of $52.00 per share. The Company Series C Preferred Stock may
be issued in fractional shares.
Except as described below, the Rights will be evidenced by all the Company
Common Stock certificates and will be transferred with the Company Common Stock
certificates, and no separate Rights certificates will be distributed. The
Rights will separate from the Company Common Stock and a "Rights Distribution
Date" will occur upon the earlier of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership of
10% or more of the outstanding the Company Common Stock (the "Stock Acquisition
Date") and (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group becoming an Acquiring
Person.
After the Rights Distribution Date, Rights certificates will be mailed to
holders of record of shares of the Company Common Stock as of the Rights
Distribution Date and thereafter the separate Rights certificates alone will
represent the Rights.
The Company Series C Preferred Stock issuable upon exercise of the Rights
will be entitled to a minimum preferential quarterly dividend payment of $.001
per share and will be entitled to an aggregate dividend of 100 times the
dividend, if any, declared for each share of the Company Common Stock. In the
event of liquidation, the holders of the Company Series C Preferred Stock will
be entitled to a minimum preferential liquidation payment of $52.00 per share
and will be entitled to an aggregate payment of 100 times the payment made per
share of the Company Common Stock. Each share of the Company Series C Preferred
Stock will have 100 votes and will vote together with the shares of the Company
Common Stock. In the event of any merger, consolidation or other transaction in
which shares of the Company Common Stock are changed or exchanged, each share of
the Company Series C Preferred Stock will be entitled to receive 100 times the
amount received per share of the Company Common Stock. These rights are
protected by customary anti-dilution provisions. The Company Series C Preferred
Stock will, if issued, be junior to any other series of the Company Preferred
Stock which may be authorized and issued by the Company, unless the terms of any
such other series provide otherwise. The Company Series C Preferred Stock will
not be redeemable. Once the shares of the Company Series C Preferred Stock are
issued, the Company Certificate of Incorporation may not be amended in a manner
which would materially alter or change the powers, preferences or special rights
of the Company Series C Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of the Company Series C Preferred Stock, voting separately as a class.
Because of the nature of the Company Series C Preferred Stock dividend,
liquidation and voting rights, the value of a share of the Company Series C
Preferred Stock purchasable upon exercise of each Right should approximate the
value of one share of the Company Common Stock.
In the event that (i) a person becomes an Acquiring Person (except pursuant
to a tender offer or an exchange offer for all outstanding shares of the Company
Common Stock at a price and on terms determined by at least a majority of the
members of the Company's Board of Directors who are not officers of the Company
and who are not representatives, nominees, affiliates or associates of an
Acquiring Person, to be (a) at a price which is fair to the Company's
stockholders and (b) otherwise in the best interests of the Company and its
stockholders (a "Qualifying Offer")), (ii) an Acquiring Person engages in
certain self-dealing transactions involving the Company, such as, (a) merging or
consolidating into or with the Company where the Company survives and the
Company Common Stock remains outstanding, (b) transferring assets to the Company
in exchange for the Company's securities, or acquiring securities from the
Company other than on the same basis as from all other stockholders, (c)
transferring assets to or from the Company on terms less favorable than arm's
length, (d) transferring to or from the Company's assets having a fair market
value in excess of $5,000,000, (e) receiving unusual compensation or (f)
receiving any other financial benefit not provided to all other stockholders, or
(iii) during such time as there is an Acquiring Person, there is any
reclassification of securities, recapitalization, merger or consolidation which
increases by more than 1% the
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amount of the Company Common Stock beneficially owned by the Acquiring Person,
each holder of a Right will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price, shares of the Company
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value equal to two times the exercise price of the
Right. Notwithstanding any of the foregoing, following the occurrence of any
such events, all Rights that are, or (under certain circumstances specified in
the Company Rights Plan) were, beneficially owned by any Acquiring Person (or
certain related parties), will be null and void. However, Rights are not
exercisable following the occurrence of the events set forth above until such
time as the Rights are no longer redeemable by the Company as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation or the Company Common Stock
is changed or exchanged (other than a merger which follows a Qualifying Offer
and satisfies certain other requirements), or (ii) 50% or more of the Company's
assets or earning power is sold or transferred, each holder of a Right (except
Rights which previously have been voided as set forth above) shall thereafter
have the right to receive upon the exercise thereof at the then current exercise
price, common stock of the acquiring company having a value equal to two times
the exercise price of the Right.
At any time until ten days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.001 per
Right. Immediately upon the action of the Company's Board of Directors ordering
redemption of the Rights, the Rights will terminate, and the only right of the
holders of the Rights will be to receive the $.001 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for shares of the Company Common Stock (or other consideration) or
for common stock of the acquiring company as set forth above.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Plan may be amended by the Company's
Board of Directors prior to the Rights Distribution Date. After the Rights
Distribution Date, the provisions of the Rights Agreement may be amended by the
Company's Board of Directors in order to cure any ambiguity, to make changes
which do not adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person) or to shorten or lengthen any time period
under the Rights Agreement, provided that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
The Rights have certain anti-takeover effects as they will cause
substantial dilution to a person or group that acquires a substantial interest
in the Company without the prior approval of the Company's Board of Directors.
The effect of the Rights may be to inhibit a change in control of the Company
(including through a third party tender offer at a price which reflects a
premium to then prevailing trading prices) that may be beneficial to the Company
stockholders.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company and its stockholders for monetary
damages arising from acts or omissions in the director's capacity as a director.
The provision does not, however, eliminate or limit the personal 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 which involve
intentional misconduct or a knowing violation of law, (iii) under the DGCL
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. This
provision offers persons who serve on the Company's Board of Directors
protection against awards of monetary damages resulting from breaches of their
duty of care (except as indicated above). 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 duty of care is limited. However,
the provision does not affect the
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availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The SEC has taken the position
that the provision will have no effect on claims arising under the federal
securities laws.
In addition, the Company Certificate of Incorporation and the Company
Bylaws provide for mandatory indemnification rights, subject to limited
exceptions, to any director, officer, employee, or agent of the Company who by
reason of the fact that he or she is a director, officer, employee, or agent of
the Company, is involved in a legal proceeding of any nature. Such
indemnification rights include reimbursement for expenses incurred by such
director, officer, employee, or agent in advance of the final disposition of
such proceeding in accordance with the applicable provisions of the DGCL.
REGISTRATION RIGHTS
Pursuant to a Registration Agreement entered into in August 1993 and
amended in March 1994 (the "Registration Agreement"), the prior holders of the
Company Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock, which Convertible Preferred Stock has now been converted into the Company
Common Stock, were entitled to certain rights with respect to the registration
under the Securities Act of the 7,000,562 shares of the Company Common Stock
into which the Company Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock were converted. The shares of the Company Common
Stock covered by the foregoing registration rights are now eligible for resale
either under Rule 144 of the Securities Act or without restriction. Accordingly,
at the request of the Company, most of the holders of the Company Common Stock,
have agreed to terminate their rights with respect to the Registration
Agreement, leaving approximately 1,200,000 shares that are presently covered by
the Registration Agreement.
The Company has entered into a Registration Rights Agreement with certain
of the holders of the Company Common Stock pursuant to which such persons will
have the right to require that the Company register shares of the Company Common
Stock owned by them for sale, at one year intervals up to three times during
1997, 1998 and 1999. Unlimited piggyback registration rights have also been
granted. The holders of these registration rights are Walter T. Mullikin, M.D.,
John S. McDonald, Rosalio J. Lopez, M.D. and DCNHS, who were the only persons
deemed to be "affiliates" of the Company, following the combination of the
Company and MME. In the March 1996 public offering carried out by the Company,
1,358,921 shares of the Company's Common Stock were sold by Drs. Mullikin and
Lopez and Mr. McDonald at $30.25 per share pursuant to the rights granted under
the Agreement.
In addition, from time-to-time, the Company has granted registration
rights, both on a periodic and a piggyback basis to various persons in
connection with acquisitions made on a private placement basis. At March 31,
1997, a total of approximately 5,300,000 shares of the Company Common Stock were
subject to such registration rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company Common Stock is First
Chicago Trust of New York, New York, New York.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal U.S. federal income tax
consequences of the purchase, ownership and disposition of Securities. The
summary represents the opinion of Haskell Slaughter & Young, L.L.C., tax counsel
to the Company, insofar as it relates to matters of law and legal conclusions.
The summary deals only with Securities held as capital assets by purchasers who
or which are (i) citizens or residents of the United States, (ii) domestic
corporations or (iii) otherwise subject to U.S. federal income taxation on a net
income basis in respect of income and gain from securities. It does not deal
with Securities held by specially treated classes of holders, such as dealers in
securities or life insurance companies. Prospective purchasers of Securities
should consult their own tax advisors concerning the U.S. federal income tax
consequences to Security holders in their particular situations, as well as any
consequences under the laws of any other taxing jurisdiction. This summary is
based on the Code, Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.
INCOME FROM SECURITIES
A holder will include interest on the Treasury Notes in income when
received or accrued, in accordance with the holder's method of accounting. For
federal income tax purposes, a holder is deemed to receive interest payments on
the Treasury Notes when such payments are made to the Collateral Agent, even if
such interest payment is not distributed to the holders until a later date, as
may be the case for the interest paid on the Treasury Notes with respect to the
first interest payment date on the Treasury Notes immediately following the
issuance date of the Securities. See "Description of the Securities".
There is no authority for the treatment of the Yield Enhancement Payments,
Initial Premium Payments or Deferred Yield Enhancement Payments, if any, under
current law, but the Company intends to file information returns on the basis
that the Yield Enhancement Payments are taxable income to holders and,
similarly, that the Initial Premium Payments (although a payment in the form of
an additional interest in the Treasury Notes and not a direct payment of cash)
are taxable income to holders when made (i.e., the day the Treasury Notes are
purchased). Holders should consult their own tax advisors concerning the
treatment of Yield Enhancement Payments and Initial Premium Payments, including
the possibility that Yield Enhancement Payments and Initial Premium Payments may
be treated as a reduction in the holders' basis in the Securities, rather than
included in income upon receipt (or, in the case of Initial Premium Payments,
upon the purchase of the Treasury Notes), by analogy to the treatment of rebates
or of option premiums. For example, if, as a result of having entered into the
Purchase Contracts, the holders were treated as having sold a put option, the
Yield Enhancement Payments and the Initial Premium Payments could be viewed as
premium payments for the put option reducing the holder's basis in the
Securities but not includible in gross income when received. In addition, if the
Company elects to defer a Yield Enhancement Payment in a taxable year, the
Company may determine to report the amount of such Deferred Yield Enhancement
Payment as constructive taxable income to holders for such taxable year, and
such Deferred Yield Enhancement Payment may result in holders recognizing
taxable income or gain for such taxable year prior to the receipt of cash or
additional shares of Common Stock. Accordingly, holders should consult their own
tax advisors as to whether or not Deferred Yield Enhancement Payments should be
treated as taxable constructive distributions and, if taxable, whether such
income would be recognized prior to the receipt of cash or additional shares of
Common Stock or upon the Final Settlement Date. The Company does not intend to
deduct the Yield Enhancement Payments, Initial Premium Payments or any Deferred
Yield Enhancement Payments for federal income tax purposes because it views them
as a cost of issuing the Common Stock. Yield Enhancement Payments and Initial
Premium Payments received by a regulated investment company should be treated as
income derived with respect to such company's business of investing in stock and
securities.
SALE OR DISPOSITION OF SECURITIES
If a holder sells, exchanges or otherwise disposes of a Security before the
Final Settlement Date, the holder will generally recognize capital gain or loss
equal to the difference between the holder's tax basis in the Security and the
amount realized from the disposition of the Security, except to the extent of
any non-de
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minimis market discount, which, if the holder does not have an election to
amortize such discount currently in effect, would be treated as ordinary
interest income (see "-- Gain or Loss on Maturity of the Treasury Notes: Market
Discount and Bond Premium"). A holder's tax basis in a Security will generally
equal (a) the amount paid for the Security, (b) increased by the sum of (i) the
amount of any constructive dividend included in such holder's income as a result
of an adjustment of the Settlement Rate (see "-- Adjustment of Settlement
Rate"), (ii) the amount of any market discount included in income, as set forth
below, and (iii) the amount, if any, previously included in such holder's
taxable income with respect to Deferred Yield Enhancement Payments not paid in
cash or Initial Premium Payments received (or deemed received) by the holder,
(c) reduced by the sum of (i) the amount of any Yield Enhancement Payments and
Initial Premium Payments received (or, in the case of Initial Premium Payments,
deemed received) by the holder and not previously included in income and (ii)
the amount of any bond premium amortized over the term of the Treasury Notes, as
described below. If a holder sells a Security between interest payment dates, a
portion of the sales proceeds will be treated as a receipt of interest accrued
since the last interest payment date, rather than as an amount realized from the
sale of the Security, consistent with the general treatment of proceeds from the
sale of debt instruments such as Treasury Notes.
GAIN OR LOSS ON MATURITY OF THE TREASURY NOTES: MARKET DISCOUNT AND BOND PREMIUM
The tax basis of the Treasury Notes will equal the fair market value of the
Treasury Notes at the time of purchase of a Security. If such tax basis equals
the principal amount payable at maturity of the Treasury Notes, the holder will
not realize gain or loss upon payment of the principal of the Treasury Notes at
maturity. If such tax basis is less than the principal amount payable at
maturity of the Treasury Notes, the holder will generally realize gain equal to
the difference between the payment of the principal of the Treasury Notes at
maturity and the holder's tax basis. This gain will be treated as ordinary
interest income (i.e., market discount) unless it is "de minimis," in which case
it will be treated as capital gain. The gain will be "de minimis" if it is less
than 1/4 of one percent of the amount payable at maturity of the Treasury Notes
multiplied by the number of complete years from the time of purchase until the
maturity of the Treasury Notes. A holder may instead elect to accrue market
discount into income on a current basis over the remaining life of the Treasury
Notes. An election to amortize market discount may apply to other debt
instruments acquired with market discount by the holder and a holder should
consult a tax advisor before making such an election.
If such tax basis is greater than the principal amount payable at maturity
of the Treasury Notes (as would be the case if the Company makes any Initial
Premium Payments provided that the holder has not previously reduced its basis
with respect to such payments), the excess will be "bond premium". A holder may
either recognize the bond premium as a capital loss upon payment of the
principal of the Treasury Notes at maturity or make an election to amortize it
over the term of the Treasury Notes. If the election is made, the bond premium
will generally reduce the interest income on the Treasury Notes on a constant
yield basis over the remaining term of the Treasury Notes and will reduce the
basis of the Treasury Notes by the amount of the amortization. An election to
amortize bond premium may apply to other debt instruments acquired at a premium
by the holder and a holder should consult a tax advisor before making such an
election.
TAX BASIS OF COMMON STOCK ACQUIRED UNDER THE PURCHASE CONTRACT
The tax basis of the Common Stock acquired by a holder of Securities under
the Purchase Contract will generally equal (a) the amount paid for the Security
(b) increased by the sum of (i) the amount of any gain recognized upon payment
of the principal of the Treasury Notes at maturity or market discount included
in income, as set forth above, (ii) the amount of any constructive dividend
included in such holder's income as a result of an adjustment of the Settlement
Rate (see "-- Adjustment of Settlement Rate") and (iii) the amount, if any,
previously included in such holder's taxable income with respect to Deferred
Yield Enhancement Payments not paid in cash or Initial Premium Payments received
(or deemed received) by the holder (c) reduced by the sum of (i) the amount of
any loss recognized on receipt of principal of the Treasury Notes, or bond
premium amortized over the term of the Treasury Notes, as set forth above, (ii)
the amount of any Yield Enhancement Payments and any Initial Premium Payments
received (or, in the case of Initial
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<PAGE> 81
Premium Payments, deemed received) by the holder and not previously included in
income and (iii) the amount of any cash received in lieu of fractional shares of
Common Stock.
OWNERSHIP OF COMMON STOCK ACQUIRED UNDER THE PURCHASE CONTRACT
Except as described below under the caption "-- Adjustment of Settlement
Rate", a holder of Securities who does not otherwise own Common Stock will not
include in income dividends paid on the Common Stock for periods prior to such
holder's acquisition of Common Stock under a Purchase Contract. Assuming that
the Company has current or accumulated earnings and profits at least equal to
the amount of a distribution with respect to Common Stock, a holder of Common
Stock acquired under the Purchase Contract will include a dividend on the Common
Stock in income when received, and the dividend will be eligible for the
dividends received deduction if received by an otherwise qualifying corporate
holder which meets the holding period and other requirements for the dividends
received deduction.
Upon the sale, exchange or other disposition of Common Stock, the holder
will recognize gain or loss equal to the difference between the holder's tax
basis in the Common Stock and the amount realized on the disposition. The gain
or loss will be capital gain or loss, and will be long-term capital gain or loss
if the holder has held the stock for more than one year at the time of
disposition.
ADJUSTMENT OF SETTLEMENT RATE
Holders of Securities might be treated as receiving a constructive
distribution from the Company if (i) the Settlement Rate is adjusted and as a
result of such adjustment, the proportionate interest of holders of Securities
in the assets or earnings and profits of the Company is increased, and (ii) the
adjustment is not made pursuant to a bona fide, reasonable antidilution formula.
An adjustment in the Settlement Rate would not be considered made pursuant to
such a formula if the adjustment were made to compensate for certain taxable
distributions with respect to Common Stock. Thus, under certain circumstances,
an increase in the Settlement Rate is likely to be taxable to holders of
Securities as a dividend to the extent of the current or accumulated earnings
and profits of the Company. Holders of Securities would be required to include
their allocable share of such constructive dividend in gross income but would
not receive any cash related thereto.
STATE AND OTHER TAX CONSIDERATIONS
Under federal law, interest on Treasury obligations is generally exempt
from state and local income taxes imposed on individual investors. This
exemption generally should apply to an individual Security holder's share of
interest on the Treasury Notes to the extent that an individual's state of
residence (or other applicable state or local taxing jurisdiction) characterizes
the Security for its income tax purposes consistently with the Security's
federal income tax characterization. There can be no assurance, however, that an
individual's state of residence (or other applicable state or local taxing
jurisdiction) would so characterize the Security, and, in any event, the
exemption would not extend to gain on sale or other disposition of a Security.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE ACQUISITION AND HOLDING OF A
SECURITY.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Company has agreed to sell to such Underwriter, the number of
Securities set forth opposite each Underwriter's name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SECURITIES
- ----------- ----------
<S> <C>
Smith Barney Inc............................................
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Montgomery Securities.......................................
Morgan Stanley & Co. Incorporated...........................
Piper Jaffray Inc...........................................
----------
Total............................................. 15,000,000
==========
</TABLE>
The Underwriters are obligated to take and pay for all Securities offered
hereby (other than those covered by the over-allotment option described below)
if any such Securities are taken.
The Underwriters, for whom Smith Barney Inc., Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Montgomery
Securities, Morgan Stanley & Co. Incorporated and Piper Jaffray Inc. are acting
as representatives, propose initially to offer the Securities to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
Security. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per Security on sales to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days following the date of this Prospectus, to purchase up to an aggregate of
additional Securities at the price to the public set forth on the cover
page of this Prospectus, less the underwriting discount. The Underwriters may
exercise this option only to cover over-allotments, if any, made on the sale of
the Securities offered hereby. If Purchase Contracts underlying any such
additional Securities are entered into, the Underwriters, at the direction of
the Company, would purchase and pledge under the Pledge Agreement the Treasury
Notes underlying such Securities and the Company or the Underwriters, as
appropriate, would pay a net amount equal to the proceeds (deficit) to the
Company in respect of such Securities as set forth on the cover page of this
Prospectus. If the Underwriters exercise their over-allotment option, each of
the Underwriters has severally agreed, subject to certain conditions, to effect
the foregoing transactions with respect to approximately the same percentage of
such Securities that the respective number of Securities set forth opposite its
name in the foregoing table bears to the Securities offered hereby. The price of
the Treasury Notes underlying Securities with respect to which an over-allotment
option is exercised may be different from that set forth on the cover page of
this Prospectus. Any such difference will be for the account of the Underwriters
and will not affect the amount of the proceeds (deficit) to the Company in
respect of such Securities as shown on the cover page of this Prospectus. The
Underwriters may enter into certain hedge transactions for their own account to
reduce or eliminate their risk in this regard.
The Company has agreed to indemnify the Underwriters against, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company has agreed, for a period of 90 days after the date of this
Prospectus, to not, without the prior written consent of Smith Barney Inc.,
directly or indirectly, sell, offer to sell, grant any option for the sale of or
otherwise dispose of, or enter into any agreement to sell, any Securities,
Purchase Contracts or Common Stock or any securities of the Company similar to
the Securities, Purchase Contracts or Common Stock or any security convertible
into or exchangeable or exercisable for Securities, Purchase Contracts or Common
Stock other than to the Underwriters pursuant to the Purchase Agreement, other
than shares of Common Stock or options for shares of Common Stock issued
pursuant to or sold in connection with any employee benefit,
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<PAGE> 83
dividend reinvestment and stock option and stock purchase plans of the Company
and its subsidiaries and other than shares of Common Stock issuable upon early
settlement of the Securities or exercise of stock options. In addition, the
Company's executive officers and directors have agreed that, for a period of 90
days from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., directly or indirectly, sell, offer to sell, grant
any option for the sale of, or otherwise dispose of, or enter into any agreement
to sell, any Common Stock or any security convertible into or exchangeable or
exercisable for Common Stock.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Securities than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the market
price of the Securities at levels above those which might otherwise prevail in
the open market. Such transaction may include placing bids for the Securities at
levels above those which might otherwise prevail in the open market. Such
transactions may include placing bids for the Securities or effecting purchases
of the Securities for the purpose of pegging, fixing or maintaining the price of
the Securities or for the purpose of reducing a syndicate short position created
in connection with the offering. A syndicate short position may be covered by
exercise of the option described above in lieu of or in addition to open market
purchases. In addition, the contractual arrangements among the Underwriters
include a provision whereby, if the Representatives purchase securities in the
open market for the account of the underwriting syndicate and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Securities in question at the cost price to
the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
Securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
Prior to this offering, there has been no public market for the Securities.
The public offering price for the Securities was determined in negotiations
between the Company and the Representatives. In determining the terms of the
Securities, including the public offering price, the Company and the
Representatives considered the market price of the Company's Common Stock and
also considered the Company's recent results of operations, the future prospects
of the Company and the industry in general, market prices and terms of, and
yields on, securities of other companies considered to be comparable to the
Company and prevailing conditions in the securities markets. There can be no
assurance that an active trading market will develop for the Securities or that
the Securities will trade in the public market subsequent to the offering at or
above the initial public offering price.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, the Company and its subsidiaries in the
ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama, and for the
Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements of MedPartners, Inc. appearing in
MedPartners, Inc.'s Annual Report on Form 10-K/A for the year ended December 31,
1996, and the consolidated financial statements of InPhyNet Medical Management
Inc. and Subsidiaries appearing in InPhyNet Medical Management Inc. and
Subsidiaries' Annual Report on Form 10-K/A for the year ended December 31, 1996,
each have been audited by Ernst & Young LLP, as set forth in their reports
included therein and incorporated herein by reference. Such consolidated
financial statements referred to above are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
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AVAILABLE INFORMATION
The Company has filed a Registration Statement (the "Registration
Statement") on Form S-3 under the Securities Act with the SEC covering the
Securities. This Prospectus does not contain all the information set forth in
the Registration Statement which the Company has filed with the SEC. Certain
portions have been omitted pursuant to the rules and regulations of the SEC, and
reference is hereby made to such portions for further information with respect
to the Company and the Securities. Statements contained herein concerning
certain documents are not necessarily complete, and in each instance, reference
is made to the copies of such documents filed as exhibits to the Registration
Statement or incorporated by reference. Each such statement is qualified in its
entirety by such reference.
The Company is subject to the information requirements of the Exchange Act
(SEC File No. 0-27276), and in accordance therewith, files periodic reports,
proxy statements and other information with the SEC relating to its business,
financial statements and other matters. The Registration Statement, as well as
such reports, proxy statements and other information, may be inspected and
copied at prescribed rates at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates by writing to the SEC, Public Reference Section, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The SEC also maintains a
Web site that contains reports, proxy statements and other information regarding
registrants that file electronically with the SEC. The address of such site is
http://www.sec.gov. The Company's Common Stock is listed on the NYSE. The
Registration Statement, reports, proxy statements and certain other information
with respect to the Company can be inspected at the office of the NYSE, 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are hereby incorporated by reference in this
Prospectus all of which were previously filed by the Company with the SEC:
1. The Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996.
2. The Company's Current Report on Form 8-K filed on January 27, 1997
(reporting the Plan of Merger with InPhyNet and setting forth certain pro
forma financial information for the combined companies).
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
4. The Company's Registration Statement on Form S-4 (Registration No.
333-24639).
5. The description of the Company's Common Stock contained in the
Company's Registration Statement filed with the SEC on Form 8-B under the
Exchange Act and declared effective on November 29, 1995, including any
amendment or reports filed for the purpose of updating such description.
Additionally, all documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of its offering of the securities
offered hereby shall be deemed to be incorporated by reference into this
Prospectus. Any statement contained in a previously filed document incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in a
subsequently filed document modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or replaced, to constitute a part of this Prospectus.
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<PAGE> 85
The Company undertakes to provide to any person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of any such
person, without charge, by first class mail or other equally prompt means within
one business day of receipt of such request, a copy of any or all of the
documents which have been or may be incorporated by reference into this
Prospectus, other than exhibits to such documents. Written or oral requests for
such copies should be directed to the Company at 3000 Galleria Tower, Suite
1000, Birmingham, Alabama 35244, Attention: Corporate Secretary (telephone (205)
733-8996).
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======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Forward-Looking Statements and Factors
that May Affect Future Results...... 10
The Company........................... 11
Risk Factors.......................... 11
Use of Proceeds....................... 21
Price Range of Common Stock........... 22
Dividend Policy....................... 22
Capitalization........................ 23
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Pro Forma Condensed Combined Financial
Information......................... 34
Business.............................. 42
Management............................ 60
Description of the Securities......... 64
Description of the Purchase
Contracts........................... 65
Certain Provisions of the Purchase
Contract Agreement and the Pledge
Agreement........................... 70
Description of Capital Stock.......... 73
Certain Federal Income Tax
Consequences........................ 78
State and Other Tax Considerations.... 80
Underwriting.......................... 81
Legal Matters......................... 82
Experts............................... 82
Available Information................. 83
Incorporation of Certain Information
by Reference........................ 83
</TABLE>
======================================================
======================================================
15,000,000 SECURITIES
(MEDPARTNERS, INC. LOGO)
% TAPS(SM)
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
(SM)SERVICE MARK OF SMITH BARNEY INC.
======================================================
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the Securities offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $
National Association of Securities Dealers, Inc. Filing
Fee....................................................... $ 30,500
Collateral Agent's Fee...................................... $
Blue Sky Fees and Expenses.................................. $
Legal Fees and Expenses..................................... $
Accounting Fees............................................. $
Printing Costs.............................................. $
Miscellaneous Expenses...................................... $
-----------
Total........................................ $
===========
</TABLE>
- ---------------
* Actual amount.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of Delaware ("DGCL")
grants corporations the right to limit or eliminate the personal liability of
their directors in certain circumstances in accordance with provisions therein
set forth. The Company's Third Restated Certificate of Incorporation contains a
provision eliminating or limiting director liability to the Company and its
stockholders for monetary damages arising from acts of omissions in the
director's capacity as a director. The provision does not, however, eliminate or
limit the personal 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 which involve intentional misconduct or a knowing violation
of law, (iii) under 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. This provision offers persons who serve on
the Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above). 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 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. The Commission has taken the
position that the provision will have no effect on claims arising under the
federal securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. The Company's Second Amended and Restated By-laws provide for
mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of the Company who, by reason of the fact
that he or she is a director, officer, employee, or agent of the Company, is
involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such director, officer, employee,
or agent in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.
The Company has agreed to indemnify all of its directors and executive
officers against liability incurred by them by reason of their services as a
director to the fullest extent allowable under applicable law. In addition, the
Company has purchased insurance containing customary terms and conditions as
permitted by Delaware law on behalf of its directors and officers, which may
cover liabilities under the Securities Act.
II-1
<PAGE> 88
ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
(1) -- Form of Underwriting Agreement.*
(2)-1 -- Agreement and Plan of Merger, dated as of January 20, 1997
as amended by Amendment No. 1 dated as of May 21, 1997,
among MedPartners, Inc., SeaBird Merger Corporation and
InPhyNet Medical Management Inc., filed as Exhibit (2)-1 to
the Company's Registration Statement on Form S-4
(Registration No. 333-24639), is hereby incorporated herein
by reference.
(3)-1 -- MedPartners, Inc. Third Restated Certificate of
Incorporation, filed as Exhibit (3)-1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is hereby incorporated herein by
reference.
(3)-2 -- MedPartners, Inc. Second Amended and Restated Bylaws, filed
as Exhibit (3)-2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-12465), is hereby
incorporated herein by reference.
(4)-1 -- MedPartners, Inc. Rights Agreement, filed as Exhibit (4)-1
to the Company's Registration Statement on Form S-4
(Registration No. 33-00774), is hereby incorporated herein
by reference.
(4)-2 -- Amendment No. 1 to the Rights Plan of MedPartners, Inc.,
filed as Exhibit (4)-2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, is hereby
incorporated herein by reference.
(4)-3 -- Amendment No. 2 to the Rights Agreement of MedPartners,
Inc., filed as Exhibit (4)-2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-17339), is
hereby incorporated herein by reference.
(4)-4 -- Form of Purchase Contract Agreement.
(4)-5 -- Form of Pledge Agreement.
(5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the
legality of the Securities.*
(8) -- Tax opinion*
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately
following signature pages to the Registration Statement.
(23)-2 -- Consent of Haskell Slaughter & Young L.L.C. (included in the
opinion filed as Exhibit (5)).
(24) -- Powers of Attorney. See the signature pages to this
Registration Statement.
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statements Schedule:
None are applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the
II-2
<PAGE> 89
form of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume, and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) For the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 hereof, or otherwise,the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Birmingham, State of Alabama on July 9, 1997.
MEDPARTNERS, INC.
By: /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Larry R. House and Harold O. Knight, Jr., and
each of them, his attorney-in-fact with power of substitution for him in any and
all capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instructions he deems necessary or appropriate, and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ LARRY R. HOUSE Chairman of the Board and July 9, 1997
- ----------------------------------------------------- Chief Executive Officer and
Larry R. House Director
/s/ HAROLD O. KNIGHT, JR. Executive Vice President and July 9, 1997
- ----------------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr. (Principal Financial and
Accounting Officer)
/s/ RICHARD M. SCRUSHY Director July 9, 1997
- -----------------------------------------------------
Richard M. Scrushy
/s/ LARRY D. STRIPLIN, JR. Director July 9, 1997
- -----------------------------------------------------
Larry D. Striplin, Jr.
/s/ CHARLES W. NEWHALL III Director July 9, 1997
- -----------------------------------------------------
Charles W. Newhall III
/s/ TED H. MCCOURTNEY Director July 9, 1997
- -----------------------------------------------------
Ted H. McCourtney
/s/ WALTER T. MULLIKIN, M.D. Director July 9, 1997
- -----------------------------------------------------
Walter T. Mullikin, M.D.
</TABLE>
II-4
<PAGE> 91
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ JOHN S. MCDONALD, J.D. Director July 9, 1997
- -----------------------------------------------------
John S. McDonald, J.D.
/s/ RICHARD J. KRAMER Director July 9, 1997
- -----------------------------------------------------
Richard J. Kramer
/s/ ROSALIO J. LOPEZ, M.D. Director July 9, 1997
- -----------------------------------------------------
Rosalio J. Lopez, M.D.
/s/ C.A. LANCE PICOLO Director July 9, 1997
- -----------------------------------------------------
C.A. Lance Picolo
/s/ ROGER L. HEADRICK Director July 9, 1997
- -----------------------------------------------------
Roger L. Headrick
/s/ HARRY M. JANSEN KRAEMER, JR. Director July 9, 1997
- -----------------------------------------------------
Harry M. Jansen Kraemer, Jr.
</TABLE>
II-5
<PAGE> 92
EXHIBIT (23)-1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3, No. 333- ) and the related Prospectus
of MedPartners, Inc. for the registration of the Securities and the shares of
its Common Stock referenced therein and to the incorporation by reference
therein of our report dated February 3, 1997, with respect to the consolidated
financial statements of MedPartners, Inc. for the year ended December 31, 1996,
included in its Annual Report on Form 10-K/A for the year ended December 31,
1996, and our report dated February 14, 1997, (except for the second paragraph
of Note 4, as to which the date is May 20, 1997) with respect to the
consolidated financial statements of InPhyNet Medical Management Inc. and
Subsidiaries, included in its Annual Report (Form 10-K/A) for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Birmingham, Alabama
July 8, 1997
<PAGE> 1
EXHIBIT (4) - 4
- --------------------------------------------------------------------------------
MEDPARTNERS, INC.
AND
--------------------------,
AS PURCHASE CONTRACT AGENT
----------------------------------------
PURCHASE CONTRACT AGREEMENT
----------------------------------------
DATED AS OF _____________, 1997
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
RECITALS .............................................................................................. 1
ARTICLE I Definitions and Other Provisions of
General Application........................................................................... 1
Section 1.1. Definitions.................................................................... 1
Act ................................................................................. 1
Affiliate............................................................................ 1
Agent................................................................................ 2
Agreement............................................................................ 2
Applicable Market Value.............................................................. 2
Bankruptcy Code...................................................................... 2
Board of Directors................................................................... 2
Board Resolution..................................................................... 2
Business Day......................................................................... 2
Closing Price........................................................................ 2
Collateral Agent..................................................................... 2
Common Stock......................................................................... 2
Company.............................................................................. 2
Corporate Trust Office............................................................... 3
Current Market Price................................................................. 3
Deferred Yield Enhancement Payments.................................................. 3
Depositary........................................................................... 3
Early Settlement..................................................................... 3
Early Settlement Amount.............................................................. 3
Early Settlement Date................................................................ 3
Early Settlement Rate................................................................ 3
Exchange Act......................................................................... 3
Excess Treasury Notes................................................................ 3
Expiration Date...................................................................... 3
Expiration Time...................................................................... 3
Final Settlement Date................................................................ 3
Final Settlement Fund................................................................ 3
Global Security Certificate.......................................................... 3
Holder............................................................................... 3
Issuer Order" or "Issuer Request..................................................... 4
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
NYSE ................................................................................ 4
Officers' Certificate................................................................ 4
Opinion of Counsel................................................................... 4
Outstanding Securities............................................................... 4
Outstanding Security Certificates.................................................... 4
Payment Date......................................................................... 5
Person............................................................................... 5
Permitted Investments................................................................ 5
Pledge............................................................................... 5
Pledge Agreement..................................................................... 5
Predecessor Security Certificate..................................................... 5
Purchase Contract.................................................................... 5
Purchased Shares..................................................................... 5
Record Date.......................................................................... 5
Reorganization Event................................................................. 6
Responsible Officer.................................................................. 6
Security ............................................................................ 6
Security Certificate................................................................. 6
Security Register.................................................................... 6
Settlement Rate...................................................................... 6
Stated Amount........................................................................ 6
Termination Date..................................................................... 6
Termination Event.................................................................... 6
Threshold Appreciation Price......................................................... 7
TIA.................................................................................. 7
Trading Day.......................................................................... 7
Treasury Notes....................................................................... 7
Underwriting Agreement............................................................... 7
Vice President....................................................................... 7
Yield Enhancement Payment............................................................ 7
Section 1.2. Compliance Certificates and Opinions........................................ 7
Section 1.3. Form of Documents Delivered to Agent........................................ 8
Section 1.4. Acts of Holders; Record Dates............................................... 8
Section 1.5. Notices, etc., to Agent and the Company..................................... 10
Section 1.6. Notice to Holders; Waiver................................................... 10
Section 1.7. Effect of Headings and Table of Contents.................................... 11
Section 1.8. Successors and Assigns...................................................... 11
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
(CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 1.9. Separability Clause......................................................... 11
Section 1.10. Benefits of Agreement....................................................... 11
Section 1.11. Governing Law............................................................... 11
Section 1.12. Legal Holidays.............................................................. 11
Section 1.13. Counterparts................................................................ 12
Section 1.14. Inspection of Agreement..................................................... 12
ARTICLE II Security Certificate Forms.................................................. 12
Section 2.1. Forms of Security Certificates Generally.................................... 12
Section 2.2. Form of Agent's Certificate of Authentication............................... 13
ARTICLE III The Securities.............................................................. 13
Section 3.1. Title and Terms; Denominations.............................................. 13
Section 3.2. Rights and Obligations Evidenced by the Security Certificates............... 13
Section 3.3. Execution, Authentication, Delivery and Dating.............................. 14
Section 3.4. Temporary Security Certificates............................................. 15
Section 3.5. Registration; Registration of Transfer and Exchange......................... 15
Section 3.6. Mutilated, Destroyed, Lost and Stolen Security Certificates................. 17
Section 3.7. Persons Deemed Owners....................................................... 18
Section 3.8. Cancellation................................................................ 19
Section 3.9. Securities Not Separable.................................................... 19
Section 3.10. No Consent to Assumption.................................................... 19
ARTICLE IV The Treasury Notes................................................................... 20
Section 4.1. Payment of Interest; Interest Rights Preserved.............................. 20
Section 4.2. Transfer of Treasury Notes Upon Occurrence of Termination Event............. 21
ARTICLE V The Purchase Contracts...................................................... 22
Section 5.1. Purchase of Shares of Common Stock.......................................... 22
Section 5.2. Yield Enhancement Payments.................................................. 23
</TABLE>
iii
<PAGE> 5
TABLE OF CONTENTS
(CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 5.3. Deferral of Payment Dates For Yield Enhancement Payments.................... 24
Section 5.4. Payment of Purchase Price................................................... 25
Section 5.5. Issuance of Shares of Common Stock.......................................... 25
Section 5.6. Adjustment of Settlement Rate............................................... 26
Section 5.7. Notice of Adjustments and Certain Other Events.............................. 31
Section 5.8. Termination Event; Notice................................................... 32
Section 5.9. Early Settlement............................................................ 32
Section 5.10. No Fractional Shares........................................................ 34
Section 5.11. Charges and Taxes........................................................... 34
ARTICLE VI Remedies............................................................................. 34
Section 6.1. Unconditional Right of Holders to Receive Yield
Enhancement Payment......................................................... 35
Section 6.2. Restoration of Rights and Remedies.......................................... 35
Section 6.3. Rights and Remedies Cumulative.............................................. 35
Section 6.4. Delay or Omission Not Waiver................................................ 35
Section 6.5. Undertaking for Costs....................................................... 36
Section 6.6. Waiver of Stay or Extension Laws............................................ 36
ARTICLE VII The Agent............................................................................ 36
Section 7.1. Certain Duties and Responsibilities......................................... 36
Section 7.2. Notice of Default........................................................... 37
Section 7.3. Certain Rights of Agent..................................................... 37
Section 7.4. Not Responsible for Recitals or Issuance of Securities...................... 38
Section 7.5. May Hold Securities......................................................... 38
Section 7.6. Money Held in Custody....................................................... 39
Section 7.7. Compensation and Reimbursement.............................................. 39
Section 7.8. Corporate Agent Required; Eligibility....................................... 39
Section 7.9. Resignation and Removal; Appointment of Successor........................... 40
Section 7.10. Acceptance of Appointment by Successor...................................... 41
Section 7.11. Merger, Conversion, Consolidation or Succession to Business................. 41
Section 7.12. Preservation of Information; Communications to Holders...................... 42
Section 7.13. No Obligations of Agent..................................................... 42
</TABLE>
iv
<PAGE> 6
TABLE OF CONTENTS
(CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 7.14. Tax Compliance.............................................................. 42
ARTICLE VIII Supplemental Agreements.............................................................. 43
Section 8.1. Supplemental Agreements Without
Consent of Holders.......................................................... 43
Section 8.2. Supplemental Agreements with Consent of Holders............................. 44
Section 8.3. Execution of Supplemental Agreements........................................ 44
Section 8.4. Effect of Supplemental Agreements........................................... 45
Section 8.5. Reference to Supplemental Agreements........................................ 45
ARTICLE IX Consolidation, Merger, Sale or Conveyance............................................ 45
Section 9.1. Covenant Not to Merge, Consolidate,
Sell or Convey Property Except
Under Certain Conditions.................................................... 45
Section 9.2. Rights and Duties of Successor
Corporation................................................................. 46
Section 9.3. Opinion of Counsel to Agent................................................. 46
ARTICLE X Covenants................................................................... 46
Section 10.1. Performance Under Purchase Contracts........................................ 46
Section 10.2. Maintenance of Office or Agency............................................. 47
Section 10.3. Company to Reserve Common Stock............................................. 47
Section 10.4. Covenant as to Common Stock................................................. 47
Section 10.5. Statement of Officers of the Company as to Default.......................... 48
</TABLE>
v
<PAGE> 7
PURCHASE CONTRACT AGREEMENT, dated as of ________________, 1997, between
MedPartners, Inc., a Delaware corporation (the "Company"), and
_________________, a ________________ corporation, acting as purchase contract
agent for the Holders of Securities from time to time (the "Agent").
RECITALS
The Company has duly authorized the execution and delivery of this
Agreement and the Security Certificates evidencing the Securities.
All things necessary to make the Company's obligations under the
Securities, when the Security Certificates are executed by the Company and
authenticated, executed on behalf of the Holders and delivered by the Agent, as
in this Agreement provided, the valid obligations of the Company, and to
constitute these presents a valid agreement of the Company, in accordance with
its terms, have been done.
WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 1.1. Definitions.
For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(1) The terms defined in this Article have the meanings assigned to them
in this Article and include the plural as well as the singular; and
(2) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
"Act" when used with respect to any Holder, has the meaning specified in
Section 1.4.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any
<PAGE> 8
specified Person means the Power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agent" means the Person named as the "Agent" in the first paragraph of
this instrument until a successor Agent shall have become such pursuant to the
applicable provisions of this Agreement, and thereafter "Agent" shall mean the
Person who is then the Agent hereunder.
"Agreement" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more agreements
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Applicable Market Value" has the meaning specified in Section 5.1.
"Bankruptcy Code" means title 11 of the United States Code, or any other
law of the United States that from time to time provides a uniform system of
bankruptcy laws.
"Board of Directors" means the board of directors of the Company or a
duly authorized committee of that board.
"Board Resolution" means one or more resolutions of the Board of
Directors, a copy of which has been certified by the Secretary or an Assistant
Secretary of the Company to have been duly adopted by the Board of Directors and
to be in full force and effect on the date of such certification and delivered
to the Agent.
"Business Day" means any day that is not a Saturday, Sunday or a day on
which the NYSE or banking institutions or trust companies in The City of New
York are authorized or obligated by law or executive order to be closed.
"Closing Price" has the meaning specified in Section 5.1.
"Collateral Agent" means __________________, as Collateral Agent under
the Pledge Agreement until a successor Collateral Agent shall have become such
pursuant to the applicable provisions of the Pledge Agreement, and thereafter
"Collateral Agent" shall mean the Person who is then the Collateral Agent
thereunder.
"Common Stock" means the Common Stock, par value $.001 per share, of the
Company.
"Company" means the Person named as the "Company" in the first paragraph
of this instrument until a successor shall have become such pursuant to the
applicable provision of this Agreement, and thereafter "Company" shall mean such
successor.
2
<PAGE> 9
"Corporate Trust Office" means the principal corporate trust office of
the Agent at which, at any particular time, its corporate trust business shall
be administered, which office at the date hereof is located at
___________________, Attention: _____________, except that for purposes of
Section 10.2, such term shall mean the office or agency of the Agent in the
Borough of Manhattan, the City of New York, which office at the date hereof is
located at _____________________.
"Current Market Price" has the meaning specified in Section 5.6(a)(8).
"Deferred Yield Enhancement Payments" has the meaning specified in
Section 5.3.
"Depositary" means a clearing agency registered under the Exchange Act
that is designated to act as Depositary for the Securities as contemplated by
Section 3.5.
"Early Settlement" has the meaning specified in Section 5.9(a).
"Early Settlement Amount" has the meaning specified in Section 5.9(a).
"Early Settlement Date" has the meaning specified in Section 5.9(a).
"Early Settlement Rate" has the meaning specified in Section 5.9(b).
"Exchange Act" means the Securities Exchange Act of 1934 and any statute
successor thereto, in each case as amended from time to time, and the rules and
regulations promulgated thereunder.
"Excess Treasury Notes" has the meaning specified in Section 4.2.
"Expiration Date" has the meaning specified in Section 1.4.
"Expiration Time" has the meaning specified in Section 5.6(a)(6).
"Final Settlement Date" means July 31, 2000.
"Final Settlement Fund" has the meaning specified in Section 5.5.
"Global Security Certificate" means a Security Certificate that evidences
all or part of the Securities and is registered in the name of a Depositary or a
nominee thereof.
"Holder," when used with respect to a Security Certificate (or a
Security) means a Person in whose name the Security evidenced by such Security
Certificate (or the Security Certificate evidencing such Security) is registered
in the Security Register, subject to Section 3.7.
3
<PAGE> 10
"Issuer Order" or "Issuer Request" means a written order or request
signed in the name of the Company by its Chairman of the Board, any Vice
Chairman, its President or a Vice President and by its Treasurer, an Assistant
Treasurer, its Secretary or an Assistant Secretary, and delivered to the Agent.
"NYSE" has the meaning specified in Section 5.1.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, any Vice Chairman of the Board, the President or any Vice President and
by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary of the Company and delivered to the Agent.
"Opinion of Counsel" means an opinion in writing signed by legal counsel,
who may be an employee of or counsel to the Company and who shall be reasonably
acceptable to the Agent.
"Outstanding Securities" means, as of the date of determination, all
Securities evidenced by then Outstanding Security Certificates, except:
(i) If a Termination Event has occurred, Securities for which
the underlying Treasury Notes have been theretofore deposited with the
Agent in trust for the Holders of such Securities; and
(ii) On and after the applicable Early Settlement Date,
Securities as to which the Holder has elected to effect Early Termination
of the related Purchase Contracts;
provided, however, that in determining whether the Holders of the requisite
number of Securities have given any request, demand, authorization, direction,
notice, consent or waiver hereunder, Securities owned by the Company or any
Affiliate of the Company shall be disregarded and deemed not to be outstanding,
except that, in determining whether the Agent shall be protected in relying upon
any such request, demand, authorization, direction, notice, consent or waiver,
only Securities which the Agent knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Agent the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Company or any Affiliate of the Company.
"Outstanding Security Certificates" means, as of the date of
determination, all Security Certificates theretofore authenticated, executed and
delivered under this Agreement, except:
(i) Security Certificates theretofore cancelled by the Agent or
delivered to the Agent for cancellation; and
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(ii) Security Certificates in exchange for or in lieu of which
other Security Certificates have been authenticated, executed on behalf
of the Holder and delivered pursuant to this Agreement, other than any
such Security Certificate in respect of which there shall have been
presented to the Agent proof satisfactory to it that such Security
Certificate is held by a bona fide purchaser in whose hands the
Securities evidenced by such Security Certificate are valid obligations
of the Company.
"Payment Date" means each January 31 and July 31, commencing
January 31, 1998.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Permitted Investments" is defined to mean securities that are (i) direct
obligations of the U.S. for the payment of which its full faith and credit is
pledged, (ii) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the U.S., the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the U.S. or
(iii) mutual funds that invest solely in the above U.S. government obligations.
"Pledge" means the pledge under the Pledge Agreement of the Treasury
Notes constituting a part of the Securities.
"Pledge Agreement" means the Pledge Agreement, dated as of the date
hereof, among the Company, the Collateral Agent and the Agent on its own behalf
and as attorney-in-fact for the Holders from time to time of the Securities.
"Predecessor Security Certificate" of any particular Security Certificate
means every previous Security Certificate evidencing all or a portion of the
rights and obligations of the Holder under the Securities evidenced thereby;
and, for the purposes of this definition, any Security Certificate authenticated
and delivered under Section 3.6 in exchange for or in lieu of a mutilated,
destroyed, lost or stolen Security Certificate shall be deemed to evidence the
same rights and obligations of the Holder as the mutilated, destroyed, lost or
stolen Security Certificate.
"Purchase Contract" when used with respect to any Security, means the
contract obligating the Company to sell and the Holder of such Security to
purchase Common Stock on the terms and subject to the conditions set forth in
Article Five hereof.
"Purchased Shares" has the meaning specified in Section 5.6(a)(6).
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"Record Date" for the interest and Yield Enhancement Payments payable on
any Payment Date means, as to any Global Security Certificate, the Business Day
next preceding such Payment Date, and as to any other Security Certificate, the
15th day of the month preceding such Payment Date.
"Reorganization Event" has the meaning specified in Section 5.6(b).
"Responsible Officer," when used with respect to the Agent, means any
officer of the Agent assigned by the Agent to administer its corporate trust
matters.
"Security" means the collective rights and obligations of a Holder of a
Security Certificate in respect of Treasury Notes with a principal amount equal
to the Stated Amount, subject to the Pledge thereof, and a Purchase Contract.
"Security Certificate" means a certificate evidencing the rights and
obligations of a Holder in respect of the number of Securities specified on such
certificate.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 3.5.
"Settlement Rate" has the meaning specified in Section 5.1.
"Stated Amount" means $______.
"Termination Date" means the date, if any, on which a Termination Event
occurs.
"Termination Event" means the occurrence of any of the following events:
(i) at any time on or prior to the Final Settlement Date, a judgment, decree or
order by a court having jurisdiction in the premises shall have been entered
granting relief under the Bankruptcy Code, adjudicating the Company to be
insolvent, or approving as properly filed a petition seeking reorganization or
liquidation of the Company under the Bankruptcy Code or any other similar
applicable Federal or State law, and, unless such judgment, decree or order
shall have been entered within 60 days prior to the Final Settlement Date, such
decree or order shall have continued undischarged and unstayed for a period of
60 days; or (ii) a judgment, decree or order of a court having jurisdiction in
the premises for the appointment of a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency of the Company or of its property, or for
the winding up or liquidation of its affairs, shall have been entered, and,
unless such judgment, decree or order shall have been entered within 60 days
prior to the Final Settlement Date, such judgment, decree or order shall have
continued undischarged and unstayed for a period of 60 days, or (iii) at any
time on or prior to the Final Settlement Date the Company shall file a petition
for relief under the Bankruptcy Code, or shall consent to the filing of a
bankruptcy proceeding against it, or shall file a petition or answer or consent
seeking reorganization or liquidation under the Bankruptcy Code or any other
similar applicable Federal or State law, or shall
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consent to the filing of any such petition, or shall consent to the appointment
of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency
of it or of its property, or shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts generally as
they become due.
"Threshold Appreciation Price" has the meaning specified in Section 5.1.
"TIA" means the Trust Indenture Act of 1939, as amended, or any successor
statute.
"Trading Day" has the meaning specified in Section 5.1.
"Treasury Notes" means _____% United States Treasury Notes due July 31,
2000.
"Underwriting Agreement" means the Underwriting Agreement dated
_________, 1997 between the Company and Smith Barney Inc., Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Montgomery Securities, Morgan Stanley & Co. Incorporated and Piper Jaffray Inc.
as representatives of the several Underwriters named therein.
"Vice President" means any vice president, whether or not designated by a
number or a word or words added before or after the title "vice president."
"Yield Enhancement Payment" means the fee payable by the Company on each
Payment Date in respect of each Purchase Contract, equal to ____% per annum of
the Stated Amount, computed on the basis of the actual number of days elapsed
in a year of 365 or 366 days, as the case may be, plus any Deferred Yield
Enhancement Payments accrued pursuant to Section 5.3, except that the Yield
Enhancement Payment payable on the first Payment Date will be adjusted so that
the Yield Enhancement Payment payable on such date will be the equivalent of
____% of the Stated Amount per annum accruing from the date of issuance of the
Securities to January 31, 1998.
Section 1.2. Compliance Certificates and Opinions.
Except as otherwise expressly provided by this Agreement, upon any
application or request by the Company to the Agent to take any action under any
provision of this Agreement, the Company shall furnish to the Agent an Officers'
Certificate stating that all conditions precedent, if any, provided for in this
Agreement relating to the proposed action have been complied with and an Opinion
of Counsel stating that, in the opinion of such counsel, all such conditions
precedent, if any, have been complied with, except that in the case of any such
application or request as to which the furnishing of such documents is
specifically required by any provision of this Agreement relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a condition
or covenant provided for in this Agreement shall include:
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(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 1.3. Form of Documents Delivered to Agent.
In the case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representation by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Agreement, they may, but need not, be consolidated and
form one instrument.
Section 1.4. Acts of Holders; Record Dates.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Holders may be embodied
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in and evidenced by one or more instruments of substantially similar tenor
signed by such Holders in Person or by an agent duly appointed in writing; and,
except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments are delivered to the Agent and,
where it is hereby expressly required, to the Company. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Holders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Agreement
and (subject to Section 7.1) conclusive in favor of the Agent and the Company,
if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgements of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Agent deems sufficient.
(c) The ownership of Securities shall be proved by the Security Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security Certificate evidencing
such Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Agent or the Company in reliance thereon, whether or not notation
of such action is made upon such Security Certificate.
(e) The Company may set any date as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to give, make or take
any request, demand, authorization, direction, notice, consent, waiver or other
action provided or permitted by this Agreement to be given, made or taken by
Holders of Securities. If any record date is set pursuant to this paragraph, the
Holders of Outstanding Securities on such record date, and no other Holders,
shall be entitled to take the relevant action, whether or not such Holders
remain Holders after such record date; provided that no such action shall be
effective hereunder unless taken on or prior to the applicable Expiration Date
by Holders of the requisite number of Outstanding Securities on such record
date. Nothing in this paragraph shall be construed to prevent the Company from
setting a new record date for any action for which a record date has previously
been set pursuant to this paragraph (whereupon the record date previously set
shall automatically and with no action by any Person be cancelled and of no
effect), and nothing in this paragraph shall be construed to render ineffective
any action taken by Holders of the requisite number of
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Outstanding Securities on the date such action is taken. Promptly after any
record date is set pursuant to this paragraph, the Company, at its own expense,
shall cause notice of such record date, the proposed action by Holders and the
applicable Expiration Date to be given to the Agent in writing and to each
Holder of Securities in the manner set forth in Section 1.6.
With respect to any record date set pursuant to this Section, the Company
may designate any date as the "Expiration Date" and from time to time may change
the Expiration Date to any earlier or later day; provided that no such change
shall be effective unless notice of the proposed new Expiration Date is given to
the Agent in writing, and to each Holder of Securities in the manner set forth
in Section 1.6, on or prior to the existing Expiration Date. If an Expiration
Date is not designated with respect to any record date set pursuant to this
Section, the Company shall be deemed to have initially designated the 180th day
after such record date as the Expiration Date with respect thereto, subject to
its right to change the Expiration Date as provided in this paragraph.
Notwithstanding the foregoing, no Expiration Date shall be later than the 180th
day after the applicable record date.
Section 1.5. Notices, etc., to Agent and the Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Agreement to be
made upon, given or furnished to, or filed with,
(1) the Agent by any Holder or by the Company shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided)
if made, given, furnished or filed in writing and personally delivered or
mailed, first-class postage prepaid, to the Agent at __________________,
Attention: ____________________, or at any other address previously
furnished for such purpose in writing by the Agent to the Holders and the
Company, or
(2) the Company by the Agent or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided)
if made, given, furnished or filed in writing and personally delivered or
mailed, first-class postage prepaid, to the Company at 3000 Galleria
Tower, Suite 1000, Birmingham, Alabama 35244, Attention: J. Brooke
Johnston, Jr., or at any other address previously furnished for such
purpose in writing to the Agent by the Company.
Section 1.6. Notice to Holders; Waiver.
Where this Agreement provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address
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as it appears in the Security Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice. In any
case where notice to Holders is given by mail, neither the failure to mail such
notice nor any defect in any notice so mailed to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Where this
Agreement provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Agent, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by reason
of any other cause it shall be impracticable to give such notice by mail, then
such notification as shall be made with the approval of the Agent shall
constitute a sufficient notification for every purpose hereunder.
Section 1.7. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not effect the construction hereof.
Section 1.8. Successors and Assigns.
All covenants and agreements in this Agreement by the Company shall bind
its successors and assigns, whether so expressed or not.
Section 1.9. Separability Clause.
In case any provision in this Agreement or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof and thereof shall not in any way be affected or
impaired thereby.
Section 1.10. Benefits of Agreement.
Nothing in this Agreement or in the Securities, express or implied, shall
give to any Person, other than the parties hereto and their successors hereunder
and the Holders, any benefits or any legal or equitable right, remedy or claim
under this Agreement. The Holders from time to time shall be beneficiaries of
this Agreement and shall be bound by all of the terms and conditions hereof and
of the Securities evidenced by their Security Certificates by their acceptance
of delivery thereof.
Section 1.11. Governing Law.
This Agreement and the Securities shall be governed by and construed in
accordance with the laws of the State of New York.
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Section 1.12. Legal Holidays.
In any case where any Payment Date, any Early Settlement Date or the
Final Settlement Date shall not be a Business Day, then (notwithstanding any
other provision of this Agreement or of the Securities) payment in respect of
interest on Treasury Notes or Yield Enhancement Payments shall not be made.
Purchase Contracts shall not be performed and Early Settlement shall not be
effected on such date, but such payments shall be made, or the Purchase
Contracts shall be performed or Early Settlement effected, as applicable, on the
next succeeding Business Day with the same force and effect as if made on such
Payment Date, Early Settlement Date or Final Settlement Date, as the case may
be; provided, that no interest shall accrue or be payable by the Company or any
Holder for the Period from and after any such Payment Date, Early Settlement
Date or Final Settlement Date, as the case may be.
Section 1.13. Counterparts.
This Agreement may be executed in any number of counterparts, each of
which, when so executed, shall be deemed an original, but all such counterparts
shall together constitute one and the same instrument.
Section 1.14. Inspection of Agreement.
A copy of this Agreement shall be available at all reasonable times at
the Corporate Trust Office for inspection by any Holder.
ARTICLE II
SECURITY CERTIFICATE FORMS
Section 2.1. Forms of Security Certificates Generally.
The Security Certificates (including the form of Purchase Contracts
forming part of the Securities evidenced thereby) shall be in substantially the
form set forth in Exhibit A hereto, with such letters, numbers or other marks of
identification or designation and such legends or endorsements printed,
lithographed or engraved thereon as may be required by the rules of any
securities exchange on which the Securities are listed or Depositary therefor,
or as may, consistently herewith, be determined by the officers of the Company
executing such Security Certificates, as evidenced by their execution of the
Security Certificates.
The definitive Security Certificates shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers of the Company executing the Security
Certificates, consistent with the provisions of this Agreement, as evidenced by
their execution thereof.
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Every Global Security Certificate authenticated, executed on behalf of
the Holders and delivered hereunder shall bear a legend in substantially the
following form:
THIS SECURITY CERTIFICATE IS A GLOBAL SECURITY CERTIFICATE WITHIN THE
MEANING OF THE PURCHASE CONTRACT AGREEMENT HEREINAFTER REFERRED TO AND
IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS
SECURITY CERTIFICATE MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A
SECURITY CERTIFICATE REGISTERED, AND NO TRANSFER OF THIS SECURITY
CERTIFICATE IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY
PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE
LIMITED CIRCUMSTANCES DESCRIBED IN THE PURCHASE CONTRACT AGREEMENT.
Section 2.2. Form of Agent's Certificate of Authentication.
The form of the Agent's certificate of authentication of the Securities
shall be in substantially the form set forth on the form of the Security
Certificates.
ARTICLE III
THE SECURITIES
Section 3.1. Title and Terms; Denominations.
The aggregate number of Securities evidenced by Security Certificates
authenticated, executed on behalf of the Holders and delivered hereunder is
limited to ____________ (subject to increase up to a maximum of ____________ to
the extent the over-allotment option of the underwriters under the Underwriting
Agreement is exercised), except for Security Certificates authenticated,
executed and delivered upon registration of transfer of, in exchange for, or in
lieu of, other Security Certificates pursuant to Section 3.4, 3.5, 3.6, 5.9 or
8.5.
The Security Certificates shall be issuable only in registered form and
only in denominations of a single Security and any integral multiple thereof.
Section 3.2. Rights and Obligations Evidenced by the Security Certificates.
Each Security Certificate shall evidence the number of Securities
specified therein, with each such Security representing the ownership by the
Holder thereof of Treasury Notes with a principal amount equal to the Stated
Amount, subject to the Pledge of such Treasury Notes by such Holder pursuant to
the Pledge Agreement, and the rights and obligations of the Holder under one
Purchase Contract. The Agent as attorney-in-fact for, and on behalf of, the
Holder shall pledge, pursuant to the Pledge Agreement, dated as of
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the date hereof, the Treasury Notes to the Collateral Agent and grant to the
Collateral Agent a security interest in the right, title, and interest of such
Holders in the Treasury Notes, for the benefit of the Company, to secure the
obligation of the Holders under the Purchase Contracts to purchase the Common
Stock of the Company. Prior to the purchase, if any, of shares of Common Stock
under the Purchase Contracts, the Securities shall not entitle the Holders to
any of the rights of a holder of shares of Common Stock, including, without
limitation, the right to vote or receive any dividends or other payments or to
consent or to receive notice as stockholders in respect of the meetings of
stockholders or for the election of directors of the Company or for any other
matter, or any other rights whatsoever as stockholders of the Company, except to
the extent otherwise expressly provided in this Agreement.
Section 3.3. Execution, Authentication, Delivery and Dating.
Upon the execution and delivery of this Agreement, and at any time from
time to time thereafter, the Company may deliver Security Certificates executed
by the Company to the Agent for authentication, execution on behalf of the
Holders and delivery, together with its Issuer Order for authentication of such
Security Certificates, and the Agent in accordance with such Issuer Order shall
authenticate, execute on behalf of the Holder and deliver such Security
Certificates.
The Security Certificates shall be executed on behalf of the Company by
its Chairman of the Board, its Vice Chairman of the Board, its President or one
of its Vice Presidents, under its corporate seal reproduced thereon attested by
its Secretary or one of its Assistant Secretaries. The signature of any of these
officers on the Security Certificates may be manual or facsimile.
Security Certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Security
Certificates or did not hold such offices at the date of such Security
Certificates.
No Purchase Contract underlying a Security evidenced by a Security
Certificate shall be valid until such Security Certificate has been executed on
behalf of the Holder by the manual signature of an authorized signatory of the
Agent, as such Holder's attorney-in-fact. Such signature by an authorized
signatory of the Agent shall be conclusive evidence that the Holder of such
Security Certificate has entered into the Purchase Contracts underlying the
Securities evidenced by such Security Certificate.
Each Security Certificate shall be dated the date of its authentication.
No Security Certificate shall be entitled to any benefit under this
Agreement or be valid or obligatory for any purpose unless there appears on such
Security Certificate a
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certificate of authentication substantially in the form provided for herein
executed by an authorized signatory of the Agent by manual signature, and such
certificate upon any Security Certificate shall be conclusive evidence, and the
only evidence, that such Security Certificate has been duly authenticated and
delivered hereunder.
Section 3.4. Temporary Security Certificates.
Pending the preparation of definitive Security Certificates, the Company
shall execute and deliver to the Agent, and the Agent shall authenticate,
execute on behalf of the Holders, and deliver, in lieu of such definitive
Security Certificates, temporary Security Certificates which are in
substantially the form set forth in Exhibit A hereto, with such letters, numbers
or other marks of identification or designation and such legends or endorsements
printed, lithographed or engraved thereon as may be required by the rules of any
securities exchange on which the Securities are listed, or as may, consistently
herewith, be determined by the officers of the Company executing such Security
Certificates, as evidenced by their execution of the Security Certificates.
If temporary Security Certificates are issued, the Company will cause
definitive Security Certificates to be prepared without unreasonable delay.
After the preparation of definitive Security Certificates, the temporary
Security Certificates shall be exchangeable for definitive Security Certificates
upon surrender of the temporary Security Certificates at the Corporate Trust
Office, at the expense of the Company and without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Security Certificates,
the Company shall execute and deliver to the Agent, and the Agent shall
authenticate, execute on behalf of the Holder, and deliver in exchange therefor,
one or more definitive Security Certificates of authorized denominations and
evidencing a like number of Securities as the temporary Security Certificate or
Security Certificates so surrendered. Until so exchanged, the temporary Security
Certificates shall in all respects evidence the same benefits and the same
obligations with respect to the Securities evidenced thereby as definitive
Security Certificates.
Section 3.5. Registration; Registration of Transfer and Exchange.
The Agent shall keep at the Corporate Trust Office a register (the
register maintained in such office being herein referred to as the "Security
Register") in which, subject to such reasonable regulations as it may prescribe,
the Agent shall provide for the registration of Security Certificates and of
transfers of Security Certificates (the Agent, in such capacity, the "Security
Registrar").
Upon surrender for registration of transfer of any Security Certificate
at the Corporate Trust Office, the Company shall execute and deliver to the
Agent, and the Agent shall authenticate, execute on behalf of the designated
transferee or transferees, and deliver, in the name of the designated transferee
or transferees, one or more new Security Certificates of any authorized
denominations and evidencing a like number of Securities.
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At the option of the Holder, Security Certificates may be exchanged for
other Security Certificates, of any authorized denominations and evidencing a
like number of Securities, upon surrender of the Security Certificates to be
exchanged at the Corporate Trust Office. Whenever any Security Certificates are
so surrendered for exchange, the Company shall execute and deliver to the Agent,
and the Agent shall authenticate, execute on behalf of the Holder, and deliver
the Security Certificates which the Holder making the exchange is entitled to
receive.
All Security Certificates issued upon any registration of transfer or
exchange of a Security Certificate shall evidence the ownership of the same
number of Securities and be entitled to the same benefits and be subject to the
same obligations, under this Agreement as the Securities evidenced by the
Security Certificate surrendered upon such registration of transfer or exchange.
Every Security Certificate presented or surrendered for registration of
transfer or for exchange shall (if so required by the Agent) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Agent duly executed, by the Holder thereof or his attorney
duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of a Security Certificate, but the Company and the Agent may require
payment from the Holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Security Certificates, other than any exchanges pursuant
to Sections 3.6 and 8.5 not involving any transfer.
Notwithstanding the foregoing, the Company shall not be obligated to
execute and deliver to the Agent, and the Agent shall not be obligated to
authenticate, execute on behalf of the Holder and deliver any Security
Certificate presented or surrendered for registration of transfer or for
exchange on or after the Final Settlement Date or the Termination Date. In lieu
of delivery of a new Security Certificate, upon satisfaction of the applicable
conditions specified above in this Section and receipt of appropriate
registration or transfer instructions from such Holder, the Agent shall (i) if
the Final Settlement Date has occurred, deliver the shares of Common Stock
issuable in respect of the Purchase Contracts forming a part of the Securities
evidenced by such Security Certificate, or (ii) if a Termination Event shall
have occurred prior to the Final Settlement Date, transfer the principal amount
of the Treasury Notes evidenced thereby, in each case subject to the applicable
conditions and in accordance with the applicable provisions of Article Five
hereof.
The provisions of Clauses (1), (2), (3) and (4) below shall apply only to
Global Security Certificates:
(1) Each Global Security Certificate authenticated and executed on
behalf of the Holders under this Agreement shall be registered in the
name of the
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Depositary designated for such Global Security Certificate or a nominee
thereof and delivered to such Depositary or a nominee thereof or
custodian therefor, and each such Global Security Certificate shall
constitute a single Security Certificate for all purposes of this
Agreement.
(2) Notwithstanding any other provision in this Agreement, no
Global Security Certificate may be exchanged in whole or in part for
Security Certificates registered, and no transfer of a Global Security
Certificate in whole or in part may be registered, in the name of any
Person other than the Depositary for such Global Security Certificate or
a nominee thereof unless (A) such Depositary (i) has notified the Company
that it is unwilling or unable to continue as Depositary for such Global
Security Certificate or (ii) has ceased to be a clearing agency
registered under the Exchange Act or (B) there shall have occurred and be
continuing a default by the Company in respect to its obligations under
one or more Purchase Contracts.
(3) Subject to Clause (2) above, any exchange of a Global Security
Certificate for other Security Certificates may be made in whole or in
part, and all Security Certificates issued in exchange for a Global
Security Certificate or any portion thereof shall be registered in such
names as the Depositary for such Global Security Certificate shall
direct.
(4) Every Security Certificate authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Security Certificate or any portion thereof, whether pursuant to this
Section, Section 3.4, 3.6, 5.9 or 8.5 or otherwise, shall be
authenticated, executed on behalf of the Holders and delivered in the
form of, and shall be, a Global Security Certificate, unless such
Security Certificate is registered in the name of a Person other than the
Depositary for such Global Security Certificate or a nominee thereof.
Section 3.6. Mutilated, Destroyed, Lost and Stolen Security Certificates.
If any mutilated Security Certificate is surrendered to the Agent, the
Company shall execute and deliver to the Agent, and the Agent shall
authenticate, execute on behalf of the Holder, and deliver in exchange therefor,
a new Security Certificate, evidencing the same number of Securities and bearing
a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Agent (i) evidence to
their satisfaction of the destruction, loss or theft of any Security
Certificate, and (ii) such security or indemnity as may be required by them to
save each of them and any agent of any of them harmless, then, in the absence of
notice to the Company or the Agent that such Security Certificate has been
acquired by a bona fide purchaser, the Company shall execute and deliver to the
Agent, and the Agent shall authenticate, execute on behalf of the Holder, and
deliver to the Holder, in lieu of any such destroyed, lost or stolen Security
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Certificate, a new Security Certificate, evidencing the same number of
Securities and bearing a number not contemporaneously outstanding.
Notwithstanding the foregoing, the Company shall not be obligated to
execute and deliver to the Agent, and the Agent shall not be obligated to
authenticate, execute on behalf of the Holder, and deliver to the Holder, a
Security Certificate on or after the Final Settlement Date or the Termination
Date. In lieu of delivery of a new Security Certificate, upon satisfaction of
the applicable conditions specified above in this Section and receipt of
appropriate registration or transfer instructions from such Holder, the Agent
shall (i) if the Final Settlement Date has occurred, deliver the shares of
Common Stock issuable in respect of the Purchase Contracts forming a part of the
Securities evidenced by such Security Certificate, or (ii) if a Termination
Event shall have occurred prior to the Final Settlement Date, transfer the
principal amount of the Treasury Notes evidenced thereby, in each case subject
to the applicable conditions and in accordance with the applicable provisions of
Article Five hereof.
Upon the issuance of any new Security Certificate under this Section, the
Company and the Agent may require the payment by the Holder of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Agent)
connected therewith.
Every new Security Certificate issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security Certificate shall constitute an original
additional contractual obligation of the Company and of the Holder, whether or
not the destroyed, lost or stolen Security Certificate shall be at any time
enforceable by anyone, and shall be entitled to all the benefits and be subject
to all the obligations of this Agreement equally and proportionately with any
and all other Security Certificate delivered hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
settlement of mutilated, destroyed, lost or stolen Security Certificates.
Section 3.7. Persons Deemed Owners.
Prior to due presentment of a Security Certificate for registration of
transfer, the Company and the Agent, and any agent of the Company or the Agent,
may treat the Person in whose name such Security Certificate is registered as
the owner of the Securities evidenced thereby, for the purpose of receiving
payments of interest on the Treasury Notes, receiving payments of Yield
Enhancement Payments, performance of the Purchase Contracts and for all other
purposes whatsoever, whether or not the payment of interest on the Treasury
Notes or any Yield Enhancement Payment payable in respect of the Purchase
Contracts constituting a part of the Securities evidenced thereby shall be
overdue and notwithstanding any notice to the contrary, and neither the Company
nor the Agent, nor any agent of the Company or the Agent, shall be affected by
notice to the contrary.
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Notwithstanding the foregoing, with respect to any Global Security
Certificate, nothing herein shall prevent the Company, the Agent or any agent of
the Company or the Agent, from giving effect to any written certification, proxy
or other authorization furnished by any Depositary (or its nominee), as a
Holder, with respect to such Global Security Certificate or impair, as between
such Depositary and owners of beneficial interests in such Global Security
Certificate, the operation of customary practices governing the exercise of
rights of such Depositary (or its nominee) as Holder of such Global Security
Certificate.
Section 3.8. Cancellation.
All Security Certificates surrendered for delivery of shares of Common
Stock on or after the Final Settlement Date, transfer of Treasury Notes after
the occurrence of a Termination Event or pursuant to an Early Settlement or
registration of transfer or exchange shall, if surrendered to any Person other
than the Agent, be delivered to the Agent and, if not already cancelled, shall
be promptly cancelled by it. The Company may at any time deliver to the Agent
for cancellation any Security Certificates previously authenticated, executed
and delivered hereunder which the Company may have acquired in any manner
whatsoever, and all Security Certificates so delivered shall, upon Issuer Order,
be promptly cancelled by the Agent. No Security Certificates shall be
authenticated, executed on behalf of the Holder and delivered in lieu of or in
exchange for any Security Certificates cancelled as provided in this Section,
except as expressly permitted by this Agreement. All cancelled Security
Certificates held by the Agent shall be disposed of as directed by Issuer Order.
If the Company or any Affiliate of the Company shall acquire any Security
Certificate, such acquisition shall not operate as a cancellation of such
Security Certificate unless and until such Security Certificate is delivered to
the Agent cancelled or for cancellation.
Section 3.9. Securities Not Separable.
Notwithstanding anything contained herein or in the Security Certificates
to the contrary, for so long as the Purchase Contract comprising a portion of a
Security remains in effect, such Security shall not be separable into its
constituent parts, for purposes of transfer or exchange of such Security, and
the rights and obligations of the Holder of such Security in respect of the
Treasury Notes and Purchase Contracts comprising such Security may be acquired,
and may be transferred and exchanged, only as a Security. Other than a Security
Certificate evidencing a Security, no Holder of a Security, or any Transferee
thereof, shall be entitled to receive a certificate evidencing the ownership of
Treasury Notes or the rights and obligations of the Holder and the Company under
a Purchase Contract for so long as the Purchase Contract underlying the Security
remains in effect.
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Section 3.10. No Consent to Assumption.
Each Holder of a Security, by acceptance thereof, shall be deemed
expressly to have withheld any consent to the assumption under Section 365 of
the Bankruptcy Code or otherwise, of the Purchase Contract by the Company or its
trustee in the event that the Company becomes a debtor under the Bankruptcy
Code.
ARTICLE IV
THE TREASURY NOTES
Section 4.1. Payment of Interest; Interest Rights Preserved.
Interest on any Treasury Note which is paid on any Payment Date shall,
subject to receipt thereof by the Agent from the Collateral Agent as provided by
the terms of the Pledge Agreement, be paid to the Person in whose name the
Security Certificate (or one or more Predecessor Security Certificates) of which
such Treasury Note is a part is registered at the close of business on the
Record Date next preceding such Payment Date; provided, that on January 31,
1998, the first Payment Date with respect to the Securities, the Agent shall
remit to the persons in whose names Securities are registered on the Record
Date with respect thereto interest payable with respect to the Treasury
Securities for the period from the date of initial issuance of the Securities
until January 31, 1998 ("Holders' Accrued Interest"). Interest payable with
respect to the Treasury Notes which accrued prior to the date of initial
issuance of the Securities and which is payable on the first interest payment
date with respect to the Treasury Notes following the date of initial issuance
of the Securities shall be remitted by the Agent to the Company. If the date of
initial issuance of the Securities is prior to July 31, 1997, then that portion
of the semi-annual interest payment due on the Treasury Notes on July 31, 1997
representing Holders' Accrued Interest shall be, upon receipt by the Agent from
the Collateral Agent, promptly invested by the Agent in Permitted Investments on
behalf of the holders of Securities until the first Payment Date, at which time
such amount and any reinvestment income thereon, net of expenses associated
therewith, shall be paid by the Agent to the persons in whose names Securities
are registered on the Record Date with respect thereto together with the
remainder of Holders' Accrued Interest represented by the regularly scheduled
semi-annual interest payment on the Treasury Notes.
Except as otherwise provided in the immediately preceding paragraph, each
Security Certificate evidencing Treasury Notes delivered under this Agreement
upon registration of transfer of or in exchange for or in lieu of any other
Security Certificate shall carry the rights to interest accrued and unpaid, and
to accrue, which were carried by the Treasury Notes underlying such other
Security Certificate.
In the case of any Security with respect to which Early Settlement of the
underlying Purchase Contract is effected on an Early Settlement Date after any
Record Date and on or prior to the next succeeding Payment Date, interest on the
Treasury Notes underlying such Security otherwise payable on such Payment Date
shall be payable on such Payment Date notwithstanding such Early Settlement, and
such interest shall, subject to receipt thereof by the Agent, be paid to the
Person in whose name the Security Certificate (or one
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or more Predecessor Security Certificates) is registered at the close of
business on the Record Date. Except as otherwise expressly provided in the
immediately preceding sentence, in the case of any Security with respect to
which Early Settlement of the underlying Purchase Contract is effected on an
Early Settlement Date, interest on the related Treasury Notes that would
otherwise be payable after the Early Settlement Date shall not be payable
hereunder to the Holder of such Security.
Section 4.2. Transfer of Treasury Notes Upon Occurrence of Termination
Event.
Upon the occurrence of a Termination Event and the transfer to the Agent
of the Treasury Notes underlying such Securities pursuant to the terms of the
Pledge Agreement, the Agent shall request transfer instructions with respect to
such Treasury Notes from each Holder of Securities by written request mailed to
such Holder at his address as it appears in the Security Register, in resect of
the Treasury Notes underlying the Security Certificate held by such Holder. Upon
surrender to the Agent of a Security Certificate with such transfer instructions
in proper form for transfer of the Treasury Notes by Federal Reserve Bank- Wire
or other appropriate procedure, the Agent shall transfer the Treasury Notes
evidenced by such Security Certificate to such Holder in accordance with such
instructions. If a Security Certificate is not duly surrendered to the Agent
with appropriate transfer instructions, the Agent shall hold the Treasury Notes
evidenced by such Security Certificate as custodian for the Holder of such
Security Certificate.
Treasury Notes shall be transferred only in denominations of $1,000 and
integral multiples thereof. As promptly as practicable following the occurrence
of a Termination Event, the Agent shall determine the excess of (i) the
aggregate principal amount of Treasury Notes underlying the Outstanding
Securities over (ii) the aggregate principal amount of Treasury Notes in
denominations of $1,000 and integral multiples thereof transferrable to Holders
of record on the date of such Termination Event (such excess being herein
referred to as the "Excess Treasury Notes"). As soon as practicable after
transfer to the Agent of the Treasury Notes underlying the Outstanding
Securities as provided in the Pledge Agreement, the Agent shall sell the Excess
Treasury Notes to or through one or more U.S. Government securities dealers at
then prevailing prices. The Agent shall deduct from the proceeds of such sales
all commissions and other out-of-pocket transaction costs incurred in connection
with such sales of Excess Treasury Notes and, until the net proceeds of such
sale or sales have been distributed to Holders of the Securities, the Agent
shall hold such proceeds as custodian for the Holders of Securities. Such
proceeds shall be held by the Agent uninvested without liability to any Person
for interest or other compensation thereon. Each Holder shall be entitled to
receive a portion, if any, of such net proceeds in lieu of Treasury Notes with a
principal amount of less than $1,000 determined by multiplying the aggregate
amount of such net proceeds by a fraction, the numerator of which is the
fraction of $1,000 in principal amount of Treasury Notes to which such Holder
would otherwise be entitled (after taking into account all Securities then held
by such Holder) and the denominator of which is the aggregate principal amount
of Excess Treasury Notes.
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ARTICLE V
THE PURCHASE CONTRACTS
Section 5.1. Purchase of Shares of Common Stock.
Each Purchase Contract shall obligate the Holder of the related Security
to purchase, and the Company to sell, on the Final Settlement Date at a price
equal to the Stated Amount, a number of shares of Common Stock equal to the
Settlement Rate, unless, on or prior to the Final Settlement Date, there shall
have occurred a Termination Event or an Early Settlement with respect to the
Security of which such Purchase Contract is a part. The "Settlement Rate" is
equal to (a) if the Applicable Market Value (as defined below) is greater than
$________ (the "Threshold Appreciation Price"), ____ of a share of Common Stock
per Purchase Contract, (b) if the Applicable Market Value is less than or equal
to the Threshold Appreciation Price but is greater than the Stated Amount, a
fractional share of Common Stock per Purchase Contract equal to the Stated
Amount divided by the Applicable Market Value (rounded upward or downward to the
nearest 1/10,000th of a share) and (c) if the Applicable Market Value is less
than or equal to the Stated Amount, one share of Common Stock per Purchase
Contract, in each case subject to adjustment as provided in Section 5.6. As
provided in Section 5.10, no fractional shares of Common Stock will be issued
upon settlement of Purchase Contracts.
The "Applicable Market Value" means the average of the Closing Prices per
share of Common Stock on each of the twenty consecutive Trading Days ending on
the second Trading Day immediately preceding the Final Settlement Date. The
"Closing Price" of the Common Stock on any date of determination means the
closing sale price (or, if no closing price is reported, the last reported sale
price) of the Common Stock on the New York Stock Exchange (the "NYSE") on such
date, or, if the Common Stock is not listed for trading on the NYSE on any such
date, as reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is so listed, or if the Common
Stock is not so listed on a United States national or regional securities
exchange, as reported by The Nasdaq Stock Market, or, if the Common Stock is not
so reported, the last quoted bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization, or, if such bid price is not available, the market value of the
Common Stock on such date as determined by a nationally recognized independent
investment banking firm retained for this purpose by the Company. A "Trading
Day" means a day on which the Common Stock (A) is not suspended from trading on
any national or regional securities exchange or association or over-the-counter
market at the close of business and (B) has traded at least once on the national
or regional securities exchange or association or over-the-counter market that
is the primary market for the trading of the Common Stock.
Each Holder of a Security Certificate evidencing Securities, by his
acceptance thereof, authorizes the Agent to enter into and perform the related
Purchase Contracts on
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his behalf as his attorney-in-fact, agrees to be bound by the terms and
provisions thereof, covenants and agrees to perform his obligations under such
Purchase Contracts, consents to the provisions hereof, authorizes the Agent as
his attorney-in-fact to enter into and perform the Pledge Agreement on his
behalf as his attorney-in-fact, and consents to and agrees to be bound by the
Pledge of the Treasury Notes underlying such Security Certificate pursuant to
the Pledge Agreement; provided that upon an Event of Termination the rights of
the Holder of such Security under the Purchase Contract may be enforced without
regard to any other rights or obligations. Each Holder of a Security, by his
acceptance thereof, further covenants and agrees, that, to the extent and in the
manner provided in Section 5.4 and the Pledge Agreement, but subject to the
terms thereof, payments in respect of principal of the Treasury Notes on the
Final Settlement Date shall be paid by the Collateral Agent to the Company in
satisfaction of such Holder's obligations under such Purchase Contract and such
Holder shall acquire no right, title or interest in such payments.
Upon registration of transfer of a Security Certificate evidencing
Purchase Contracts, the transferee shall be bound (without the necessity of any
other action on the part of such transferee), under the terms of this Agreement,
the Purchase Contracts evidenced thereby and the Pledge Agreement and the
transferor shall be released from the obligations under the Purchase Contracts
evidenced by the Security Certificates so transferred. The Company covenants and
agrees, and each Holder of a Security Certificate, by his acceptance thereof,
likewise covenants and agrees, to be bound by the provisions of this paragraph.
Section 5.2. Yield Enhancement Payments.
Subject to Section 5.3, the Company shall pay, on each Payment Date, the
Yield Enhancement Payments payable in respect of each Purchase Contract to the
Person in whose name the Security Certificate (or one or more Predecessor
Security Certificates) evidencing such Purchase Contract is registered at the
close of business on the Record Date next preceding such Payment Date. The Yield
Enhancement Payment will be payable at the office of the Agent in The City of
New York maintained for that purpose or, at the option of the Company, by check
mailed to the address of the Person entitled thereto at such address as it
appears on the Security Register.
Each Security Certificate delivered under this Agreement upon
registration of transfer of or in exchange for or in lieu of any other Security
Certificate shall carry the rights to Yield Enhancement Payments accrued and
unpaid, and to accrue, which were carried by the Purchase Contracts evidenced by
such other Security Certificate.
In the case of any Security with respect to which Early Settlement of the
underlying Purchase Contract is effected on an Early Settlement Date after any
Record Date and on or prior to the next succeeding Payment Date, Yield
Enhancement Payments otherwise payable on such Payment Date shall be payable on
such Payment Date notwithstanding
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such Early Settlement, and such Yield Enhancement Payments shall be paid to the
Person in whose name the Security Certificate evidencing such Security (or one
or more Predecessor Security Certificates) is registered at the close of
business on such Record Date. Except as otherwise expressly provided in the
immediate preceding sentence, in the case of any Security with respect to which
Early Settlement of the underlying Purchase Contract is effected on an Early
Settlement Date, Yield Enhancement Payments that would otherwise be payable
after the Early Settlement Date with respect to the Purchase Contract underlying
such Security shall not be payable.
The Company's obligations with respect to Yield Enhancement Payments are
subordinate and junior in right of payment to all other liabilities of the
Company and pari passu with the most senior preferred stock issued from time
to time, if any, by the Company.
Section 5.3. Deferral of Payment Dates For Yield Enhancement Payments.
The Company shall have the right, at any time prior to the Final
Settlement Date, to defer the payment of any or all of the Yield Enhancement
Payments otherwise payable on any Payment Date, but only if the Company shall
give the Holders and the Agent written notice of its election to defer such
payment (specifying the amount to be deferred) at least ten Business Days prior
to the earlier of (i) the next succeeding Payment Date or (ii) the date the
Company is required to give notice of the Record Date or Payment Date with
respect to payment of such Yield Enhancement Payment to the New York Stock
Exchange or other applicable self-regulatory organization or to Holders of the
Securities, but in any event not less than two Business Days prior to such
Record Date. Any Yield Enhancement Payments so deferred shall bear additional
Yield Enhancement Payments thereon at the rate of _____% per annum (computed on
the basis of the actual number of days elapsed in a year of 365 or 366 days, as
the case may be), compounding on each succeeding Payment Date, until paid in
full (such deferred installments of Yield Enhancement Payments together with the
additional Yield Enhancement Payments accrued thereon, are referred to herein as
the "Deferred Yield Enhancement Payments"). Deferred Yield Enhancement Payments
shall be due on the next succeeding Payment Date except to the extent that
payment is deferred pursuant to this Section. No Yield Enhancement Payments may
be deferred to a date that is after the Final Settlement Date or, with respect
to any particular Purchase Contract, Early Settlement thereof.
In the event that the Company elects to defer the payment of Yield
Enhancement Payments on the Purchase Contracts until the Final Settlement Date,
each holder will receive on the Final Settlement Date, in lieu of a cash
payment, a number of shares of Common Stock (in addition to a number of shares
of Common Stock equal to the Settlement Rate) equal to (x) the aggregate amount
of Deferred Yield Enhancement Payments payable to a Holder divided by (y) the
Applicable Market Value.
No fractional shares of Common Stock will be issued by the Company with
respect to the payment of Deferred Yield Enhancement Payments on the Final
Settlement Date.
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In lieu of fractional shares otherwise issuable with respect to such payment of
Deferred Yield Enhancement Payments, the Holder will be entitled to receive an
amount in cash as provided in Section 5.10.
In the event the Company exercises its option to defer the payment of
Yield Enhancement Payments, then, until the Deferred Yield Enhancement Payments
have been made, (a) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchase or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plans
or the satisfaction by the Company of its obligations pursuant to any contract
or security requiring the Company to purchase shares of Common Stock, (ii) as a
result of a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock or (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged) or make any guarantee payments with respect to the
foregoing), (b) the Company shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees) issued by the Company that rank pari passu with or junior
to such Yield Enhancement Payments and (c) the Company shall not make any
guarantee payments with respect to the foregoing.
Section 5.4. Payment of Purchase Price.
Unless a Holder settles the underlying Purchase Contract either through
the early delivery of cash to the Purchase Contract Agent in the manner
described in Section 5.9 or otherwise, the purchase price for the shares of
Common Stock purchased pursuant to a Purchase Contract shall be paid by
application of payments received by the Company on the Final Settlement Date
from the Collateral Agent pursuant to the Pledge Agreement in respect of the
principal of the Treasury Notes pledged to secure the obligations of the
relevant Holder under such Purchase Contract. Such application shall satisfy in
full the obligations under such Purchase Contract of the Holder of the Security
of which such Purchase Contract is a part. The Company shall not be obligated to
issue any shares of Common Stock in respect of a Purchase Contract or deliver
any certificates therefor to the Holder unless it shall have received payment in
full of the aggregate purchase price for the shares of Common Stock to be
purchased thereunder in the manner herein set forth.
Section 5.5. Issuance of Shares of Common Stock.
Unless a Termination Event shall have occurred on or prior to the Final
Settlement Date, on the Final Settlement Date, upon its receipt of payment in
full of the purchase price for the shares of Common Stock purchased by the
Holders pursuant to the foregoing provisions of this Article, and in payment of
Deferred Yield Enhancement Payments, if
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any, owed by the Company to the Holders and subject to Section 5.6(b), the
Company shall issue and deposit with the Agent, for the benefit of the holders
of the Outstanding Securities, one or more certificates representing the new
shares of Common Stock registered in the name of the Agent (or its nominee) as
custodian for the Holders (such certificates for shares of Common Stock,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Final Settlement Fund") to which the Holders are
entitled hereunder. Subject to the foregoing, upon surrender of a Security
Certificate to the Agent on or after the Final Settlement Date, together with
settlement instructions thereon duly completed and executed, the Holder of such
Security Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Common Stock which such
Holder is entitled to receive pursuant to the provisions of this Article Five
(after taking into account all Securities then held by such Holder) together
with cash in lieu of fractional shares as provided in Section 5.10 and any
dividends or distributions with respect to such shares constituting part of the
Final Settlement Fund, but without any interest thereon, and the Security
Certificate so surrendered shall forthwith be cancelled. Such shares shall be
registered in the name of the Holder or the Holder's designee as specified in
the settlement instructions on the Security Certificate. If any shares of Common
Stock issued in respect of a Purchase Contract and in payment of any Deferred
Yield Enhancement Payments are to be registered to a Person other than the
Person in whose name the Security Certificate evidencing such Purchase Contract
is registered, no such registration shall be made unless the Person requesting
such registration has paid any transfer and other taxes required by reason of
such registration in a name other than that of the registered Holder of the
Security Certificate evidencing such Purchase Contract or has established to the
satisfaction of the Company that such tax either has been paid or is not
payable.
Section 5.6. Adjustment of Settlement Rate.
(a) Adjustments for Dividends, Distributions, Stock Splits, Etc.
(1) In case the Company shall pay or make a dividend or other
distribution on any class of Common Stock of the Company in Common Stock, the
Settlement Rate in effect at the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be increased by dividing such Settlement
Rate by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination and the denominator shall be the sum of such number of shares and
the total number of shares constituting such dividend or other distribution,
such increase to become effective immediately after the opening of business on
the day following the date fixed for such determination. For the purposes of
this paragraph (1), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Company but shall include
shares issuable in respect of scrip certificates issued in lieu of fractions of
shares of Common Stock. The Company will not pay any dividend or make any
distribution on shares of Common Stock held in the treasury of the Company.
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(2) In case the Company shall issue rights, options or warrants to all
holders of its Common Stock (not being available on an equivalent basis to
Holders of the Securities upon settlement of the Purchase Contracts underlying
such Securities) entitling them, for a period expiring within 45 days after the
record date for the determination of stockholders entitled to receive such
rights, options or warrants, to subscribe for or purchase shares of Common Stock
at a price per share less than the Current Market Price per share of the Common
Stock on the date fixed for the determination of stockholders entitled to
receive such rights, options or warrants (other than pursuant to a dividend
reinvestment plan), the Settlement Rate in effect at the opening of business on
the day following the date fixed for such determination shall be increased by
dividing such Settlement Rate by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
Current Market Price and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such increase to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For the purposes of this paragraph (2), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
shall not issue any such rights, options or warrants in respect of shares of
Common Stock held in the treasury of the Company.
(3) In case outstanding shares of Common Stock shall be subdivided or
split into a greater number of shares of Common Stock, the Settlement Rate in
effect at the opening of business on the day following the day upon which such
subdivision or split become effective shall be proportionately increased, and,
conversely, in case outstanding shares of Common Stock shall each be combined
into a smaller number of shares of Common Stock, the Settlement Rate in effect
at the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately reduced, such increase or
reduction, as the case may be, to become effective immediately after the opening
of business on the day following the day upon which such subdivision, split or
combination becomes effective.
(4) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock evidences of its indebtedness or assets
(including securities, but excluding any rights or warrants referred to in
paragraph (2) of this Section, any dividend or distribution paid exclusively in
cash and any dividend or distribution referred to in paragraph (1) of this
Section), the Settlement Rate shall be adjusted so that the same shall equal the
rate determined by dividing the Settlement Rate in effect immediately prior to
the close of business on the date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of which the numerator shall
be the Current Market
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Price per share of the Common Stock on the date fixed for such determination
less the then fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution filed with
the Agent) of the portion of the assets or evidences of indebtedness so
distributed applicable to one share of Common Stock and the denominator shall be
such Current Market Price per share of the Common Stock, such adjustment to
become effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such distribution. In any case in which this paragraph (4) is
applicable, paragraph (2) of this Section shall not be applicable.
(5) In case the Company shall, (I) by dividend or otherwise, distribute
to all holders of its Common Stock cash (excluding any cash that is distributed
in a Reorganization Event to which Section 5.6(b) applies or as part of a
distribution referred to in paragraph (4) of this Section) in an aggregate
amount that, combined together with (II) the aggregate amount of any other
distribution to all holders of its Common Stock made exclusively in cash within
the 12 months preceding the date of payment of such distribution and in respect
of which no adjustment pursuant to this paragraph (5) or paragraph (6) of this
Section has been made and (III) the aggregate of any cash plus the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) of consideration payable in
respect of any tender or exchange offer by the Company or any of its
subsidiaries for all or any portion of the Common Stock concluded within the 12
months preceding the date of payment of the distribution described in clause (I)
above and in respect of which no adjustment pursuant to this paragraph (5) or
paragraph (6) of this Section has been made, exceeds 15% of the product of the
Current Market Price per share of the Common Stock on the date for the
determination of holders of shares of Common Stock entitled to receive such
distribution times the number of shares of Common Stock outstanding on such
date, then, and in each such case, immediately after the close of business on
such date for determination, the Settlement Rate shall be increased so that the
same shall equal the rate determined by dividing the Settlement Rate in effect
immediately prior to the close of business on the date fixed for determination
of the stockholders entitled to receive such distribution by a fraction (i) the
numerator of which shall be equal to the Current Market Price per share of the
Common Stock on the date fixed for such determination less an amount equal to
the quotient of (x) the combined amount distributed or payable in the
transactions described in clauses (I), (II) and (III) above and (y) the number
of shares of Common Stock outstanding on such date for determination and (ii)
the denominator of which shall be equal to the Current Market Price per share of
the Common Stock on such date for determination.
(6) In case (I) a tender or exchange offer made by the Company or any
subsidiary of the Company for all or any portion of the Common Stock shall
expire and such tender or exchange offer (as amended upon the expiration
thereof) shall require the payment to stockholders (based on the acceptance (up
to any maximum specified in the terms of the tender or exchange offer) of
Purchased Shares) of an aggregate consideration
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having a fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) that
combined together with (II) the aggregate of the cash plus the fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution), as of the expiration of such
tender or exchange offer, of consideration payable in respect of any other
tender or exchange offer, by the Company or any subsidiary of the Company for
all or any portion of the Common Stock expiring within the 12 months preceding
the expiration of such tender or exchange offer and in respect of which no
adjustment pursuant to paragraph (5) of this Section or this paragraph (6) has
been made and (III) the aggregate amount of any distributions to all holders of
the Company's Common Stock made exclusively in cash within the 12 months
preceding the expiration of such tender or exchange offer and in respect of
which no adjustment pursuant to paragraph (5) of this Section or this paragraph
(6) has been made, exceeds 15% of the product of the Current Market Price per
share of the Common Stock as of the last time (the "Expiration Time") tenders
could have been made pursuant to such tender or exchange offer (as it may be
amended) times the number of shares of Common Stock outstanding (including any
tendered shares) on the Expiration Time, then, and in each such case,
immediately prior to the opening of business on the day after the date of the
Expiration Time, the Settlement Rate shall be adjusted so that the same shall
equal the rate determined by dividing the Settlement Rate immediately prior to
the close of business on the date of the Expiration Time by a fraction (i) the
numerator of which shall be equal to (A) the product of (I) the Current Market
Price per share of the Common Stock on the date of the Expiration Time and (II)
the number of shares of Common Stock outstanding (including any tendered shares)
on the Expiration Time less (B) the amount of cash plus the fair market value
(determined as aforesaid) of the aggregate consideration payable to stockholders
based on the transactions described in clauses (I), (II) and (III) above
(assuming in the case of clause (I) the acceptance, up to any maximum specified
in the terms of the tender or exchange offer, of Purchased Shares), and (ii) the
denominator of which shall be equal to the product of (A) the Current Market
Price per share of the Common Stock as of the Expiration Time and (B) the number
of shares of Common Stock outstanding (including any tendered shares) as of the
Expiration Time less the number of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares").
(7) The reclassification of Common Stock into securities including
securities other than Common Stock (other than any reclassification upon a
Reorganization Event to which Section 5.6(b) applies) shall be deemed to involve
(a) a distribution of such securities other than Common Stock to all holders of
Common Stock (and the effective date of such reclassification shall be deemed to
be "the date fixed for the determination of stockholders entitled to receive
such distribution" and the "date fixed for such determination" within the
meaning of paragraph (4) of this Section), and (b) a subdivision, split or
combination, as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such reclassification into the number of shares
of Common Stock outstanding immediately thereafter (and the effective date of
such
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reclassification shall be deemed to be "the date upon which such subdivision or
split becomes effective" or "the day upon which such combination becomes
effective", as the case may be and "the day upon which such subdivision, split
or combination becomes effective" within the meaning of paragraph (3) of this
Section).
(8) The "Current Market Price" per share of Common Stock on any day means
the average of the daily Closing Prices for the 5 consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before, and
ending not later than, the earlier of the day in question and the day before the
"ex date" with respect to the issuance or distribution requiring such
computation. For purposes of this paragraph, the term "ex date", when used with
respect to any issuance or distribution, shall mean the first date on which the
Common Stock trades regular way on such exchange or in such market without the
right to receive such issuance or distribution.
(9) All adjustments to the Settlement Rate shall be calculated to the
nearest 1/10,000th of a share of Common Stock (or if there is not a nearest
1/10,000th of a share to the next lower 1/10,000th of a share). No adjustment in
the Settlement Rate shall be required unless such adjustment would require an
increase or decrease of at least one percent therein; provided, however, that
any adjustments which by reason of this subparagraph are not required to be made
shall be carried forward and taken into account in any subsequent adjustment. If
an adjustment is made to the Settlement Rate pursuant to paragraph (1), (2),
(3), (4), (5), (6), (7) or (10) of this Section 5.6(a), an adjustment shall also
be made to the Applicable Market Value solely to determine which of clauses (a),
(b) or (c) of the definition of Settlement Rate in Section 5.1 will apply on the
Final Settlement Date. Such adjustment shall be made by multiplying the
Applicable Market Value by a fraction of which the numerator shall be the
Settlement Rate immediately after such adjustment pursuant to paragraph (1),
(2), (3), (4), (5), (6), (7) or (10) of this Section 5.6(a) and the denominator
shall be the Settlement Rate immediately before such adjustment.
(10) The Company may make such increases in the Settlement Rate, in
addition to those required by this Section, as it considers to be advisable in
order to avoid or diminish any income tax to any holders of shares of Common
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes or for any other reasons.
(b) Adjustment for Consolidation, Merger or Other Reorganization Event.
In the event of (i) any consolidation or merger of the Company, with or into
another Person (other than a merger or consolidation in which the Company is the
continuing corporation and in which the Common Stock outstanding immediately
prior to the merger or consolidation is not exchanged for cash, securities or
other property of the Company or another corporation), (ii) any sale, transfer,
lease or conveyance to another Person of the property of the Company as an
entirety or substantially as an entirety, (iii) any statutory
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exchange of securities of the Company with another Person (other than in
connection with a merger or acquisition) or (iv) any liquidation, dissolution or
winding up of the Company other than as a result of or after the occurrence of a
Termination Event (any such event, a "Reorganization Event"), the Settlement
Rate will be adjusted to provide that each Holder of Securities will receive on
the Final Settlement Date with respect to each Purchase Contract forming a part
thereof, the kind and amount of securities, cash and other property receivable
upon such Reorganization Event by a Holder of the number of shares of Common
Stock issuable on account of each Purchase Contract if the Final Settlement Date
had occurred immediately prior to such Reorganization Event, assuming such
Holder of Common Stock is not a Person with which the Company consolidated or
into which the Company merged or which merged into the Company or to which such
sale or transfer was made, as the case may be ("Constituent Person"), or an
Affiliate of a Constituent Person, and failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such Reorganization Event (provided that if the kind or
amount of securities, cash and other property receivable upon such
Reorganization Event is not the same for each share of Common Stock held
immediately prior to such Reorganization Event by other than a Constituent
Person or an Affiliate thereof and in respect of which such rights of election
shall not have been exercised ("non-electing share"), then for the purpose of
this Section the kind and amount of securities, cash and other property
receivable upon such Reorganization Event by each non-electing share shall be
deemed to be the kind and amount so receivable per share by a plurality of the
non-electing shares). In the event of such a Reorganization Event, the Person
formed by such consolidation, merger or exchange or the Person which acquires
the assets of the Company or, in the event of a liquidation or dissolution of
the Company, the Company or a liquidating trust created in connection therewith,
shall execute and deliver to the Agent an agreement supplemental hereto
providing that the Holders of each Outstanding Security shall have the rights
provided by this Section 5.6. Such supplemental agreement shall provide for
adjustments which, for events subsequent to the effective date of such
supplemental agreement, shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section. The above provisions of this
Section shall similarly apply to successive Reorganization Events.
Section 5.7. Notice of Adjustments and Certain Other Events.
(a) Whenever the Settlement Rate is adjusted as herein provided, the
Company shall:
(i) forthwith compute the adjusted Settlement Rate in
accordance with Section 5.6 and prepare and transmit to the Agent an Officers'
Certificate setting forth the Settlement Rate, the method of calculation thereof
in reasonable detail, and the facts requiring such adjustment and upon which
such adjustment is based; and
(ii) within 10 Business Days following the occurrence of an
event that permits or requires an adjustment to the Settlement Rate pursuant to
Section 5.6 (or if the
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Company is not aware of such occurrence, as soon as practicable after becoming
so aware), provide a written notice to the Holders of the Securities of the
occurrence of such event and a statement in reasonable detail setting forth the
method by which the adjustment to the Settlement Rate was determined and setting
forth the adjusted Settlement Rate.
(b) The Agent shall not at any time be under any duty or responsibility
to any holder of Securities to determine whether any facts exist which may
require any adjustment of the Settlement Rate, or with respect to the nature or
extent or calculation of any such adjustment when made, or with respect to the
method employed in making the same. The Agent shall not be accountable with
respect to the validity or value (or the kind or amount) of any shares of Common
Stock, or of any securities or property, which may at the time be issued or
delivered with respect to any Purchase Contract; and the Agent makes no
representation with respect thereto. The Agent shall not be responsible for any
failure of the Company to issue, transfer or deliver any shares of Common Stock
pursuant to a Purchase Contract or to comply with any of the duties,
responsibilities or covenants of the Company contained in this Article.
Section 5.8. Termination Event; Notice.
The Purchase Contracts and the obligations and rights of the Company and
the Holders thereunder, including, without limitation, the rights of the Holders
to receive and the obligation of the Company to pay any Yield Enhancement
Payment, shall immediately and automatically terminate, without the necessity of
any notice or action by any Holder, the Agent or the Company, if, on or prior to
the Final Settlement Date, a Termination Event shall have occurred. Upon and
after the occurrence of a Termination Event, the Securities shall thereafter
represent the right to receive the Treasury Notes forming a part of such
Securities in accordance with the provisions of Section 4.2 and the Pledge
Agreement. Upon the occurrence of a Termination Event, the Company shall
promptly but in no event after two business days thereafter give written notice
to the Agent, the Collateral Agent and to the Holders, at their addresses as
they appear in the Security Register.
Section 5.9. Early Settlement.
(a) Subject to and upon compliance with the provisions of this Section
5.9 at the option of the Holder thereof, any Purchase Contracts underlying
Securities having an aggregate Stated Amount equal to $__________ or an integral
multiple thereof may be settled early ("Early Settlement") as provided herein.
In order to exercise the right to effect Early Settlement with respect to any
Purchase Contracts, the Holder of the Security Certificate evidencing such
Purchase Contracts shall deliver such Security Certificate to the Agent at the
Corporate Trust Office duly endorsed for transfer to the Company or in blank
with the form of Election to Settle Early on the reverse thereof duly completed
and accompanied by payment in the form of immediately available funds in an
amount (the "Early Settlement Amount") equal to (i) the product of (A) the
Stated Amount times (B)
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the number of Purchase Contracts with respect to which the Holder has elected to
effect Early Settlement plus (ii) if such delivery is made with respect to any
Purchase Contracts during the period from the close of business on any Record
Date next preceding any Payment Date to the opening of business on such Payment
Date, an amount equal to the sum of (x) the Yield Enhancement Payments payable
on such Payment Date with respect to such Purchase Contracts plus (y) the
interest on the related Treasury Notes payable on such Payment Date. Except as
provided in the immediately preceding sentence and subject to the second to the
last paragraph of Section 5.2, no payment or adjustment shall be made upon Early
Settlement of any Purchase Contract on account of any Yield Enhancement Payments
accrued on such Purchase Contract or on account of any dividends on the Common
Stock issued upon such Early Settlement. If the foregoing requirements are first
satisfied with respect to Purchase Contracts underlying any Securities at or
prior to 5:00 p.m., New York City time, on a Business Day, such day shall be the
"Early Settlement Date" with respect to such Securities and if such requirements
are first satisfied after 5:00 p.m, New York City time, on a Business Day or on
a day that is not a Business Day, the "Early Settlement Date" with respect to
such Securities shall be the next succeeding Business Day.
(b) Upon Early Settlement of Purchase Contracts by a Holder of the
related Securities, the Company shall issue, and the Holder shall be entitled to
receive, a number of shares of Common Stock on account of each Purchase Contract
as to which Early Settlement is effected equal to the Early Settlement Rate;
provided, however, that upon the Early Settlement of the Purchase Contracts, the
Holder of such related Securities will forfeit the right to receive any Deferred
Yield Enhancement Payments. The Early Settlement Rate shall initially be equal
to ____ and shall be adjusted in the same manner and at the same time as the
Settlement Rate is adjusted. As promptly as practicable after Early Settlement
of Purchase Contracts in accordance with the provisions of this Section 5.9, the
Company shall issue and shall deliver to the Agent at the Corporate Trust Office
a certificate or certificates for the full number of shares of Common Stock
issuable upon such Early Settlement together with payment in lieu of any
fraction of a share, as provided in Section 5.10.
(c) The Company shall cause the shares of Common Stock issuable, and
Treasury Notes deliverable, upon Early Settlement of Purchase Contracts to be
issued and delivered, in the case of such shares of Common Stock, and released
from the Pledge by the Collateral Agent and transferred, in the case of such
Treasury Notes, to the Agent, for delivery to the Holder thereof or its
designee, no later than the third Business Day after the applicable Early
Settlement Date.
(d) Upon Early Settlement of any Purchase Contracts, and subject to
receipt thereof from the Company or the Collateral Agent, as applicable, the
Agent shall, in accordance with the instructions provided by the Holder thereof
on the applicable form of Election to Settle Early on the reverse of the
Security Certificate evidencing the related Securities, (i) transfer the
Treasury Notes forming a part of such Securities and (ii) deliver
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a certificate or certificates for the full number of shares of Common Stock
issuable upon such Early Settlement together with payment in lieu of any
fraction of a share, as provided in Section 5.10.
(e) In the event that Early Settlement is effected with respect to
Purchase Contracts underlying less than all the Securities evidenced by a
Security Certificate, upon such Early Settlement the Company shall execute and
the Agent shall authenticate, countersign and deliver to the Holder thereof, at
the expense of the Company, a Security Certificate evidencing the Securities as
to which Early Settlement was not effected.
Section 5.10. No Fractional Shares.
No fractional shares or scrip representing fractional shares of Common
Stock shall be issued or delivered upon settlement on the Final Settlement Date
or upon Early Settlement of any Purchase Contracts or with respect to the
payment of Deferred Yield Enhancement Payments, if any, on the Final Settlement
Date. If Security Certificates evidencing more than one Purchase Contract shall
be surrendered for settlement at one time by the same Holder, the number of full
shares of Common Stock which shall be delivered upon settlement shall be
computed on the basis of the aggregate number of Purchase Contracts evidenced by
the Security Certificates so surrendered. Instead of any fractional share of
Common Stock which would otherwise be deliverable upon settlement of any
Purchase Contracts on the Final Settlement Date or upon Early Settlement or with
respect to the payment of any Deferred Yield Enhancement Payments, the Company,
through the Agent, shall make a cash payment in respect of such fractional
interest in an amount equal to the value of such fractional shares at the
Closing Price per share on the Trading Date immediately preceding the Final
Settlement Date or the related Early Settlement Date, respectively. The Company
shall provide the Agent from time to time with sufficient funds to permit the
Agent to make all cash payments required by this Section 5.10 in a timely
manner.
Section 5.11. Charges and Taxes.
The Company will pay all stock transfer and similar taxes attributable to
the initial issuance and delivery of the shares of Common Stock pursuant to the
Purchase Contracts and in payment of any Deferred Yield Enhancement Payments;
provided, however, that the Company shall not be required to pay any such tax or
taxes which may be payable in respect of any exchange of or substitution for a
Security Certificate evidencing a Purchase Contract or any issuance of a share
of Common Stock in a name other than that of the registered Holder of a Security
Certificate surrendered in respect of the Purchase Contracts evidenced thereby,
other than in the name of the Agent, as custodian for such Holder, and the
Company shall not be required to issue or deliver such share certificates or
Security Certificates unless or until the Person or Persons requesting the
transfer or 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.
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ARTICLE VI
REMEDIES
Section 6.1. Unconditional Right of Holders to Receive Yield Enhancement
Payment.
The Holder of any Security shall have the right, which is absolute and
unconditional (subject to the right of the Company to defer payment thereof
pursuant to Section 5.3 and subject to the forfeiture of any Deferred Yield
Enhancement Payments upon Early Settlement pursuant to Section 5.9(b)), to
receive payment of each installment of the Yield Enhancement Payment with
respect to the Purchase Contract constituting a part of such Security on the
respective Payment Date for such Security and to purchase Common Stock pursuant
to such Purchase Contract and, in each such case, to institute suit for the
enforcement of any such payment and right to purchase Common Stock, and such
rights shall not be impaired without the consent of such Holder.
Section 6.2. Restoration of Rights and Remedies.
If any Holder of Securities has instituted any proceeding to enforce any
right or remedy under this Agreement and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to such Holder,
then and in every such case, subject to any determination in such proceeding,
the Company and such Holder shall be restored severally and respectively to
their former positions hereunder and thereafter all rights and remedies of such
Holder shall continue as though no such proceeding had been instituted.
Section 6.3. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement of
mutilated, destroyed, lost or stolen Security Certificates in the last paragraph
of Section 3.6, no right or remedy herein conferred upon or reserved to the
Holders of Securities is intended to be exclusive of any other right or remedy,
and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 6.4. Delay or Omission Not Waiver.
No delay or omission of any Holder to exercise any right or remedy shall
impair any such right or remedy or constitute a waiver of any such right. Every
right and remedy given by this Article or by law to the Holders may be exercised
from time to time, and as often as may be deemed expedient, by such Holders.
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Section 6.5. Undertaking for Costs.
All parties to this Agreement agree, and each Holder of any Security by
his acceptance of the Security Certificate evidencing such Security shall be
deemed to have agreed, that any court may in its discretion require, in any suit
for the enforcement of any right or remedy under this Agreement, or in any suit
against the Agent for any action taken, suffered or omitted by it as Agent, the
filing by any party litigant in such suit of an undertaking to pay the costs of
such suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; provided that the provisions of this Section shall not
apply to any suit instituted by the Company, to any suit instituted by the
Agent, to any suit instituted by any Holder of Securities, or group of Holders,
holding in the aggregate more than 10% of the Outstanding Securities, or to any
suit instituted by any Holder for the enforcement of the payment of the interest
on any Treasury Note or the Yield Enhancement Payment on any Purchase Contract
on or after the respective Payment Date therefor constituting a part of the
Securities held by such Holder, or for enforcement of the right to purchase
shares of Common Stock under the Purchase Contracts constituting a part of the
Securities held by such Holder.
Section 6.6. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Agreement; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Agent or the Holders, but will suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE VII
THE AGENT
Section 7.1. Certain Duties and Responsibilities.
(a)(1) The Agent undertakes to perform, with respect to the
Securities, such duties and only such duties as are specifically set
forth in this Agreement and the Pledge Agreement, and no implied
covenants or obligations shall be read into this Agreement against the
Agent; and
(2) in the absence of bad faith or negligence on its part, the
Agent may, with respect to the Securities, conclusively rely, as to the
truth of the statements
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and the correctness of the opinions expressed therein, upon certificates
or opinions furnished to the Agent and conforming to the requirements of
this Agreement, but in the case of any certificates or opinions which by
any provision hereof are specifically required to be furnished to the
Agent, the Agent shall be under a duty to examine the same to determine
whether or not they conform to the requirements of this Agreement.
(b) No provision of this Agreement shall be construed to relieve the
Agent from liability for its own negligent action, its own negligent failure to
act, or its own wilful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Agent shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it shall be proved that
the Agent was negligent in ascertaining the pertinent facts; and
(3) no provision of this Agreement shall require the Agent to
expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder, or in the exercise of
any of its rights or powers, if adequate indemnity is not provided to it.
(c) Whether or not therein expressly so provided, every provision of
this Agreement relating to the conduct or affecting the liability of or
affording protection to the Agent shall be subject to the provisions of this
Section.
Section 7.2. Notice of Default.
Within 30 days after the occurrence of any default by the Company
hereunder, of which a Responsible Officer of the Agent has actual knowledge, the
Agent shall transmit by mail to all Holders of Securities, as their names and
addresses appear in the Security Register, notice of such default hereunder,
unless such default shall have been cured or waived.
Section 7.3. Certain Rights of Agent.
Subject to the provisions of Section 7.1:
(a) the Agent may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
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(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by an Officers' Certificate, Issuer Order or Issuer
Request, and any resolution of the Board of Directors of the Company may be
sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Agreement the Agent shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Agent (unless other evidence be
herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate of the Company;
(d) the Agent may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon;
(e) the Agent shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the Agent,
in its discretion, may make reasonable further inquiry or investigation into
such facts or matters related to the issuance of the Securities and the
execution, delivery and performance of the Purchase Contracts as it may see fit,
and, if the Agent shall determine to make such further inquiry or investigation,
it shall be entitled to examine the books, records and promises of the Company,
personally or by agent or attorney; and
(f) the Agent may execute any of its powers hereunder or perform any
duties hereunder either directly or by or through agents or attorneys or an
Affiliate and the Agent shall not be responsible for any misconduct or
negligence on the part of any agent or attorney or an Affiliate appointed with
due care by it hereunder.
Section 7.4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Security Certificates shall be
taken as the statements of the Company and the Agent assumes no responsibility
for their accuracy. The Agent makes no representations as to the validity or
sufficiency of either this Agreement or of the Securities, or of the Pledge
Agreement or the Pledge. The Agent shall not be accountable for the use or
application by the Company of the proceeds in respect of the Purchase Contracts.
Section 7.5. May Hold Securities.
Any Security Registrar or any other agent of the Company, or the Agent
and its Affiliates, in their individual or any other capacity, may become the
owner or pledgee of Securities and may otherwise deal with the Company, the
Collateral Agent or any other
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Person with the same rights it would have if it were not Security Registrar or
such other agent, or the Agent.
Section 7.6. Money Held in Custody.
Money held by the Agent in custody hereunder need not be segregated from
the other funds except to the extent required by law. The Agent shall be under
no obligation to invest or pay interest on any money received by it hereunder
except pursuant to the provisions of Section 4.1 or as otherwise agreed in
writing with the Company.
Section 7.7. Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Agent from time to time reasonable
compensation for all services rendered by it hereunder;
(2) except as otherwise expressly provided herein, to reimburse
the Agent upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Agent in accordance with any provision
of this Agreement (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Agent and any predecessor Agent for, and
to hold each of them harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or
in connection with the acceptance or administration of its duties
hereunder, including the costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance of
any of its powers or duties hereunder.
Section 7.8. Corporate Agent Required; Eligibility.
There shall at all times be an Agent hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America, any State thereof or the District of Columbia, authorized under such
laws to exercise corporate trust powers, having (or being a member of a bank
holding company having) a combined capital and surplus of at least $50,000,000,
subject to supervision or examination by Federal or State authority and having a
Corporate Trust Office in the Borough of Manhattan, The City of New York, if
there be such a corporation in the Borough of Manhattan, The City of New York
qualified and eligible under this Article and willing to act on reasonable
terms. If such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of said supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to
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be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Agent shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
Section 7.9. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Agent and no appointment of a
successor Agent pursuant to this Article shall become effective until the
acceptance of appointment by the successor Agent in accordance with the
applicable requirements of Section 7.10.
(b) The Agent may resign at any time by giving written notice thereof
to the Company 60 days prior to the effective date of such resignation. If the
instrument of acceptance by a successor Agent required by Section 7.10 shall not
have been delivered to the Agent within 30 days after the giving of such notice
of resignation, the resigning Agent may petition any court of competent
jurisdiction for the appointment of a successor Agent.
(c) The Agent may be removed at any time by Act of the Holders of a
majority in number of the Outstanding Securities delivered to the Agent and the
Company.
(d) if at any time
(1) the Agent fails to comply with Section 310(b) of the TIA, as
if the Agent were an indenture trustee under an indenture qualified under
the TIA, after written request therefor by the Company or by any Holder
who has been a bona fide Holder of a Security for at least six months, or
(2) the Agent shall cease to be eligible under Section 7.8 and
shall fail to resign after written request therefor by the Company or by
any such Holder, or
(3) the Agent shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Agent or of its
property shall be appointed or any public officer shall take charge or
control of the Agent or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Agent, or (ii) any Holder who has been a bona fide Holder of a Security for at
least six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the Agent and
the appointment of a successor Agent.
(e) If the Agent shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Agent for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Agent and
shall comply with the applicable
40
<PAGE> 47
requirements of Section 7.10. If no successor Agent shall have been so appointed
by the Company and accepted appointment in the manner required by Section 7.10,
any Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Agent.
(f) The Company shall give, or shall cause such successor Agent to
give, notice of each resignation and each removal of the Agent and each
appointment of a successor Agent by mailing written notice of such event by
first-class mail, postage prepaid, to all Holders of Securities as their names
and addresses appear in the Security Register. Each notice shall include the
name of the successor Agent and the address of its Corporate Trust Office.
Section 7.10. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Agent, every
such successor Agent so appointed shall execute, acknowledge and deliver to the
Company and to the retiring Agent an instrument accepting such appointment, and
thereupon the resignation or removal of the retiring Agent shall become
effective and such successor Agent, without any further act, deed or conveyance,
shall become vested with all the rights, powers, agencies and duties of the
retiring Agent; but, on the request of the Company or the successor Agent, such
retiring Agent shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Agent all the rights, powers and
trusts of the retiring Agent and shall duly assign, transfer and deliver to such
successor Agent all property and money held by such retiring Agent hereunder.
(b) Upon request of any such successor Agent, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Agent all such rights, powers and agencies referred
to in paragraph (a) of this Section.
(c) No successor Agent shall accept its appointment unless at the time
of such acceptance such successor Agent shall be qualified and eligible under
this Article.
Section 7.11. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Agent may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Agent shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Agent, shall be the successor of the Agent hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Security Certificates shall have been
authenticated and executed on behalf of the Holders, but not delivered, by the
Agent then in office, any
41
<PAGE> 48
successor by merger, conversion or consolidation to such Agent may adopt such
authentication and execution and deliver the Security Certificates so
authenticated and executed with the same effect as if such successor Agent had
itself authenticated and executed such Securities.
Section 7.12. Preservation of Information; Communications to Holders.
(a) The Agent shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders received by the Agent in its
capacity as Security Registrar.
(b) If three or more Holders (herein referred to as "applicants")
apply in writing to the Agent, and furnish to the Agent reasonable proof that
each such applicant has owned a Security for a period of at least six months
preceding the date of such application, and such application states that the
applicants desire to communicate with other Holders with respect to their rights
under this Agreement or under the Securities and is accompanied by a copy of the
form of proxy or other communication which such applicants propose to transmit,
then the Agent shall, within five Business Days after the receipt of such
application, afford such applicants access to the information preserved at the
time by the Agent in accordance with Section 7.12(a).
(c) Every Holder of Securities, by receiving and holding the Security
Certificates evidencing the same, agrees with the Company and the Agent that
none of the Company, the Agent nor any agent of any of them shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Holders in accordance with Section 7.12(b), regardless of
the source from which such information was derived.
Section 7.13. No Obligations of Agent.
Except to the extent otherwise provided in this Agreement, the Agent
assumes no obligations and shall not be subject to any liability under this
Agreement, the Pledge Agreement or any Purchase Contract in respect of the
obligations of the Holder of any Security thereunder. The Company agrees, and
each Holder of a Security Certificate, by his acceptance thereof, shall be
deemed to have agreed, that the Agent's execution of the Security Certificates
on behalf of the Holders shall be solely as agent and attorney-in-fact for the
Holders, and that the Agent shall have no obligation to perform such Purchase
Contracts on behalf of the Holders, except to the extent expressly provided in
Article Five hereof.
Section 7.14. Tax Compliance.
(a) The Agent, on its own behalf and on behalf of the Company, will
comply with all applicable certification, information reporting and withholding
(including
42
<PAGE> 49
"backup" withholding) requirements imposed by applicable tax laws, regulations
or administrative practice with respect to (i) any payments made with respect to
the Securities or (ii) the issuance, delivery, holding, transfer, redemption or
exercise of rights under the Securities. Such compliance shall include, without
limitation, the preparation and timely filing of required returns and the timely
payment of all amounts required to be withheld to the appropriate taxing
authority or its designated agent.
(b) The Agent shall comply with any direction received from the
Company with respect to the application of such requirements to particular
payments or Holders or in other particular circumstances, and may for purposes
of this Agreement rely on any such direction in accordance with the provisions
of Section 7.1(a)(2) hereof.
(c) The Agent shall maintain all appropriate records documenting
compliance with such requirements, and shall make such records available, on
written request, to the Company or to its authorized representative within a
reasonable period of time after receipt of such request.
ARTICLE VIII
SUPPLEMENTAL AGREEMENTS
Section 8.1. Supplemental Agreements Without Consent of Holders.
Without the consent of any Holders, the Company and the Agent, at any
time and from time to time, may enter into one or more agreements supplemental
hereto, in form satisfactory to the Company and the Agent, for any of the
following purposes:
(1) to evidence the succession of another Person to the Company, and
the assumption by any such successor of the covenants of the Company herein and
in the Security Certificates; or
(2) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Company;
or
(3) to evidence and provide for the acceptance of appointment
hereunder by a successor Agent; or
(4) to make provision with respect to the rights of Holders pursuant
to the requirements of Section 5.6(b); or
(5) except as provided for in Section 5.6, to cure any ambiguity, to
correct or supplement any provisions herein which may be inconsistent with any
other provisions herein, or to make any other provisions with respect to such
matters or questions arising
43
<PAGE> 50
under this Agreement, provided such action shall not adversely affect the
interests of the Holders.
Section 8.2. Supplemental Agreements with Consent of Holders.
With the consent of the Holders of not less than 66 2/3% of the
Outstanding Securities, by Act of said Holders delivered to the Company and the
Agent, the Company when authorized by a Board Resolution, and the Agent may
enter into an agreement or agreements supplemental hereto for the purpose of
modifying in any manner the terms of the Securities, or the provisions of this
Agreement or the rights of the Holders in respect of the Securities; provided,
however, that no such supplemental agreement shall, without the consent of the
Holder of each Outstanding Security affected thereby,
(1) change any Payment Date;
(2) change the amount or type of Treasury Notes underlying a Security,
impair the right of the Holder of any Security to receive interest payments on
the underlying Treasury Notes or otherwise adversely affect the Holder's rights
in or to such Treasury Notes;
(3) reduce any Yield Enhancement Payment or any Deferred Yield
Enhancement Payment, or change any place where, or the coin or currency in
which, any Yield Enhancement Payment is payable;
(4) impair the right to institute suit for the enforcement of any
Purchase Contract;
(5) reduce the number of shares of Common Stock to be purchased
pursuant to any Purchase Contract, increase the price to purchase shares of
Common Stock upon settlement of any Purchase Contract, change the Final
Settlement Date or otherwise adversely affect the Holder's rights under any
Purchase Contract; or
(6) reduce the percentage of the Outstanding Securities the consent of
whose Holders is required for any such supplemental agreement.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental agreement, but it shall
be sufficient if such Act shall approve the substance thereof.
Section 8.3. Execution of Supplemental Agreements.
In executing, or accepting the additional agencies created by, any
supplemental agreement permitted by this Article or the modifications thereby of
the agencies created by this Agreement, the Agent shall be entitled to receive
and (subject to Section 7.1) shall
44
<PAGE> 51
be fully protected in relying upon, an Opinion of Counsel stating that the
execution of such supplemental agreement is authorized or permitted by this
Agreement. The Agent may, but shall not be obligated to, enter into any such
supplemental agreement which affects the Agent's own rights, duties or
immunities under this Agreement or otherwise.
Section 8.4. Effect of Supplemental Agreements.
Upon the execution of any supplemental agreement under this Article, this
Agreement shall be modified in accordance therewith, and such supplemental
agreement shall form a part of this Agreement for all purposes; and every Holder
of Security Certificates theretofore or thereafter authenticated, executed on
behalf of the Holders and delivered hereunder shall be bound thereby.
Section 8.5. Reference to Supplemental Agreements.
Security Certificates authenticated, executed on behalf of the Holders
and delivered after the execution of any supplemental agreement pursuant to this
Article may, and shall if required by the Agent, bear a notation in form
approved by the Agent as to any matter provided for in such supplemental
agreement. If the Company shall so determine, new Security Certificates so
modified as to conform, in the opinion of the Agent and the Company, to any such
supplemental agreement may be prepared and executed by the Company and
authenticated, executed on behalf of the Holders and delivered by the Agent in
exchange for Outstanding Security Certificates.
ARTICLE IX
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 9.1. Covenant Not to Merge, Consolidate, Sell or Convey Property
Except Under Certain Conditions.
The Company covenants that it will not merge or consolidate with any
other Person or sell, assign, transfer, lease or convey all or substantially all
of its properties and assets to any Person or group of affiliated Persons in one
transaction or a series of related transactions, unless (i) either the Company
shall be the continuing corporation, or the successor (if other than the
Company) shall be a corporation organized and existing under the laws of the
United States of America or a State thereof or the District of Columbia and such
corporation shall expressly assume all the obligations of the Company under the
Purchase Contracts, this Agreement and the Pledge Agreement by one or more
supplemental agreements in form satisfactory to the Agent and the Collateral
Agent, executed and delivered to the Agent and the Collateral Agent by such
corporation, and (ii) the Company or such successor corporation, as the case may
be, shall not, immediately after such merger or consolidation, or such sale,
assignment, transfer, lease or
45
<PAGE> 52
conveyance, be in default in the performance of any covenant or condition
hereunder, under any of the Securities or under the Pledge Agreement.
Section 9.2. Rights and Duties of Successor Corporation.
In case of any such consolidation, merger, sale, assignment, transfer,
lease or conveyance and upon any such assumption by the successor corporation in
accordance with Section 9.1 such successor corporation shall succeed to and be
substituted for the Company with the same effect as if it had been named herein
as the Company. Such successor corporation thereupon may cause to be signed, and
may issue either in its own name or in the name of MedPartners, Inc., any or all
of the Security Certificates evidencing Securities issuable hereunder which
theretofore shall not have been signed by the Company and delivered to the
Agent; and, upon the order of such successor corporation, instead of the
Company, and subject to all the terms, conditions and limitations in this
Agreement prescribed, the Agent shall authenticate and execute on behalf of the
Holders and deliver any Security Certificates which previously shall have been
signed and delivered by the officers of the Company to the Agent for
authentication and execution, and any Security Certificates evidencing
Securities which such successor corporation thereafter shall cause to be signed
and delivered to the Agent for that purpose. All the Security Certificates so
issued shall in all respects have the same legal rank and benefit under this
Agreement as the Security Certificates theretofore or thereafter issued in
accordance with the terms of this Agreement as though all of such Security
Certificates had been issued at the date of the execution hereof.
In case of any such consolidation, merger, sale, assignment, transfer,
lease or conveyance such change in phraseology and form (but not in substance)
may be made in Security Certificates evidencing Securities thereafter to be
issued as may be appropriate.
Section 9.3. Opinion of Counsel to Agent.
The Agent, subject to Sections 7.1 and 7.3, shall receive an Opinion of
Counsel as conclusive evidence that any such consolidation, merger, sale,
assignment, transfer, lease or conveyance, and any such assumption, complies
with the provisions of this Article and that all conditions precedent to the
consummation of any such consolidation, merger, sale, assignment, transfer,
lease or conveyance have been met.
ARTICLE X
COVENANTS
Section 10.1. Performance Under Purchase Contracts.
The Company covenants and agrees for the benefit of the Holders from time
to time of the Securities that it will duly and punctually perform its
obligations under the
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<PAGE> 53
Purchase Contracts in accordance with the terms of the Purchase Contracts and
this Agreement.
Section 10.2. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, the City of New
York an office or agency where Security Certificates may be presented or
surrendered for acquisition of shares of Common Stock upon settlement or Early
Settlement and for transfer of Treasury Notes upon occurrence of a Termination
Event, where Security Certificates may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Securities and this Agreement may be served. The Company will
give prompt written notice to the Agent of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Agent
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the Corporate Trust Office, and the Company hereby
appoints the Agent as its agent to receive all such presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more other
offices or agencies where Security Certificates may be presented or surrendered
for any or all purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York for such purposes. The Company will
give prompt written notice to the Agent of any such designation or rescission
and of any change in the location of any such other office or agency. The
Company hereby designates as the place of payment for the Securities the
Corporate Trust Office and appoints the Agent at its Corporate Trust Office as
paying agent in such city.
Section 10.3. Company to Reserve Common Stock.
The Company shall at all times prior to the Final Settlement Date reserve
and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock the full number of shares of Common Stock issuable (x)
against tender of payment in respect of all Purchase Contracts constituting a
part of the Securities evidenced by Outstanding Security Certificates and (y) in
payment of Deferred Yield Enhancement Payments, if any, owed by the Company to
the Holders.
Section 10.4. Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which may be issued
against tender of payment in respect of any Purchase Contract constituting a
part of the Outstanding Securities and in payment of any Deferred Yield
Enhancement Payments will, upon issuance, be duly authorized, validly issued,
fully paid and nonassessable.
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<PAGE> 54
Section 10.5. Statement of Officers of the Company as to Default.
The Company will deliver to the Agent, within 120 days after the end of
each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions hereof, and if the Company shall be in default,
specifying all such defaults and the nature and status thereof of which they may
have knowledge.
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<PAGE> 55
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.
Attested by:
By:
- ------------------------------ --------------------------------
Name: Name:
Title: Title:
[AGENT]
Attested by:
By:
- ------------------------------ --------------------------------
Name: Name:
Title: Title:
49
<PAGE> 56
EXHIBIT A
MEDPARTNERS, INC.
% THRESHOLD APPRECIATION PRICE SECURITIES
-----
(STATED AMOUNT $ PER SECURITY)
-----
CUSIP No.
--------
No. Securities
--------
This Security Certificate certifies that is the registered Holder of the
number of Securities set forth above. Each Security represents (i) ownership by
the Holder of ____% United States Treasury Notes due July 31, 2000 ("Treasury
Notes") with a principal amount equal to the Stated Amount, subject to the
Pledge of such Treasury Notes by such Holder pursuant to the Pledge Agreement,
and (ii) the rights and obligations of the Holder under one Purchase Contract
with MedPartners, Inc., a Delaware corporation (the "Company"). The Treasury
Notes represented by this Security Certificate were acquired by the Underwriters
at the direction of the Company for the benefit of the holder hereof with the
proceeds of the offering of this Security Certificate [and other funds provided
by the Company] and are being conveyed to the Holder of this Security
Certificate and pledged pursuant to the Pledge Agreement simultaneously
therewith.
Pursuant to the Pledge Agreement, the Treasury Notes constituting part of
each Security evidenced hereby have been pledged to the Collateral Agent to
secure the obligation of the Holder under the Purchase Contract comprising a
portion of such Security.
The Pledge Agreement provides that all payments of principal of, or
interest on, any Treasury Notes comprising a portion of the Securities received
by the Collateral Agent shall be paid by the Collateral Agent by wire transfer
in same day funds no later than 1:00 p.m., New York City time, on the Business
Day such payment is received by the Collateral Agent (provided that in the event
such payment is received by the Collateral Agent on a day that is not a Business
Day or after 1:00 p.m., New York City time, on a Business Day, then such payment
shall be made no later than 10:00 a.m., New York City time, on the next
succeeding Business Day) (i) in the case of (A) interest payments and (B) any
principal payments with respect to any Treasury Notes that have been released
from the Pledge pursuant to the Pledge Agreement, to the Agent to the account
designated by it for such purpose and (ii) in the case of principal payments on
any Pledged Treasury Notes (as defined in the Pledge Agreement), at the
direction of the Agent on behalf of the Holders, to the Company, in full
satisfaction of the respective obligations of the Holders of the Securities of
which such Pledged Treasury Securities are a part under the Purchase Contracts
forming a part of such Securities. Interest on any Treasury Note forming part
A-1
<PAGE> 57
of a Security evidenced hereby which is paid on any January 31 or July 31,
commencing January 31, 1998 (a "Payment Date"), shall, subject to receipt
thereof by the Agent from the Collateral Agent, be paid to the Person in whose
name this Security Certificate (or a Predecessor Security Certificate) is
registered at the close of business on the Record Date next preceding such
Payment Date; provided, that on January 31, 1998, the first Payment Date with
respect to the Securities, the Agent shall remit to the persons in whose names
Securities are registered on the Record Date with respect thereto interest
payable with respect to the Treasury Securities for the period from the date of
initial issuance of the Securities until January 31, 1998 ("Holders' Accrued
Interest"). Interest payable with respect to the Treasury Notes which accrued
prior to the date of initial issuance of the Securities and which is payable on
the first interest payment date with respect to the Treasury Notes following
the date of initial issuance of the Securities shall be remitted by the Agent
to the Company. If the date of initial issuance of the Securities is prior to
July 31, 1997, then that portion of the semi-annual interest payment due on the
Treasury Notes on July 31, 1997 representing Holders' Accrued Interest shall
be, upon receipt by the Agent from the Collateral Agent, promptly invested by
the Agent in Permitted Investments on behalf of the holders of Securities until
the first Payment Date, at which time such amount and any reinvestment income
thereon, net of expenses associated therewith, shall be paid by the Agent to
the persons in whose names Securities are registered on the Record Date with
respect thereto together with the remainder of Holders' Accrued Interest
represented by the regularly scheduled semi-annual interest payment on the
Treasury Notes.
Each Purchase Contract evidenced hereby obligates the Holder of this
Security Certificate to purchase, and the Company to sell, on July 31, 2000 (the
"Final Settlement Date"), at a price equal to $_____ (the "Stated Amount"), a
number of shares of Common Stock, par value $.001 per share ("Common Stock"), of
the Company, equal to the Settlement Rate, unless on or prior to the Final
Settlement Date there shall have occurred a Termination Event or Early
Settlement with respect to the Security of which such Purchase Contract is a
part, all as provided in the Purchase Contract Agreement and more fully
described on the reverse hereof. The purchase price for the shares of Common
Stock purchased pursuant to each Purchase Contract evidenced hereby, if not paid
earlier, shall be paid on the Final Settlement Date by application of payment
received in respect of the principal of the Treasury Notes pledged to secure the
obligations under such Purchase Contract of the Holder of the Security of which
such Purchase Contract is a part.
The Company shall pay, on each Payment Date, in respect of each Purchase
Contract forming part of a Security evidenced hereby an amount (the "Yield
Enhancement Payment") equal to ____% per annum of the Stated Amount, computed on
the basis of the actual number of days elapsed in a year of 365 or 366 days, as
the case may be, subject to deferral at the option of the Company as provided
in the Purchase Contract Agreement and more fully described on the reverse
hereof; except that the Yield Enhancement Payment payable on the first Payment
Date will be adjusted so that the Yield Enhancement Payment payable on such date
will be the equivalent of ____% of the Stated Amount per annum accruing from the
date of initial issuance of the Securities to January 31, 1998. Such Yield
Enhancement Payment shall be payable to the Person in whose name this Security
Certificate (or a Predecessor Security Certificate) is registered at the close
of business on the Record Date next preceding such Payment Date.
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<PAGE> 58
Interest on the Treasury Notes and the Yield Enhancement Payment will be
payable at the office of the Agent in the City of New York or, at the option of
the Company, by check mailed to the address of the Person entitled thereto as
such address appears on Security Register.
Reference is hereby made to the further provisions set forth on the
reverse hereof, which further provisions shall for all purposes have the same
effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Agent by manual signature, this Security Certificate shall not be entitled to
any benefit under the Pledge Agreement or the Purchase Contract Agreement or be
valid or obligatory for any purpose.
A-3
<PAGE> 59
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
MEDPARTNERS, INC.
By:
------------------------------
Name:
Title:
Attest:
- -----------------------------------
HOLDER SPECIFIED ABOVE (as to
obligations of such Holder under
the Purchase Contracts evidenced
hereby)
By: [AGENT], not individually but
solely as Attorney-in-Fact of
such Holder
By:
-------------------------------
Name:
Title:
Dated:
This is one of the Security Certificates referred to in the within
mentioned Purchase Contract Agreement.
[AGENT],
as Agent
By:
----------------------------
A-4
<PAGE> 60
(Form of Reverse of Security Certificates)
Each Purchase Contract evidenced hereby is governed by a Purchase
Contract Agreement, dated as of _____________, 1997 (the "Purchase Contract
Agreement"), between the Company and _______________________, as Purchase
Contract Agent (herein called the "Agent"), to which Purchase Contract Agreement
and supplemental agreements thereto reference is hereby made for a description
of the respective rights, limitations of rights, obligations, duties and
immunities thereunder of the Agent, the Company and the Holders and of the terms
upon which the Security Certificates are, and are to be, executed and delivered.
Each Purchase Contract evidenced hereby obligates the Holder of this
Security Certificate to purchase, and the Company to sell, on the Final
Settlement Date at a price equal to the Stated Amount, a number of shares of
Common Stock of the Company equal to the Settlement Rate, unless on or prior to
the Final Settlement Date there shall have occurred a Termination Event or an
Early Settlement with respect to the Security of which such Purchase Contract is
a part. The "Settlement Rate" is equal to (a) if the Applicable Market Value (as
defined below) is greater than $_______ (the "Threshold Appreciation Price"),
___ of a share of Common Stock per Purchase Contract, (b) if the Applicable
Market Value is less than or equal to the Threshold Appreciation Price but is
greater than the Stated Amount, a fractional share of Common Stock per Purchase
Contract equal to the Stated Amount divided by the Applicable Market Value and
(c) if the Applicable Market Amount is less than or equal to the Stated Amount,
one share of Common Stock per Purchase Contract, in each case subject to
adjustment as provided in the Purchase Contract. No fractional shares of Common
Stock will be issued upon settlement of Purchase Contracts, as provided in the
Purchase Contract Agreement.
The "Applicable Market Value" means the average of the Closing Prices per
share of Common Stock on each of the twenty consecutive Trading Days ending on
the second Trading Day immediately preceding the Final Settlement Date. The
"Closing Price" of the Common Stock on any date of determination means the
closing sale price (or, if no closing price is reported, the last reported sale
price) of the Common Stock on the New York Stock Exchange (the "NYSE") on such
date or, if the Common Stock is not listed for trading on the NYSE on any such
date, as reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is so listed, or if the Common
Stock is not listed on a United States national or regional securities exchange,
as reported by the Nasdaq Stock Market, or, if the Common Stock is not so
reported, the last quoted bid price for the Common Stock in the over-the-counter
market as reported by the National Quotation Bureau or similar organization, or,
if such bid price is not available, the market value of the Common Stock on such
date as determined by a nationally recognized independent investment banking
firm retained for this purpose by the Company. A "Trading Day" means a day on
which the Common Stock (A) is not suspended from trading on any national or
regional securities exchange or association or
A-5
<PAGE> 61
over-the-counter market at the close of business and (B) has traded at least
once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of the Common
Stock.
The purchase price for the shares of Common Stock purchased pursuant to
each Purchase Contract shall be paid by application of payments received by the
Company on the Final Settlement Date from the Collateral Agent at the direction
of the Agent on behalf of the Holders pursuant to the Pledge Agreement in
respect of the principal of the Treasury Notes pledged to secure the obligations
of the relevant Holder under such Purchase Contract.
The Company shall not be obligated to issue any shares of Common Stock in
respect of a Purchase Contract or deliver any certificates therefor to the
Holder unless it shall have received payment in full of the aggregate purchase
price for the shares of Commons Stock to be purchased thereunder in the manner
herein set forth.
Subject to the next succeeding paragraph, the Company shall pay, on each
Payment Date, the Yield Enhancement Payment payable in respect of each Purchase
Contract to the Person in whose name the Security Certificate evidencing such
Purchase Contract is registered at the Close of business on the Record Date next
preceding such Payment Date. Yield Enhancement Payments will be payable at the
office of the Agent in the City of New York or, at the option of the Company, by
check mailed to the address of the Person entitled thereto at such address as it
appears on the Security Register.
The Company shall have the right, at any time prior to the Final
Settlement Date, to defer the payment of any or all of the Yield Enhancement
Payments otherwise payable on any Payment Date but only if the Company shall
give the Holders and the Agent written notice of its election to defer such
payment (specifying the amount to be deferred) as provided in the Purchase
Contract Agreement. Any Yield Enhancement Payments so deferred shall bear
additional Yield Enhancement Payments thereon at the rate of _____% per annum
(computed on the basis of the actual number of days elapsed in a year of 365 or
366 days, as the case may be), compounding on each succeeding Payment Date,
until paid in full (such deferred installments of Yield Enhancement Payments
together with the additional Yield Enhancement Payments accrued thereon, are
referred to herein as the "Deferred Yield Enhancement Payments"). Deferred Yield
Enhancement Payments shall be due on the next succeeding Payment Date except to
the extent that payment is deferred pursuant to the Purchase Contract Agreement.
No Yield Enhancement Payments may be deferred to a date that is after the Final
Settlement Date.
In the event that the Company elects to defer the payment of Yield
Enhancement Payments on Purchase Contracts until the Final Settlement Date, the
Holder of this Security Certificate will receive on the Final Settlement Date,
in lieu of a cash payment, a number of shares of Common Stock (in addition to a
number of shares of Common Stock equal to the Settlement Rate) equal to (x) the
aggregate amount of Deferred Yield
A-6
<PAGE> 62
Enhancement Payments payable to the Holder of the Security Certificate divided
by (y) the Applicable Market Value. No fractional shares of Common Stock will be
issued with respect to the payment of Deferred Yield Enhancement Payments on the
Final Settlement Date, as provided in the Purchase Contract Agreement.
In the event the Company exercises its option to defer the payment of
Yield Enhancement Payments, then, until the Deferred Yield Enhancement Payments
have been made, (a) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchase or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plans
or the satisfaction by the Company of its obligations pursuant to any contract
or security requiring the Company to purchase shares of Common Stock, (ii) as a
result of a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock or (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged) or make any guarantee payments with respect to the
foregoing), (b) the Company shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees) issued by the Company that rank pari passu with or junior
to such Yield Enhancement Payments and (c) the Company shall not make any
guarantee payments with respect to the foregoing.
The Purchase Contracts and the obligations and rights of the Company and
the Holders thereunder, including, without limitation, the rights of the Holders
to receive and the obligation of the Company to pay any Yield Enhancement
Payment or any Deferred Yield Enhancement Payments, shall immediately and
automatically terminate, without the necessity of any notice or action by any
Holder, the Agent or the Company, if, on or prior to the Final Settlement Date,
a Termination Event shall have occurred. Upon the occurrence of a Termination
Event, the Company shall promptly but in no event after two business days
thereafter give written notice to the Agent, the Collateral Agent and to the
Holders, at their address as they appear in the Security Register. Upon and
after the occurrence of a Termination Event, the Collateral Agent shall release
the Treasury Notes from the Pledge in accordance with the provisions of the
Pledge Agreement. The Securities shall thereafter represent the right to receive
the Treasury Notes forming a part of such Securities in accordance with the
provisions of the Purchase Contract Agreement and the Pledge Agreement.
Subject to and upon compliance with the provisions of the Purchase
Contract Agreement at the option of the Holder thereof, Purchase Contracts
underlying Securities having an aggregate Stated Amount equal to $________ or an
integral multiple thereof may be settled early ("Early Settlement") as provided
in the Purchase Contract Agreement. In order to exercise the right to effect
Early Settlement with respect to any Purchase
A-7
<PAGE> 63
Contracts evidenced by this Security Certificate, the Holder of this Security
Certificate shall deliver this Security Certificate to the Agent at the
Corporate Trust Office duly endorsed for transfer to the Company or in blank
with the form of Election to Settle Early set forth below duly completed and
accompanied by payment in the form of immediately available funds in an amount
(the "Early Settlement Amount") equal to (i) the product of (A) the Stated
Amount times (B) the number of Purchase Contracts with respect to which the
Holder has elected to effect Early Settlement, plus (ii) if such delivery is
made with respect to any Purchase Contracts during the period from the close of
business on any Record Date next preceding any Payment Date to the opening of
business of such Payment Date, an amount equal to the sum of (x) the Yield
Enhancement Payments payable on such Payment Date with respect to such Purchase
Contracts plus (y) the interest with respect to the related Treasury Notes
payable on such Payment Date. Upon Early Settlement of Purchase Contracts by a
Holder of the related Securities, the Treasury Notes underlying such Securities
shall be released from the Pledge as provided in the Pledge Agreement and the
Holder shall be entitled to receive a number of shares of Common Stock on
account of each Purchase Contract forming part of a Security as to which Early
Settlement is effected equal to the Early Settlement Rate; provided, however,
that upon the Early Settlement of the Purchase Contracts, the Holder thereof
will forfeit the right to receive any Deferred Yield Enhancement Payments on
such Purchase Contracts. The Early Settlement Rate shall initially be equal to
___ and shall be adjusted in the same manner and at the same time as the
Settlement Rate is adjusted as provided in the Purchase Contract Agreement.
The Security Certificates are issuable only in registered form and only
in denominations of a single Security and any integral multiple thereof. The
transfer of any Security Certificates will be registered and Security
Certificates may be exchanged as provided in the Purchase Contract Agreement.
The Security Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents permitted by the Purchase
Contract Agreement. No service charge shall be required for any such
registration of transfer or exchange, but the Company and the Agent may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. For so long as the Purchase Contract underlying
a Security remains in effect, such Security shall not be separable into its
constituent parts, and the rights and obligations of the Holder of such Security
in respect of the Treasury Notes and Purchase Contract constituting such
Security may be transferred and exchanged only as a Security.
Upon registration of transfer of this Security Certificate, the
transferee shall be bound (without the necessity of any other action on the part
of such transferee, except as may be required by the Agent pursuant to the
Purchase Contract Agreement), under the terms of the Purchase Contract Agreement
and the Purchase Contracts evidenced hereby and the transferor shall be released
from the obligations under the Purchase Contracts evidenced by this Security
Certificate. The Company covenants and agrees, and the Holder, by his acceptance
hereof, likewise covenants and agrees, to be bound by the provisions of this
paragraph.
A-8
<PAGE> 64
The Holder of this Security Certificate, by his acceptance hereof,
authorizes the Agent to enter into and perform the related Purchase Contracts
forming part of the Securities evidenced hereby on his behalf as his
attorney-in-fact, expressly withholds any consent to the assumption (i.e.,
affirmance) of the Purchase Contracts by the Company or its trustee in the event
that the Company becomes the subject of a case under the Bankruptcy Code, agrees
to be bound by the terms and provisions thereof, covenants and agrees to perform
his obligations under such Purchase Contracts, consents to the provisions of the
Purchase Contract Agreement, authorizes the Agent to enter into and perform the
Pledge Agreement on his behalf as his attorney-in-fact, and consents to the
Pledge of the Treasury Notes underlying this Security Certificate pursuant to
the Pledge Agreement. The Holder further covenants and agrees, that, to the
extent and in the manner provided in the Purchase Contract Agreement and the
Pledge Agreement, but subject to the terms thereof, payments in respect of
principal of the Treasury Notes on the Final Settlement Date shall be paid by
the Collateral Agent to the Company in satisfaction of such Holder's obligations
under such Purchase Contract and such Holder shall acquire no right, title or
interest in such payments.
Subject to certain exceptions, the provisions of the Purchase Contract
Agreement may be amended with the consent of the Holders of at least 66 2/3% of
the Outstanding Securities.
All terms used herein which are defined in the Purchase Contract
Agreement have the meanings set forth therein.
The Purchase Contracts shall for all purposes be governed by, and
construed in accordance with, the laws of the State of New York.
The Company, the Agent and its Affiliates and any agent of the Company or
the Agent may treat the Person in whose name this Security Certificate is
registered as the owner of the Securities evidenced hereby for the purpose of
receiving payments of interest on the Treasury Notes, receiving payments of
Yield Enhancement Payments and any Deferred Yield Enhancement Payments,
performance of the Purchase Contracts and for all other purposes whatsoever,
whether or not any payments in respect thereof be overdue and notwithstanding
any notice to the contrary, and neither the Company, the Agent nor any such
agent shall be affected by notice to the contrary.
The Purchase Contracts shall not, prior to the settlement thereof,
entitle the Holder to any of the rights of a holder of shares of Common Stock.
A copy of the Purchase Contract Agreement is available for inspection at
the offices of the Agent.
A-9
<PAGE> 65
SETTLEMENT INSTRUCTIONS
The undersigned Holder directs that a certificate for shares of Common
Stock deliverable upon settlement on or after the Final Settlement Date of the
Purchase Contracts underlying the number of Securities evidenced by this
Security Certificate be registered in the name of, and delivered, together with
a check in payment for any fractional share, to the undersigned at the address
indicated below unless a different name and address have been indicated below.
If shares are to be registered in the name of a Person other than the
undersigned, the undersigned will pay any transfer tax payable incident thereto.
Dated:
----------------------------- -------------------------------
Signature
If shares are to be registered
in the name of and delivered
to a Person other than the REGISTERED HOLDER
Holder, please print such
Person's name and address:
Please print name and
address of Registered
Holder:
- ------------------------------------ -------------------------------
Name Name
- ------------------------------------ -------------------------------
Address Address
Social Security or other
Taxpayer Identification
Number, if any
-------------------------------
A-10
<PAGE> 66
ELECTION TO SETTLE EARLY
The undersigned Holder of this Security Certificate hereby irrevocably
exercises the option to effect Early Settlement in accordance with the terms of
the Purchase Contract Agreement with respect to the Purchase Contracts
underlying the number of Securities evidenced by this Security Certificate
specified below. The option to effect Early Settlement may be exercised only
with respect to Purchase Contracts underlying Securities with an aggregate
Stated Amount equal to $ or an integral multiple thereof. The undersigned
Holder directs that a certificate for shares of Common Stock deliverable upon
such Early Settlement be registered in the name of, and delivered, together
with a check in payment for any fractional share and any Security Certificate
representing any Securities evidenced hereby as to which Early Settlement of
the related Purchase Contracts is not effected, to the undersigned at the
address indicated below unless a different name and address have indicated
below. Treasury Notes deliverable upon such Early Settlement will be
transferred in accordance with the transfer instructions set forth below. If
shares are to be registered in the name of a Person other than the undersigned,
the undersigned will pay any transfer tax payable incident thereto.
Date:
------------------------------ -------------------------------
Signature
A-11
<PAGE> 67
Number of Securities evidenced hereby as to which Early Settlement of the
related Purchase Contracts is being elected:
If shares of Security Certifi- REGISTERED HOLDER
cates are to be registered in
the name of and delivered to
and Treasury Notes are to be
transferred to a Person other
than the Holder, please print
such Person's name and address
Please print name and
address of Registered
Holder:
- ----------------------------------- -----------------------------------
Name Name
- ----------------------------------- -----------------------------------
Address Address
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Social Security or other
Taxpayer Identification
Number, if any
-----------------------------------
Transfer Instructions for Treasury Notes Transferable Upon Early Settlement or a
Termination Event:
- ---------------------------
- ---------------------------
- ---------------------------
A-12
<PAGE> 1
EXHIBIT (4) - 5
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of ______________, 1997 (this "Agreement"),
among MedPartners, Inc., a Delaware corporation (the "Company"),
_______________, a ________________ corporation, not individually but solely as
collateral agent (in such capacity, together with its successors in such
capacity, the "Collateral Agent"), and ___________________, not individually but
solely as purchase contract agent and as attorney-in-fact of the holders from
time to time of the Securities (as hereinafter defined) (in such capacity,
together with its successors in such capacity, the "Purchase Contract Agent")
under the Purchase Contract Agreement (as hereinafter defined).
RECITALS
The Company and the Purchase Contract Agent are parties to the Purchase
Contract Agreement, dated as of the date hereof (as modified and supplemented
and in effect from time to time, the "Purchase Contract Agreement"), pursuant to
which there will be issued ____% Threshold Appreciation Price Securities (the
"Securities").
Each Security consists of (a) one Purchase Contract (as hereinafter
defined) and (b) ____% United States Treasury Notes due July 31, 2000 ("Treasury
Notes") having a principal amount equal to $______ (the "Stated Amount") and
maturing on July 31, 2000 (the "Final Settlement Date"), subject to the
pledge of such Treasury Notes created hereby.
The Company has caused the Underwriters, on its behalf, to purchase the
Treasury Notes for the benefit of holders of the Securities, to be settled on
_______________, 1997 with the proceeds of the offering of the Securities [and
other funds to be provided by the Company].
Pursuant to the terms of the Purchase Contract Agreement and the
Purchase Contracts, the Holders (as defined in the Purchase Contract Agreement)
from time to time of the Securities have authorized the Purchase Contract Agent,
as attorney-in-fact of such Holders, among other things to execute and deliver
this Agreement on behalf of such Holders and to grant the pledge provided hereby
of the Treasury Notes constituting part of such Securities as provided herein
and subject to the terms hereof.
Accordingly, the Company, the Collateral Agent and the Purchase
Contract Agent, on its own behalf and as attorney-in-fact of the Holders from
time to time of the Securities, agree as follows:
SECTION 1. DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
<PAGE> 2
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular; and
(2) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole and not to
any particular Article, Section or other subdivision.
"Act" has the meaning specified in the Purchase Contract Agreement.
"Agreement" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more agreements
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Applicable Treasury Regulations" means Subpart O - Book-Entry
Procedure of Title 31 of the Code of Federal Regulations (31 CFR (ss.ss.)
306.115 et seq.) and any other regulations of the United States Treasury
Department from time to time applicable to the transfer or pledge of book-entry
U.S. Treasury Securities.
"Bankruptcy Code" means Title 11 of the United States Code, or any
other law of the United States that from time to time provides a uniform system
of bankruptcy laws.
"Board Resolution" has the meaning specified in the Purchase Contract
Agreement.
"Business Day" means any day that is not a Saturday, a Sunday or a day
on which the New York Stock Exchange or banking institutions or trust companies
in the City of New York are authorized or obligated by law or executive order to
be closed.
"Collateral Agent" has the meaning specified in the first paragraph of
this instrument.
"Collateral Account" means the account maintained at _______________ in
the name "_______________ as Collateral Agent of MedPartners, Inc. as pledgee of
___________________ as Purchase Contract Agent."
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor shall have become such, and
thereafter "Company" shall mean such successor.
"Early Settlement" has the meaning specified in the Purchase Contract
Agreement.
2
<PAGE> 3
"Early Settlement Amount" has the meaning specified in the Purchase
Contract Agreement.
"Final Settlement Date" has the meaning specified in the Recitals.
"Holder" when used with respect to a Security, or a Purchase Contract
constituting a part thereof, has the meaning specified in the Purchase Contract
Agreement.
"Opinion of Counsel" means an opinion in writing signed by legal
counsel, who may be an employee of or counsel to the Company and who shall be
reasonably acceptable to the Collateral Agent or the Purchase Contract Agent, as
the case may be.
"Outstanding Securities" has the meaning specified in the Purchase
Contract Agreement.
"Outstanding Security Certificates" has the meaning specified in the
Purchase Contract Agreement.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Pledge" has the meaning specified in Section 2 hereof.
"Pledged Treasury Notes" has the meaning specified in Section 2 hereof.
"Purchase Contract" has the meaning specified in the Purchase Contract
Agreement.
"Purchase Contract Agent" has the meaning specified in the first
paragraph of this instrument.
"Security" has the meaning specified in the Recitals.
"Security Certificate" has the meaning specified in the Purchase
Contract Agreement.
"Stated Amount" has the meaning specified in the Recitals.
"Termination Event" has the meaning specified in the Purchase Contract
Agreement.
"Treasury Notes" has the meaning specified in the Recitals.
3
<PAGE> 4
SECTION 2. THE PLEDGE. The Holders from time to time of the Securities
acting through the Purchase Contract Agent, as their attorney-in-fact, hereby
pledge and grant to the Collateral Agent for the benefit of the Company, as
collateral security for the performance when due by such Holders of their
respective obligations under the Purchase Contracts comprising a portion of such
Securities, a security interest in all of the right, title and interest of such
Holders in the Treasury Notes constituting a part of such Securities.
Concurrently with the execution and delivery of the Securities, the initial
Holders and the Purchase Contract Agent shall (i) cause the Treasury Notes to be
transferred to the Collateral Agent by Federal Reserve Bank-Wire to the account
of the Collateral Agent and (ii) the Collateral Agent shall credit the Treasury
Notes to the Collateral Account; in each case pursuant to Applicable Treasury
Regulations and to the Uniform Commercial Code to the extent such laws are
applicable. The pledge provided in this Section 2 is herein referred to as the
"Pledge" and the Treasury Notes subject to the Pledge, excluding any Treasury
Notes released from the Pledge as provided in Section 4 hereof, are hereinafter
referred to as the "Pledged Treasury Notes." Subject to the Pledge, and to the
provisions of Section 4.1 of the Purchase Contract Agreement, the Holders from
time to time of the Securities shall have full beneficial ownership of the
Treasury Notes constituting a part of such Securities.
SECTION 3. DISTRIBUTION OF PRINCIPAL AND INTEREST. (a) All payments of
principal of, or interest on, any Treasury Notes constituting part of the
Securities received by the Collateral Agent shall be paid by the Collateral
Agent by wire transfer in same day funds no later than 1:00 p.m., New York City
time, on the Business Day such interest payment is received by the Collateral
Agent (provided that in the event such interest payment is received by the
Collateral Agent on a day that is not a Business Day or after 1:00 p.m., New
York City time, on a Business Day, then such payment shall be made no later than
10:00 a.m., New York City time, on the next succeeding Business Day) (i) in the
case of (A) interest payments and (B) any principal payments with respect to any
Treasury Notes that have been released from the Pledge pursuant to Section 4
hereof, to the Purchase Contract Agent to the account designated by it for such
purpose and (ii) in the case of principal payments on any Pledged Treasury
Notes, the Purchase Contract Agent on behalf of the Holders hereby directs the
Collateral Agent to make such payments to the Company, in full satisfaction of
the respective obligations of the Holders of the Securities of which such
Pledged Treasury Notes are a part under the Purchase Contracts forming a part of
such Securities. All such payments received by the Purchase Contract Agent as
provided herein shall be applied by the Purchase Contract Agent pursuant to the
provisions of the Purchase Contract Agreement. If, notwithstanding the
foregoing, the Purchase Contract Agent shall receive any payments of
principal on account of any Pledged Treasury Notes, the Purchase Contract Agent
shall hold the same as trustee of an express trust for the benefit of the
Company (and promptly deliver over to the Company) for application to the
obligations of the Holders of the Securities of which such Treasury Notes are a
part under the Purchase Contracts relating to the
4
<PAGE> 5
Securities of which such Treasury Notes are a part, and such Holders shall
acquire no right, title or interest in any such payments of principal so
received.
SECTION 4. RELEASE OF PLEDGED TREASURY NOTES. (a) Upon written notice
to the Collateral Agent by the Company or the Purchase Contract Agent that there
has occurred a Termination Event, resulting in the termination of the Purchase
Contracts in accordance with Section 5.8 of the Purchase Contract Agreement, the
Collateral Agent shall release all Pledged Treasury Notes from the Pledge and
shall transfer all such Treasury Notes, free and clear of any lien, pledge or
security interest created hereby, to the Purchase Contract Agent.
If such Termination Event shall result from the Company's becoming a
debtor under the Bankruptcy Code, and if the Collateral Agent shall for any
reason fail immediately to effectuate the release and transfer of all Pledged
Treasury Notes as provided by this Section 4(a), the Purchase Contract Agent
shall, subject to Section 6.12, (i) use its best efforts to obtain an opinion of
a nationally recognized law firm reasonably acceptable to the Collateral Agent
to the effect that, as a result of the Company's being the debtor in such a
bankruptcy case, the Collateral Agent will not be prohibited from releasing or
transferring the Treasury Notes as provided in this Section 4(a), and shall
deliver such opinion to the Collateral Agent within ten days after the
occurrence of such Termination Event, and if (y) the Purchase Contract Agent
shall be unable to obtain such opinion within ten days after the occurrence of
such Termination Event or (z) the Collateral Agent shall continue, after
delivery of such opinion, to refuse to effectuate the release and transfer of
all Pledged Treasury Notes as provided in this Section 4(a), then the Purchase
Contract Agent shall within fifteen days after the occurrence of such
Termination Event commence an action or proceeding in the court with
jurisdiction of the Company's case under the Bankruptcy Code seeking an order
requiring the Collateral Agent to effectuate the release and transfer of all
Pledged Treasury Notes as provided by this Section 4(a) or (ii) commence an
action or proceeding like that described in subsection (i)(z) hereof within ten
days after the occurrence of such Termination Event.
(b) Upon written notice to the Collateral Agent by the Purchase
Contract Agent that one or more Holders of Securities have elected to effect
Early Settlement of their respective obligations under the Purchase Contracts
forming a part of such Securities in accordance with the terms of the Purchase
Contracts and the Purchase Contract Agreement (setting forth the number of such
Purchase Contracts as to which such Holders have elected to effect Early
Settlement), and that the Purchase Contract Agent has received from such
Holders, and paid to the Company, the related Early Settlement Amounts pursuant
to the terms of the Purchase Contracts and the Purchase Contract Agreement and
that all conditions to such Early Settlement have been satisfied, then the
Collateral Agent shall release from the Pledge, Pledged Treasury Notes with a
principal amount equal to the product of (i) the Stated Amount times (ii) the
number of such Purchase Contracts as to which such Holders have elected to
effect Early Settlement.
5
<PAGE> 6
(c) Transfers of Treasury Notes pursuant to Section 4(a) or (b) shall
be by Federal Reserve Bank-Wire or in another appropriate manner, (i) if the
Collateral Agent shall have received such notification at or prior to 11:00
a.m., New York City time, on a Business Day, then no later than 2:00 p.m., New
York City time, on such Business Day and (ii) if the Collateral Agent shall have
received such notification on a day that is not a Business Day or after 11:00
a.m., New York City time, on a Business Day, then no later than 10:00 a.m., New
York City time, on the next succeeding Business Day.
SECTION 5. RIGHTS AND REMEDIES. (a) The Collateral Agent shall have all
of the rights and remedies with respect to the Pledged Treasury Notes of a
secured party under the Uniform Commercial Code as in effect in the State of New
York (the "Code") (whether or not the Code is in effect in the jurisdiction
where the rights and remedies are asserted) and such additional rights and
remedies to which a secured party is entitled under the laws in effect in any
jurisdiction where any rights and remedies hereunder may be asserted.
(b) Without limiting any rights or powers otherwise granted by this
Agreement to the Collateral Agent, in the event the Collateral Agent is unable
to make payments to the Company on account of principal payments of any Pledged
Treasury Notes as provided in Section 3 hereof in satisfaction of the
obligations of the Holder of the Securities of which such Pledged Treasury Notes
are a part under the Purchase Contracts forming a part of such Securities, the
Collateral Agent shall have and may exercise, with reference to such Pledged
Treasury Notes and such obligations of such Holder, any and all of the rights
and remedies available to a secured party under the Code after default by a
debtor, and as otherwise granted herein or under any other law.
(c) Without limiting any rights or powers otherwise granted by this
Agreement to the Collateral Agent, the Collateral Agent is hereby irrevocably
authorized to receive and collect all payments of principal of or interest on
the Pledged Treasury Notes.
(d) The Purchase Contract Agent agrees that, from time to time, upon
the written request of the Collateral Agent, the Purchase Contract Agent shall
execute and deliver such further documents and do such other acts and things as
the Collateral Agent may reasonably request in order to maintain the Pledge, and
the perfection and priority thereof, and to confirm the rights of the Collateral
Agent hereunder.
SECTION 6. THE COLLATERAL AGENT AND THE PURCHASE CONTRACT AGENT. It is
hereby agreed as follows:
6.01. APPOINTMENT, POWERS AND IMMUNITIES. The Collateral Agent
shall act as agent for the Company hereunder with such powers as are
specifically vested in the Collateral Agent by the terms of this
Agreement, together with such other powers as are reasonably incidental
thereto. The Collateral Agent: (a) shall have no duties or
responsibilities except those
6
<PAGE> 7
expressly set forth in this Agreement and no implied covenants or
obligations shall be inferred from this Agreement against the
Collateral Agent, nor shall the Collateral Agent be bound by the
provisions of any agreement by any party hereto beyond the specific
terms hereof; (b) shall not be responsible for any recitals contained
in this Agreement, or in any certificate or other document referred to
or provided for in, or received by it under, this Agreement, the
Securities or the Purchase Contract Agreement, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of
this Agreement (other than as against the Collateral Agent), the
Securities or the Purchase Contract Agreement or any other document
referred to or provided for herein or therein or for any failure by the
Company or any other Person (except the Collateral Agent) to perform
any of its obligations hereunder or thereunder; (c) shall not be
required to initiate or conduct any litigation or collection
proceedings hereunder (except pursuant to directions furnished under
Section 6.02 hereof); (d) shall not be responsible for any action taken
or omitted to be taken by it hereunder or under any other document or
instrument referred to or provided for herein or in connection herewith
or therewith, except for its own negligence; and (e) shall not be
required to advise any party as to selling or retaining, or taking or
refraining from taking any action with respect to, any securities or
other property deposited hereunder. Subject to the foregoing, during
the term of this Agreement, the Collateral Agent shall take all
reasonable action in connection with the safe keeping and preservation
of the Pledged Treasury Notes hereunder.
No provision of this Agreement shall require the Collateral
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder. In no
event shall the Collateral Agent be liable for any amount in excess of
the value of the Pledged Treasury Notes.
6.02. INSTRUCTIONS OF THE COMPANY. The Company shall have the
right, by one or more instruments in writing executed and delivered to
the Collateral Agent, to direct the time, method and place of
conducting any proceeding for any right or remedy available to the
Collateral Agent, or of exercising any power conferred on the
Collateral Agent, or to direct the taking or refraining from taking of
any action authorized by this Agreement; provided, however, that (i)
such direction shall not conflict with the provisions of any law or of
this Agreement and (ii) the Collateral Agent shall be adequately
indemnified as provided herein. Nothing in this Section 6.02 shall
impair the right of the Collateral Agent in its discretion to take any
action or omit to take any action which it deems proper and which is
not inconsistent with such direction.
6.03. RELIANCE BY COLLATERAL AGENT. The Collateral Agent shall
be entitled to rely upon any certification, order, judgment, opinion,
notice or other communication (including, without limitation, any
thereof by telephone, telecopy, telex, telegram or cable) believed by
it to be genuine and correct and to have been signed or sent by or on
behalf of the proper Person or Persons
7
<PAGE> 8
(without being required to determine the correctness of any fact stated
therein), and upon advice and statements of legal counsel and other
experts selected by the Collateral Agent. As to any matters not
expressly provided for by this Agreement, the Collateral Agent shall in
all cases be fully protected in acting, or in refraining from acting,
hereunder in accordance with instructions given by the Company in
accordance with this Agreement.
6.04. RIGHTS IN OTHER CAPACITIES. The Collateral Agent and its
affiliates may (without having to account therefor to the Company)
accept deposits from, lend money to, make investments in and generally
engage in any kind of banking, trust or other business with the
Purchase Contract Agent and any Holder of Securities (and any of their
subsidiaries or affiliates) as if it were not acting as the Collateral
Agent, and the Collateral Agent and its affiliates may accept fees and
other consideration from the Purchase Contract Agent and any Holder of
Securities without having to account for the same to the Company,
provided that the Collateral Agent covenants and agrees with the
Company that the Collateral Agent shall not accept, receive or permit
there to be created in its favor any security interest, lien or other
encumbrance of any kind in or upon the Pledged Treasury Notes.
6.05. NON-RELIANCE ON COLLATERAL AGENT. The Collateral Agent
shall not be required to keep itself informed as to the performance or
observance by the Purchase Contract Agent or any Holder of Securities
of this Agreement, the Purchase Contract Agreement, the Securities or
any other document referred to or provided for herein or therein or to
inspect the properties or books of the Purchase Contract Agent or any
Holder of Securities. The Collateral Agent shall not have any duty or
responsibility to provide the Company with any credit or other
information concerning the affairs, financial condition or business of
the Purchase Contract Agent or any Holder of Securities (or any of
their affiliates) that may come into the possession of the Collateral
Agent or any of its affiliates.
6.06. COMPENSATION AND INDEMNITY. The Company agrees: (i) to
pay the Collateral Agent from time to time reasonable compensation for
all services rendered by it hereunder and (ii) to indemnify the
Collateral Agent for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or
administration of its powers and duties under this Agreement, including
the costs and expenses (including reasonable fees and expenses of
counsel) of defending itself against any claim or liability in
connection with the exercise or performance of such powers and duties.
6.07. FAILURE TO ACT. In the event of any ambiguity in the
provisions of this Agreement or any dispute between or conflicting
claims by or among the parties hereto and/or any other Person with
respect to any funds or property deposited hereunder, the Collateral
Agent shall be entitled, at its sole
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option, to refuse to comply with any and all claims, demands or
instructions with respect to such property or funds so long as such
dispute or conflict shall continue, and the Collateral Agent shall not
be or become liable in any way to any of the parties hereto for its
failure or refusal to comply with such conflicting claims, demands or
instructions. The Collateral Agent shall be entitled to refuse to act
until either (i) such conflicting or adverse claims or demands shall
have been finally determined by a court of competent jurisdiction or
settled by agreement between the conflicting parties as evidenced in a
writing, satisfactory to the Collateral Agent or (ii) the Collateral
Agent shall have received security or an indemnity satisfactory to the
Collateral Agent sufficient to save the Collateral Agent harmless from
and against any and all loss, liability or expense which the Collateral
Agent may incur by reason of its acting. The Collateral Agent may in
addition elect to commence an interpleader action or seek other
judicial relief or orders as the Collateral Agent may deem necessary.
Notwithstanding anything contained herein to the contrary, the
Collateral Agent shall not be required to take any action that is in
its opinion contrary to law or to the terms of this Agreement, or which
would in its opinion subject it or any of its officers, employees or
directors to liability.
6.08. RESIGNATION OF COLLATERAL AGENT. Subject to the
appointment and acceptance of a successor Collateral Agent as provided
below, (a) the Collateral Agent may resign at any time by giving notice
thereof to the Company and the Purchase Contract Agent, (b) the
Collateral Agent may be removed at any time by the Company and (c) if
the Collateral Agent fails to perform any of its material obligations
hereunder in any material respect for a period of not less than 20 days
after receiving written notice of such failure by the Purchase Contract
Agent and such failure shall be continuing, the Collateral Agent may be
removed by the Purchase Contract Agent. The Purchase Contract Agent
shall promptly notify the Company of any removal of the Collateral
Agent pursuant to clause (c) of the immediately preceding sentence.
Upon any such resignation or removal, the Company shall have the right
to appoint a successor Collateral Agent. If no successor Collateral
Agent shall have been so appointed and shall have accepted such
appointment within 30 days after the retiring Collateral Agent's giving
of notice of resignation or such removal, then the retiring Collateral
Agent may petition any court of competent jurisdiction for the
appointment of a successor Collateral Agent. The Collateral Agent shall
be a bank which has an office in New York, New York with a combined
capital and surplus of at least $50,000,000. Upon the acceptance of any
appointment as Collateral Agent hereunder by a successor Collateral
Agent, such successor Collateral Agent shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the
retiring Collateral Agent, and the retiring Collateral Agent shall take
all appropriate action to transfer any money and property held by it
hereunder (including the Pledged Treasury Notes) to such successor
Collateral Agent. The retiring Collateral Agent shall, upon such
succession, be discharged from its duties and obligations as Collateral
Agent
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hereunder. After any retiring Collateral Agent's resignation hereunder
as Collateral Agent, the provisions of this Section 6 shall continue in
effect for its benefit in respect of any actions taken or omitted to be
taken by it while it was acting as the Collateral Agent.
Promptly following the removal or resignation of the
Collateral Agent the Company shall give written notice thereof to
Moody's Investors Services, Inc.
6.09. RIGHT TO APPOINT AGENT OR ADVISOR. The Collateral Agent
shall have the right to appoint agents or advisors in connection with
any of its duties hereunder, and the Collateral Agent shall not be
liable for any action taken or omitted by such agents or advisors
selected in good faith.
6.10. SURVIVAL. The provisions of this Section 6 shall survive
termination of this Agreement and the resignation or removal of the
Collateral Agent.
6.11. LIMITATION ON LIABILITY. Anything in this Agreement to
the contrary notwithstanding, in no event shall the Collateral Agent or
its officers, employees or agents be liable under this Agreement to any
third party for indirect, special, punitive, or consequential loss or
damage of any kind whatsoever, including lost profits, whether or not
the likelihood of such loss or damage was known to the Collateral
Agent, or any of them, incurred without any act or deed that is found
to be attributable to gross negligence on the part of the Collateral
Agent.
6.12. THE PURCHASE CONTRACT AGENT. The duties and
responsibilities of the Purchase Contract Agent under this Agreement
shall in each case be governed by Article VII of the Purchase Contract
Agreement.
SECTION 7. AMENDMENT.
7.01. AMENDMENT WITHOUT CONSENT OF HOLDERS. Without
the consent of any Holders, the Company, the Collateral Agent and the
Purchase Contract Agent, at any time and from time to time, may amend
this Agreement, in form satisfactory to the Company, the Collateral
Agent and the Purchase Contract Agent, for any of the following
purposes:
(1) to evidence the succession of another
Person to the Company, and the assumption by any such
successor of the covenants of the Company; or
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(2) to add to the covenants of the Company
for the benefit of the Holders, or to surrender any right or
power herein conferred upon the Company; or
(3) to evidence and provide for the
acceptance of appointment hereunder by a successor Collateral
Agent or Purchase Contract Agent; or
(4) to cure any ambiguity, to correct or
supplement any provisions herein which may be inconsistent
with any other such provisions herein, or to make any other
provisions with respect to such matters or questions arising
under this Agreement, provided such action shall not adversely
affect the interests of the Holders.
7.02. AMENDMENT WITH CONSENT OF HOLDERS. With the
consent of the Holders of not less than 66 2/3% of the Outstanding
Securities, by Act of said Holders delivered to the Company, the
Purchase Contract Agent and the Collateral Agent, the Company, when
authorized by a Board Resolution, the Purchase Contract Agent and the
Collateral Agent may amend this Agreement for the purpose of modifying
in any manner the provisions of this Agreement or the rights of the
Holders in respect of the Securities; provided, however, that no such
supplemental agreement shall, without the consent of the Holder of each
Outstanding Security affected thereby,
(1) change the amount or type of Treasury
Notes underlying a Security, impair the right of the Holder of
any Security to receive interest payments on the underlying
Treasury Notes or otherwise adversely affect the Holder's
rights in or to such Treasury Notes; or
(2) otherwise effect any action that would
require the consent of the Holder of each Outstanding Security
affected thereby pursuant to the Purchase Contract Agreement
if such action were effected by an agreement supplemental
thereto; or
(3) reduce the percentage of Outstanding
Securities the consent of whose Holders is required for any
such amendment.
It shall not be necessary for any Act of Holders
under this Section to approve the particular form of any proposed
amendment, but it shall be sufficient if such Act shall approve the
substance thereof.
7.03. EXECUTION OF AMENDMENTS. In executing any
amendment permitted by this Section, the Collateral Agent and the
Purchase Contract Agent shall be entitled to receive and (subject to
Section 6.01 hereof, with respect to the Collateral Agent, and Section
7.1 of the Purchase Contract Agreement, with
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respect to the Purchase Contract Agent) shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of such
amendment is authorized or permitted by this Agreement and that all
conditions precedent to such execution and delivery have been
satisfied.
7.04. EFFECT OF AMENDMENTS. Upon the execution of any
amendment under this Section, this Agreement shall be modified in
accordance therewith, and such amendment shall form a part of this
Agreement for all purposes; and every Holder of Security Certificates
theretofore or thereafter authenticated, executed on behalf of the
Holders and delivered under the Purchase Contract Agreement shall be
bound thereby.
7.05. REFERENCE TO AMENDMENTS. Security Certificates
authenticated, executed on behalf of the Holders and delivered after
the execution of any amendment pursuant to this Section may, and shall
if required by the Collateral Agent or the Purchase Contract Agent,
bear a notation in form approved by the Purchase Contract Agent and the
Collateral Agent as to any matter provided for in such amendment. If
the Company shall so determine, new Security Certificates so modified
as to conform, in the opinion of the Collateral Agent, the Purchase
Contract Agent and the Company, to any such amendment may be prepared
and executed by the Company and authenticated, executed on behalf of
the Holders and delivered by the Purchase Contract Agent in accordance
with the Purchase Contract Agreement in exchange for Outstanding
Security Certificates.
SECTION 8. MISCELLANEOUS.
8.01. NO WAIVER. No failure on the part of the
Collateral Agent or any of its agents to exercise, and no course of
dealing with respect to, and no delay in exercising, any right, power
or remedy hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise by the Collateral Agent or any of its agents
of any right, power or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or remedy.
The remedies herein are cumulative and are not exclusive of any
remedies provided by law.
8.02. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
The Company, the Collateral Agent and the Holders from time to time of
the Securities, acting through the Purchase Contract Agent as their
attorney-in-fact, hereby submit to the nonexclusive jurisdiction of the
United States District Court for the Southern District of New York and
of any New York state court sitting in New York City for the purposes
of all legal proceedings arising out of or relating to this Agreement
or the transactions contemplated hereby. The Company, the Collateral
Agent and the Holders from
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time to time of the Securities, acting through the Purchase Contract
Agent as their attorney-in-fact, irrevocably waive, to the fullest
extent permitted by applicable law, any objection which they may now or
hereafter have to the laying of the venue of any such proceeding
brought in such a court and any claim that any such proceeding brought
in such a court has been brought in an inconvenient forum.
8.03. NOTICES. All notices, requests, consents and
other communications provided for herein (including, without
limitation, any modifications of, or waivers or consents under, this
Agreement) shall be given or made in writing (including, without
limitation, by telecopy) delivered to the intended recipient at the
"Address for Notices" specified below its name on the signature pages
hereof or, as to any party, at such other address as shall be
designated by such party in a notice to the other parties. Except as
otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given when transmitted by telecopier or
personally delivered or, in the case of a mailed notice, upon receipt,
in each case given or addressed as aforesaid.
8.04. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the respective successors and
assigns of the Company, the Collateral Agent and the Purchase Contract
Agent, and the Holders from time to time of the Securities, by their
acceptance of the same, shall be deemed to have agreed to be bound by
the provisions hereof and to have ratified the agreements of, and the
grant of the Pledge hereunder by, the Purchase Contract Agent.
8.05. COUNTERPARTS. This Agreement may be executed in
any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any of the parties hereto
may execute this Agreement by signing any such counterpart.
8.06. SEVERABILITY. If any provision hereof is
invalid and unenforceable in any jurisdiction, then, to the fullest
extent permitted by law, (i) the other provisions hereof shall remain
in full force and effect in such jurisdiction and shall be liberally
construed in order to carry out the intentions of the parties hereto as
nearly as may be possible and (ii) the invalidity or unenforceability
of any provision hereof in any jurisdiction shall not affect the
validity or enforceability of such provision in any other jurisdiction.
8.07. EXPENSES, ETC. The Company agrees to reimburse
the Collateral Agent for: (a) all reasonable out-of-pocket costs and
expenses of the Collateral Agent (including, without limitation, the
reasonable fees and expenses of counsel to the Collateral Agent), in
connection with (i) the negotiation, preparation, execution and
delivery or performance of this Agreement and (ii) any modification,
supplement or waiver of any of the terms of this Agreement; (b) all
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reasonable costs and expenses of the Collateral Agent (including,
without limitation, reasonable fees and expenses of counsel) in
connection with (i) any enforcement or proceedings resulting or
incurred in connection with causing any Holder of Securities to satisfy
its obligations under the Purchase Contracts forming a part of the
Securities and (ii) the enforcement of this Section 8.07; and (c) all
transfer, stamp, documentary or other similar taxes, assessments or
charges levied by any governmental or revenue authority in respect of
this Agreement or any other document referred to herein and all costs,
expenses, taxes, assessments and other charges incurred in connection
with any filing, registration, recording or perfection of any security
interest contemplated hereby.
8.08. SECURITY INTEREST ABSOLUTE. All rights of the
Collateral Agent and security interests hereunder, and all obligations
of the Holders from time to time of the Securities hereunder, shall be
absolute and unconditional irrespective of:
(a) any lack of validity or enforceability
of any provision of the Purchase Contracts or the Securities
or any other agreement or instrument relating thereto;
(b) any change in the time, manner or place
of payment of, or any other term of, or any increase in the
amount of, all or any of the obligations of Holders of
Securities under the related Purchase Contracts, or any other
amendment or waiver of any term of, or any consent to any
departure from any requirement of, the Purchase Contract
Agreement or any Purchase Contract or any other agreement or
instrument relating thereto; or
(c) any other circumstance which might
otherwise constitute a defense available to, or discharge of,
a borrower, a guarantor or a pledgor.
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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:
Address for Notices:
MedPartners, Inc.
3000 Galleria Tower
Suite 1000
Birmingham, Alabama 35244
Attention: J. Brooke Johnston, Jr.
Telecopy: (205) 982-7709
[PURCHASE CONTRACT AGENT], as
Purchase Contract Agent and as attorney-in-
fact of the Holders from time to time of the
Securities
By:
-----------------------------------------
Name:
Title:
Address for Notices:
[Purchase Contract Agent]
[Address]
Attention:
Telecopy:
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[Collateral Agent]
[Address]
as Collateral Agent
By:
-----------------------------------------
Name:
Title:
Address for Notices:
Attention:
Telecopy:
16
