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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<S> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 0-27276
MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 63-1151076
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code:
(205) 733-8996
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<C> <C>
COMMON STOCK, PAR VALUE $.001 PER SHARE THE NEW YORK STOCK EXCHANGE
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 20, 1997: Common Stock, par value $.001 per
share -- $3,524,905,388.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 20, 1997
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<C> <C>
COMMON STOCK, PAR VALUE $.001 PER SHARE 171,449,860 SHARES*
</TABLE>
* Includes 9,317,000 shares held in trust to be utilized in employee benefit
plans.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form
10-K.
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FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS. 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"). MedPartners, Inc. ("MedPartners" or 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 document 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 below and
others set forth from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission (the "SEC").
These "forward looking statements" are found at various places throughout
this document. Additionally, the discussions herein under the captions
"Business -- Acquisition Program", "Business -- Industry", "Business --
Strategy", "Business -- Operations", "Business -- Government Regulation",
"Corporate Liability and Insurance", "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
susceptible to the risks and uncertainties discussed below. Moreover, the
Company, through its senior management, may from time to time make "forward
looking statements" about the matters described herein or other matters
concerning the Company.
The Company disclaims any intent or obligation to update "forward looking
statements".
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 circumstance that the Company has a
relatively short operating history and is the largest physician practice
management ("PPM") consolidator in the United States, 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; risks relating to
capital requirements; identification of growth opportunities;
dependence on HMO enrollee growth; risks related to the capitated
nature of revenues; control of healthcare costs; risks relating to
certain legal matters; risks relating to exposure to professional
liability; risks relating to government regulation; risks relating to
pharmacy licensing operations; risks relating to healthcare reform and
proposed legislation; and possible volatility of stock price.
For a more detailed discussion of these factors and their potential impact
on future results, see the applicable discussions herein.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
The Company is the largest PPM company in the United States based on annual
revenues of approximately $4.8 billion as of December 31, 1996. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and independent practice association
("IPA") physicians, the Company provides primary and specialty healthcare
services to prepaid managed care enrollees and fee-for-service patients. The
Company also operates one of the largest independent prescription benefit
management ("PBM") programs in the United States, with annual revenues of
approximately $1.8 billion as of December 31, 1996 and provides disease
management services and therapies for patients with certain chronic conditions.
As of December 31, 1996, the Company operated its PBM program in all 50 states
and its PPM business in 26 states and was affiliated with approximately 8,850
physicians, including approximately 2,600 in group practices, 5,300 through IPA
relationships and 950 who were hospital-based, providing healthcare to
approximately 1.6 million prepaid enrollees.
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'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 California Department of Corporations (the "DOC")
issued a healthcare service plan license (the "Restricted License") to Pioneer
Provider Network, Inc. ("Pioneer Network") in accordance with the requirements
of the Knox-Keene Health Care Service Plan Act of 1975 (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 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 also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately
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59,000 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 believes it is the leading consolidator in the PPM industry.
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 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 MedPartners Common Stock having a total
value of $1.8 billion (the "Caremark Acquisition"), creating the largest PPM
company in the United States.
In November 1995, the Company acquired Mullikin Medical Enterprises, L.P.
("MME"), a privately held PPM entity based in Long Beach, California, in
exchange for approximately 13.5 million shares of MedPartners Common Stock
having a total value of approximately $384.1 million (the "MME Acquisition"). In
February 1996, the Company acquired Pacific Physician Services, Inc. ("PPSI"), a
publicly traded PPM company based in Redlands, California, in exchange for
approximately 11.0 million shares of MedPartners Common Stock having a total
value of approximately $341.8 million. In June 1995, PPSI acquired Team Health,
Inc. ("Team Health"), based in Knoxville, Tennessee. Team Health primarily
manages physicians and other healthcare professionals engaged in the delivery of
emergency medicine and hospital based primary care.
Through December 31, 1994, the Company had affiliated with 190
physicians(excluding pooling of interests treatment for certain acquisitions).
As of December 31, 1996, the Company had affiliated with approximately 8,850
physicians.
The Company's success in continuing its aggressive growth strategy will be
dependent on many factors including, among others, its ability to identify
suitable growth opportunities and to integrate its acquired practices. 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".
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RECENT DEVELOPMENTS
On January 20, 1997, the Company entered into an Agreement and Plan of
Merger by and among the Company, Seabird Acquisition Corporation (the
"Subsidiary") and InPhyNet Medical Management Inc. ("InPhyNet") relating to the
merger of InPhyNet with and into the Subsidiary (the "Merger"). The Merger is
expected to be accounted for as a pooling of interests under generally accepted
accounting practices and is expected to qualify for treatment as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Merger is subject to certain conditions typical for
transactions of this kind.
On March 4, 1997, the Company entered into a Stock Purchase Agreement by
and between the Company and AHP Holdings, Inc., whereby the Company is to
acquire the business assets and assume the liabilities of most of the operations
of Aetna Professional Management Corporation ("APMC"), a PPM company and
affiliate of Aetna Inc. based in Glastonbury, Connecticut (the "APMC
Acquisition"). For accounting purposes, the APMC Acquisition will be treated as
if it were an asset purchase pursuant to Section 338(h)(10) of the Code. As a
part of the APMC Acquisition, the Company also will enter into a 10-year Master
Network Agreement with Aetna U.S. Healthcare, pursuant to which the members of
MedPartners' networks of affiliated physicians will be authorized providers for
many of the 14 million members of Aetna U.S. Healthcare's health plan. The APMC
Acquisition, as well as the Master Network Agreement, are subject to certain
conditions typical for transactions of this kind.
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 565,000 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
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provide both the professional and institutional components of covered healthcare
services to the HMO enrollees.
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 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. 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 it is the leading consolidator in the
PPM industry and that the MME Acquisition was the first major consolidation
in the industry. That acquisition was followed by the merger with PPSI, the
Caremark Acquisition and the announcement in January 1997 of the proposed
merger with InPhynet. 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.
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
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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
market trends.
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.
OPERATIONS
Prior to the MME Acquisition 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 and Caremark
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 26 states.
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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. See
also Note 1 to the consolidated financial statements.
The practice management agreements between the Company and the physician
practices provide three general types of financial arrangements regarding
physician compensation: (i) fixed salary and a discretionary bonus; (ii)
fee-for-service; or (iii) base compensation plus a percentage of a practice's
net income. Under these agreements, the Company has a direct interest in the
earnings of the practices. Practice revenue is deposited in an account owned by
the Company, and the Company pays the physicians as described above. The Company
retains any residual from the operations of the practices (and funds any
deficit). For further details regarding the nature of physician compensation
arrangements, see Note 1 to the consolidated financial statements.
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. See Note 1 to the consolidated financial statements.
IPAs. The Company's networks include approximately 5,300 primary care and
specialist IPA physicians serving approximately 300,000 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
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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
29 percent of the Company's net revenue for the year ended December 31, 1996.
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 December 31, 1996, over 1.6 million prepaid HMO
enrollees were covered beneficiaries for services in the Company's networks.
These 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
December 31, 1996, the Company's HMO enrollees comprised approximately 1.3
million commercial enrollees and approximately 0.1 million senior (over age 65)
enrollees and approximately 0.2 million Medicaid and other enrollees. As of
December 31, 1996, the Company was receiving institutional capitation payments
for approximately 0.6 million 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. 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.
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 largest independent PBM programs,
dispensing 42,000 prescriptions daily from four mail service pharmacies. The
Company also manages patients' immediate prescription needs through a network of
approximately 59,000 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
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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.
Hospital-Based Physician Operations. The Company's Hospital-Based
Physician ("HBP") operations organize and manage 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.
Team Health currently serves 127 hospital emergency departments and 21 hospital
radiology departments in 18 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.
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.
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.
INTERNATIONAL
The Company has minimal operations in several European countries, Canada
and Japan. The Company believes increasing healthcare costs, an expanding
population base over age 65, advances in medical technology and the ability to
provide improved quality of life while managing the cost of care will foster the
growth of managed healthcare services internationally as well as domestically.
Accordingly, the Company is
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considering whether to expand its efforts in offering new approaches to
healthcare delivery and management around the world.
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. 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 24
percent of the revenues of the Company's affiliated physician practices is
derived from payments made by government-sponsored healthcare programs
(principally, medicare and state reimbursed 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 of reimbursement for the Company, up to a maximum of the
approximately 24 percent of revenues derived from such programs, 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.
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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. 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. The Company believes
that its practices fit within exemptions contained in such statutes.
The Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (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 United States Department of Justice
(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.
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. 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
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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. As stated in Note 1 to the consolidated financial
statements, 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 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 National
Association of Insurance Commissioners 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.
Other State and Local Regulation. On March 5, 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.
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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 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 and Regulation. 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
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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.
EMPLOYEES
As of December 31, 1996, the Company, including its affiliated professional
entities, employed approximately 20,400 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 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. This insurance includes "tail" coverage for claims
against the Company's affiliated medical organizations, including those acquired
from Caremark, to cover incidents which were or are incurred but not reported
during the periods for which the related risk was covered by "claims made"
insurance. 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 insurance coverage.
Such insurance would provide 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.
ITEM 2. 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 and Northbrook, Illinois. The Company
currently owns or leases facilities providing medical services in 26 states,
Puerto Rico and six 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.
ITEM 3. 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 May 1996, two stockholders of Caremark, each purporting to represent a
class, filed complaints against Caremark and each of its directors in the Court
of Chancery of the State of Delaware alleging breaches of the directors'
fiduciary duty in connection with Caremark's then proposed merger with the
Company. The complaints seek unspecified damages, injunctive relief, and
attorneys' fees and expenses. The plaintiffs have not pursued these actions in
any manner since the consummation of the Caremark Acquisition, but if they do,
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the Company intends to defend these cases vigorously. Although the ultimate
outcome of such litigation cannot be predicted, the Company does not believe
such litigation, if adversely determined, would 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 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, 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 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
$42.3 million. In addition, the Company paid $23.3 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 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 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 may be incurred in connection with future disposition of
non-governmental claims or litigation. Such
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additional costs, if incurred, could have a material adverse effect on the
operating results and financial condition of the Company. See Note 13 to the
consolidated financial statements.
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 to all of the
complaints 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. 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 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 September 1995, Coram Healthcare Corporation ("Coram") filed a complaint
in the San Francisco Superior Court against Caremark and its subsidiary,
Caremark Inc. and 50 unnamed individual defendants. The complaint, which arises
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, alleges breach of the Asset Sale and Note Purchase Agreement, dated
January 29, 1995, as amended April 1, 1995, between Coram and Caremark, breach
of related contracts, fraud, negligent misrepresentation and a right to
contractual indemnity. Requested relief in Coram's amended complaint includes
specific performance, declaratory relief, injunctive relief, and damages of $5.2
billion. Caremark filed counterclaims against Coram in this lawsuit and also
filed a lawsuit in the U.S. District Court in Chicago claiming that Coram
committed securities fraud in its sale to Caremark of its securities in
connection with the sale of the Company's home infusion business to Coram. The
lawsuit filed in federal court in Chicago has been dismissed, and Caremark's
appeal of the dismissal was argued on May 10, 1996 and is now under submission.
The Coram lawsuit is in the final stages of discovery and a trial is scheduled
for the second quarter of 1997 in the event the IHS/Coram merger
15
<PAGE> 18
described below is not consummated. In October 1996, Coram agreed to merge with
Integrated Health Services, Inc. ("IHS"). In connection with the merger
agreement, IHS and the Company have agreed to a settlement of the Coram
litigation, contingent upon consummation of the proposed merger, expected to be
completed in the second quarter of 1997. Under the settlement proposal, the
notes that are now payable by Coram to Caremark will be cancelled and replaced
with a new two-year note in the approximate principal amount of $57.5 million.
Caremark had previously established a reserve for a portion of the $100 million
in securities, and, therefore, the terms of the new note and commitments related
to the transition of this business are not expected to result in any additional
charge against earnings by the Company. The Company and IHS/Coram will enter
into long-term preferred provider agreements pursuant to which IHS/Coram will
provide services to the patients served by the Company's integrated delivery
systems on a national basis. The Company understands that the acquisition of
Coram by IHS is subject to the usual conditions found in transactions of this
type, including approval of the stockholders of both companies, and is expected
to be consummated in the second quarter of 1997. The Company has no control over
the conduct of the IHS/Coram transaction, and there can be no assurance that it
will be consummated.
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 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 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. The Company intends to
defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate
16
<PAGE> 19
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.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The stockholders of the Company approved the Amendment to the Second
Amended and Restated Certificate of Incorporation at a special meeting of the
stockholders on December 12, 1996, as follows:
<TABLE>
<CAPTION>
NUMBER
VOTING FOR AGAINST ABSTENTIONS
- ----------- ----------- ---------- -----------
<C> <C> <C> <C>
132,625,497 119,394,453 12,247,656 983,388
</TABLE>
Broker non-votes were not counted for the purpose of determining whether
the proposal had been approved by the stockholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to February 21, 1995, the effective date of the Company's initial
public offering, there was no public market for the Company's Common Stock. The
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 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 (through March 24)............................ $24.63 $18.63
</TABLE>
There were approximately 43,644 holders of record of the Company's Common
Stock as of March 20, 1997.
UNREGISTERED SALES OF SECURITIES
The following table indicates all unregistered sales of the Company's
Common Stock during the last three years:
<TABLE>
<CAPTION>
MARKET
TRANSACTION PURPOSE DATE VALUE
- ----------- ----------------------- ------------------- -----------------
<S> <C> <C> <C>
Retina & Vitreous Associates of Alabama, Asset Acquisition December 29, 1995 $ 28,382,244.00
P.C.
The Atlanta Allergy Clinic, P.A. Asset Acquisition March 29, 1996 12,656,593.50
Eaton Medical Group Asset Acquisition March 31, 1996 2,364,189.00
Cardiovascular Specialists Clark & Martin Asset Acquisition March 29, 1996 1,999,959.00
East Bay Fertility OB-GYN Medical Group, Asset Acquisition May 31, 1996 2,736,622.00
Inc.
Emergency Physician Associates, P.A. Acquisition June 25, 1996 25,891,871.25
Global Care, Inc. (Bethany Medical) Acquisition June 28, 1996 1,599,713.88
Brevard OB/GYN Specialists, P.A. Asset Acquisition June 28, 1996 1,791,638.63
Southwest Healthcare Network, Inc. Acquisition July 13, 1996 3,624,478.00
</TABLE>
17
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
Cleveland Ear, Nose, Throat and Facial Surgery Asset Acquisition July 30, 1996 $ 3,347,263.75
Group, Inc.
East Metro OB/GYN Specialists, Inc. Asset Acquisition July 1, 1996 877,200.00
Orthopedic Management Associates, Inc. Acquisition June 1, 1996 455,151.75
The Emergency Associates for Medicine, Inc. Acquisition July 31, 1996 3,076,593.75
Mount Vernon Orthopedic Associates, Ltd. Management July 31, 1996 4,687,500.00
Conversion
Bay Area Primary Care Earn-out/Asset August 21, 1996 1,212,985.75
Acquisition
Georgia Urology Management Associates, Inc. Acquisition August 16, 1996 3,670,115.75
CHS Management, Inc. Acquisition August 30, 1996 41,240,583.50
New Management Asset Acquisition August 30, 1996 7,217,036.75
Woman's Healthcare Associates, P.C. Asset Acquisition September 13, 1996 3,087,370.00
Mount Vernon Orthopedic Associates, Ltd. Management July 31, 1996 163,117.50
Conversion
Doctors Medical Associates, Pinole, Inc. Asset Acquisition September 18, 1996 236,606.50
Atlanta Plastic Surgery, P.A. Asset Acquisition October 1, 1996 7,924,493.20
Quinn Wollowick Purita Schosheim Krebsbach & Acquisition September 27, 1996 874,818.75
Stewart, Inc.
Emergency Professional Services, Inc. Acquisition September 20, 1996 48,226,907
OB-GYN Specialists of the Palm Beaches, Inc. Acquisition of Minority September 30, 1996 6,976,742.50
Interest
Gary L. Groves Settlement October 1, 1996 765,956.25
TBMSZ, Inc. Acquisition September 30, 1996 1,404,585.00
NeuroMedical Management, Inc. Acquisition September 30, 1996 3,160,521.00
Southeastern Fertility Institute, et al Management October 1, 1996 1,608,719.50
Conversion
Michael Tucker, MD Employee Stock Agreement October 1, 1996 97,499.50
Martinex, Sadowsky, Zuniga, Tuchman and Brown, Management September 30, 1996 1,287,604.50
MDS, PA Conversion
Roberts Medical Group Earn-out/Asset September 1, 1996 454,030.75
Acquisition
Cardinal Healthcare, P.A. Acquisition November 21, 1996 44,134,544.25
Drs. Sheer, Ahearn and Associates, P.A. Acquisition December 2, 1996 51,366,283.25
Northwest Diagnostic Clinic, P.A. Asset Acquisition December 31, 1996 2,620,517.50
Aldine Women's Clinic, P.A. Asset Acquisition December 31, 1996 450,257.25
L. Stayton Halberdier, Jr., M.D., P.A. Asset Acquisition December 31, 1996 450,254.25
Alan G. Moore, M.D., P.A. Asset Acquisition December 31, 1996 540,309.25
Jeffrey C. Lambert, M.D., P.A. Asset Acquisition December 31, 1996 225,110.75
Georgia Urology, P.A. Management December 1, 1996 5,594,247.75
Conversion
SOUTHVIEW Medical Group, P.C. Acquisition December 31, 1996 7,642,930.50
Hirsch, Strassberg, Kenward & Vizoso, M.D.s, Acquisition of Minority January 8, 1997 794,920.00
Inc. Interest
Summit Medical Group, P.A. Acquisition January 31, 1997 41,843,483.75
North Carolina Medical Associates, P.A. Management December 31, 1996 1,725,756.75
Conversion
Chase Dennis Medical Group, Inc. Asset Acquisition January 31, 1997 16,174,508.00
</TABLE>
None of these sales was underwritten, and all of the shares issued were
taken for investment by the entity or individual to whom they were issued. The
Company believes all of the securities issued were exempt from registration
under Section 4(2) of the Securities Act.
18
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
The following tables set forth selected financial data for the Company
derived from the Company's consolidated financial statements. The selected
financial data should be read in conjunction with the consolidated financial
statements and the related notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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
Net income (loss) from continuing
operations......................... $ 20,417 $ 47,881 $ 54,144 $ 20,901 $ (89,831)
Income from continuing operations
excluding merger costs and losses
on investments..................... $ 44,089 $ 47,881 $ 54,144 $ 96,181 $ 133,745
Income (loss) from discontinued
operations......................... $ 5,858 $ 30,808 $ 25,902 $ (136,528) $ (68,698)
Net income (loss).................... $ 26,275 $ 78,689 $ 80,046 $ (115,627) $ (158,529)
Income per share from continuing
operations excluding merger costs
and losses on investments.......... $ 0.45 $ 0.40 $ 0.41 $ 0.69 $ 0.86
Income (loss) per share from
continuing operations(1)........... $ 0.21 $ 0.40 $ 0.41 $ 0.15 $ (0.58)
Income (loss) per share from
discontinued operations(1)......... $ 0.06 $ 0.26 $ 0.20 $ (0.97) $ (0.44)
Net income (loss) per share(1)....... $ 0.27 $ 0.66 $ 0.61 $ (0.82) $ (1.02)
Number of shares used in net (loss)
per share.......................... 98,798 119,380 131,783 140,364 155,364
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 22,312 $ 43,367 $ 99,679 $ 86,276 $ 123,779
Working capital...................... 139,642 240,023 150,977 234,630 170,313
Total assets......................... 777,632 1,049,258 1,585,643 1,840,914 2,265,969
Long-term debt, less current
portion............................ 80,378 164,040 385,258 531,774 715,657
Total stockholders' equity........... 381,481 481,177 612,781 592,074 739,497
</TABLE>
- ---------------
(1) Net income (loss) per share is computed by dividing net 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 MedPartners 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.
ITEM 7. 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
should be read in conjunction with the consolidated financial statements and the
notes thereto.
19
<PAGE> 22
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.
MedPartners 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. MedPartners' PPM revenue is derived primarily from the
contracts with HMOs that compensate MedPartners and its affiliated physicians on
a prepaid basis. In the prepaid arrangements, MedPartners 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, MedPartners is responsible for substantially all of the
medical services required by enrollees. In many instances, MedPartners 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"), MedPartners, 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. 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.
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 42,000 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.
20
<PAGE> 23
RESULTS OF OPERATIONS
Through the Company's network of affiliated group and IPA physicians,
MedPartners provides primary and specialty healthcare services to prepaid
enrollees and fee-for-service patients. The Company also provides prescription
benefit services to more than 15 million individuals in all 50 states 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>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Services
Net revenue...................................... $1,053,519 $1,663,728 $2,555,642
Operating income................................. 27,121 73,586 125,015
Margin........................................... 2.6% 4.4% 4.9%
Pharmaceutical Services
Net revenue...................................... $1,097,315 $1,432,250 $1,784,319
Operating income................................. 46,236 56,022 75,788
Margin........................................... 4.2% 3.9% 4.2%
Specialty Services
Net revenue...................................... $ 487,820 $ 487,399 $ 473,538
Operating income................................. 75,139 70,762 56,006
Margin........................................... 15.4% 14.5% 11.8%
Corporate Services
Operating loss................................... $ (35,212) $ (24,668) $ (20,881)
Percentage of total net revenue.................. (1.3)% (0.7)% (0.4)%
</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.
The Company's PPM operations in the other regions of the country are in
predominantly fee-for-service environments with limited but increasing managed
care penetration. The following table sets forth the breakdown of net revenue
for the PPM services area for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Prepaid............................................ $ 620,701 $ 982,128 $1,401,837
Fee-for-Service.................................... 408,832 661,974 1,139,265
Other.............................................. 23,986 19,626 14,540
---------- ---------- ----------
Total net revenue from PPM service
area................................... $1,053,519 $1,663,728 $2,555,642
========== ========== ==========
</TABLE>
21
<PAGE> 24
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,
-------------------------------
1994 1995 1996
------- --------- ---------
<S> <C> <C> <C>
Professional enrollees................................. 548,821 603,391 1,025,763
Global enrollees (professional and institutional)...... 255,188 477,208 603,892
------- --------- ---------
Total enrollees.............................. 804,009 1,080,599 1,629,655
======= ========= =========
</TABLE>
During 1996, the Company 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 4.9% in 1996.
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 are expected to result in significant internal growth.
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.
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 during the fourth quarter of 1996,
significant cost savings have been 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
22
<PAGE> 25
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. This
growth is entirely internal and has not been supplemented by acquisitions. Key
factors contributing to this growth include high customer retention, additional
penetration of retained customers, new customer contracts and drug cost
inflation. These growth factors were partially offset in 1995 and 1996 by
selective non-renewal of certain accounts not meeting threshold profitability
levels. The preponderance 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 experienced accelerated growth in 1995 and 1996 while
margins fell slightly in 1995 to 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 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, France, the Netherlands, the United Kingdom,
Puerto Rico and Japan, where it is expanding into new services in response to
transforming health care delivery systems in these countries. Revenues for
specialty services have declined 3% 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 revenues negatively. To offset these
declines, the Company is attempting to launch new products and services
including the opening of a PBM in the Netherlands in the fourth quarter of 1996
and a multiple sclerosis ("MS") therapy service in the U.S.
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 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.
23
<PAGE> 26
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 $65.6 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 $2.1 million.
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.
24
<PAGE> 27
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 Caremark Acquisition 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. See Note 13 to the accompanying consolidated financial statements of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had working capital of $170.3 million,
including cash and cash equivalents of $123.8 million. For the years ending
December 31, 1996, 1995 and 1994, cash flow from continuing operations was
$159.8 million, $152.8 million and $43.6 million, respectively.
For the year ended December 31, 1996, the Company invested $157.4 million
in acquisitions of the assets of physician practices and $122.1 million in
property and equipment. These expenditures were funded by approximately $270.2
million derived from equity proceeds and $133.6 million in net incremental
borrowings. 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 December 31, 1996, there was
$213.0 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
December 31, 1996, 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 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.
25
<PAGE> 28
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.
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,
1995 1995 1995 1995 1996 1996
--------- --------- ------------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue........... $806,396 $ 887,121 $919,750 $ 970,110 $1,149,812 $1,196,226
Operating expenses.... 770,599 846,889 871,279 918,908 1,099,519 1,143,107
-------- --------- -------- --------- ---------- ----------
Operating income...... 35,797 40,232 48,471 51,202 50,293 53,119
Non-operating
expenses:
Net interest
expense........... 6,254 2,213 5,350 3,804 6,741 4,021
Merger expenses..... -- 1,051 3,473 62,040 34,448 --
Losses on
investments....... -- -- -- 86,600 -- --
Other, net.......... (406) 5 (27) 236 (144) (229)
-------- --------- -------- --------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes........ 29,949 36,963 39,675 (101,478) 9,248 49,327
Income tax expense
(benefit)......... 10,903 13,904 15,156 (55,755) 6,496 16,926
-------- --------- -------- --------- ---------- ----------
Income (loss) from
continuing
operations.......... 19,046 23,059 24,519 (45,723) 2,752 32,401
Discontinued
operations:
Income (loss) from
discontinued
operations........ (2,605) (144,011) (5,791) (15,935) (71,221) --
Net gains 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
======== ========= ======== ========= ========== ==========
<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1996
------------- ------------
<S> <C> <C>
Net revenue........... $1,199,679 $1,267,782
Operating expenses.... 1,139,178 1,195,767
---------- ----------
Operating income...... 60,501 72,015
Non-operating
expenses:
Net interest
expense........... 5,257 7,911
Merger expenses..... 263,000 11,247
Losses on
investments....... -- --
Other, net.......... (37) (1,159)
---------- ----------
Income (loss) from
continuing
operations before
income taxes........ (207,719) 54,016
Income tax expense
(benefit)......... (55,465) 26,746
---------- ----------
Income (loss) from
continuing
operations.......... (152,254) 27,270
Discontinued
operations:
Income (loss) from
discontinued
operations........ -- --
Net gains on sales
of discontinued
operations........ -- --
---------- ----------
Income (loss) from
discontinued
operations.......... -- --
---------- ----------
Net income
(loss)........ $ (152,254) $ 27,270
========== ==========
</TABLE>
26
<PAGE> 29
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>
27
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Company meeting the requirements
of Regulation S-X are filed on the succeeding pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 29
Consolidated Balance Sheets as of December 31, 1995 and
1996...................................................... 30
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996.......................... 31
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996.............. 32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.......................... 33
Notes to Consolidated Financial Statements.................. 34
</TABLE>
Other financial statements and schedules required under regulation S-X are
listed in Item 14(a)2 of this Annual Report on Form 10-K.
28
<PAGE> 31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
MedPartners, Inc.
We have audited the accompanying consolidated balance sheets of
MedPartners, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MedPartners,
Inc. at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Birmingham, Alabama
February 3, 1997
29
<PAGE> 32
MEDPARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 86,276 $ 123,779
Marketable securities..................................... 35,567 --
Accounts receivable, less allowances for bad debts of
$80,077 in 1995 and $120,350 in 1996................... 506,226 563,519
Inventories............................................... 122,337 150,156
Deferred tax assets, net.................................. 95,026 52,479
Income tax receivable..................................... -- 2,496
Prepaid expenses and other current assets................. 40,216 54,689
---------- ----------
Total current assets................................... 885,648 947,118
Property and equipment, net................................. 458,780 505,060
Intangible assets, net...................................... 370,960 659,202
Deferred tax asset, net..................................... -- 18,333
Other assets................................................ 89,226 136,256
Net assets of discontinued operations....................... 36,300 --
---------- ----------
Total assets........................................... $1,840,914 $2,265,969
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 280,958 $ 280,060
Other accrued expenses and liabilities.................... 220,086 375,618
Accrued medical claims payable............................ 52,434 93,043
Notes payable............................................. 81,900 --
Current portion of long-term debt......................... 15,640 28,084
---------- ----------
Total current liabilities.............................. 651,018 776,805
Long-term debt, net of current portion...................... 531,774 715,657
Other long-term liabilities................................. 42,053 34,010
Deferred tax liabilities, net............................... 23,995 --
Contingencies (Note 13)
Stockholders' equity:
Common stock, $.001 par value; 400,000 shares authorized,
issued -- 146,390 in 1995 and 165,281 in 1996.......... 146 165
Additional paid-in capital................................ 477,362 788,636
Notes receivable from stockholders........................ (1,930) (1,665)
Unrealized loss on marketable securities, net of taxes.... (7) --
Unamortized deferred compensation......................... (2,682) --
Shares held in trust, 9,317 in 1995 and 1996.............. (150,200) (150,200)
Retained earnings......................................... 269,385 102,561
---------- ----------
Total stockholders' equity............................. 592,074 739,497
---------- ----------
Total liabilities and stockholders' equity............. $1,840,914 $2,265,969
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenue............................................. $ 2,638,654 $ 3,583,377 $ 4,813,499
Operating expenses:
Affiliated physician services......................... 433,758 657,826 980,429
Outside medical expenses.............................. 102,496 149,185 311,900
Clinic expenses....................................... 433,091 705,369 1,040,629
Non-clinic goods and services......................... 1,365,203 1,688,075 2,019,895
General and administrative expenses................... 148,990 148,515 142,789
Depreciation and amortization......................... 41,832 58,705 81,929
----------- ----------- -----------
Operating income.............................. 113,284 175,702 235,928
Non-operating expenses:
Net interest expense.................................. 15,235 17,621 23,930
Merger expenses....................................... -- 66,564 308,695
Losses on investments................................. -- 86,600 --
Other, net............................................ (143) (192) (1,569)
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes......................... 98,192 5,109 (95,128)
Income tax expense (benefit)............................ 44,048 (15,792) (5,297)
----------- ----------- -----------
Income (loss) from continuing operations...... 54,144 20,901 (89,831)
Discontinued operations:
Income (loss) from discontinued operations net of
taxes of $18,000, $(72,100) and $(35,849) in 1994,
1995 and 1996, respectively........................ 25,902 (168,342) (71,221)
Net gains on sales of discontinued operations......... -- 31,814 2,523
----------- ----------- -----------
Income (loss) from discontinued operations.... 25,902 (136,528) (68,698)
----------- ----------- -----------
Net income (loss)....................................... $ 80,046 $ (115,627) $ (158,529)
=========== =========== ===========
Earnings per common and common equivalent shares
outstanding:
Income (loss) from continuing operations.............. $ 0.41 $ 0.15 $ (0.58)
Income (loss) from discontinued operations............ 0.20 (0.97) (0.44)
----------- ----------- -----------
Net income (loss)....................................... $ 0.61 $ (0.82) $ (1.02)
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding........................................... 131,783 140,364 155,364
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 34
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year................................ $ 111 $ 119 $ 146
Beginning balance of immaterial poolings of interests
entities............................................... -- -- 6
Common stock issued and capital contributions............. 8 9 10
PPSI common stock issued during the two months ended
December 31, 1995...................................... -- -- 1
Conversion of preferred stock............................. -- 7 --
Stock issued in connection with acquisitions.............. -- 2 2
Contributions to employee benefit trust................... -- 9 --
-------- -------- --------
Balance, end of year...................................... 119 146 165
ADDITIONAL PAID-IN-CAPITAL:
Balance, beginning of year................................ 154,350 202,611 477,362
Beginning balance of immaterial poolings of interests
entities............................................... -- 2 620
PPSI common stock issued during the two months ended
December 31, 1995...................................... -- -- 588
Common stock issued and capital contributions............. 61,852 98,812 226,190
Capital distributions..................................... (18,743) (30,970) --
Exercise of stock options................................. 802 1,124 43,996
Deferred compensation on issuance of options.............. 4,350 -- --
Conversion of preferred stock............................. -- 19,994 --
Stock issued in connection with acquisitions.............. -- 35,598 39,880
Contribution to employee benefit trust.................... -- 150,191 --
-------- -------- --------
Balance, end of year...................................... 202,611 477,362 788,636
NOTES RECEIVABLE FROM STOCKHOLDERS:
Balance, beginning of year................................ (2,396) (2,349) (1,930)
Net change in notes receivable from stockholders.......... 47 419 265
-------- -------- --------
Balance, end of year...................................... (2,349) (1,930) (1,665)
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES:
Balance, beginning of year................................ (166) 14 (7)
Unrealized gain (loss) on marketable securities, net of
taxes.................................................. 180 (21) 7
-------- -------- --------
Balance, end of year...................................... 14 (7) --
UNAMORTIZED DEFERRED COMPENSATION:
Balance, beginning of year................................ -- (3,552) (2,682)
Amortization of deferred compensation..................... 798 870 2,682
Deferred compensation on issuance of options.............. (4,350) -- --
-------- -------- --------
Balance, end of year...................................... (3,552) (2,682) --
SHARES HELD IN TRUST:
Balance, beginning of year................................ -- -- (150,200)
Contribution to employee benefit trust.................... -- (150,200) --
-------- -------- --------
Balance, end of year...................................... -- (150,200) (150,200)
RETAINED EARNINGS:
Balance, beginning of year................................ 324,677 396,994 269,385
Beginning balance of immaterial poolings of interests
entities............................................... -- (308) (238)
Net income (loss)......................................... 80,046 (115,627) (158,529)
Dividends and distributions paid.......................... (10,008) (11,674) --
Pro forma tax provision of pooled entities................ 2,279 -- --
Net loss for two months ended December 31, 1995 for
PPSI................................................... -- -- (8,057)
-------- -------- --------
Balance, end of year...................................... 396,994 269,385 102,561
-------- -------- --------
Total stockholders' equity........................ $593,837 $592,074 $739,497
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 35
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations.................... $ 54,144 $ 20,901 $ (89,831)
Adjustments for non-cash items:
Depreciation and amortization............................. 41,832 58,705 81,929
Provision (benefit) for deferred taxes.................... 12,451 (69,273) (37,350)
Merger expenses........................................... -- 66,564 308,695
Loss on sale of investments............................... -- 86,600 --
Other..................................................... 6,755 1,683 94
Changes in operating assets and liabilities, net of effects
of acquisitions........................................... (71,622) (12,384) (103,704)
---------- --------- ---------
Net cash and cash equivalents provided by continuing
operations........................................... 43,560 152,796 159,833
Investing activities:
Cash paid for merger expense.............................. -- (53,600) (143,285)
Net cash used to fund acquisitions........................ (126,697) (205,051) (157,396)
Additions to intangibles.................................. -- (7,235) (19,515)
Purchase of property and equipment........................ (102,702) (124,455) (122,127)
(Purchases) proceeds of marketable securities............. (17,560) 1,636 27,558
Other..................................................... (1,305) 546 74
---------- --------- ---------
Net cash and cash equivalents used in investing
activities........................................... (248,264) (388,159) (414,691)
Financing activities:
Common stock issued and capital contributions............. 128,109 83,407 270,198
Capital distributions..................................... (21,045) (37,771) --
Proceeds from debt........................................ 267,563 156,728 1,781,498
Repayment of debt......................................... (35,188) (85,546) (1,647,866)
Dividends and distributions paid.......................... (7,453) (9,355) --
Other..................................................... 68 (3) 266
---------- --------- ---------
Net cash and cash equivalents provided by financing
activities........................................... 332,054 107,460 404,096
Cash flow from discontinued operations, net of divestiture
proceeds.................................................. (180,000) 114,500 (115,835)
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (52,650) (13,403) 33,403
Cash and cash equivalents at beginning of year.............. 152,329 99,679 87,081
Beginning cash and cash equivalents of immaterial poolings
of interests entities..................................... -- -- 3,295
---------- --------- ---------
Cash and cash equivalents at end of year.................... $ 99,679 $ 86,276 $ 123,779
========== ========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest............................................... $ 18,241 $ 33,294 $ 41,860
========== ========= =========
Income taxes........................................... $ 28,436 $ 14,820 $ (21,351)
========== ========= =========
</TABLE>
Non-cash investing activities include notes and other obligations issued
for acquisitions of $1.2 and $30.8 million in 1994 and 1995, respectively, and
$123.6 million in notes and other securities received from divestitures in 1995.
Non-cash financing activities include the issuance of $45.8 and $39.9 million of
stock for acquisitions in 1995 and 1996, respectively.
See accompanying notes to consolidated financial statements.
33
<PAGE> 36
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ACCOUNTING POLICIES
Description of Business
MedPartners, Inc. (The "Original Predecessor") was incorporated in January
1993, and affiliated with its initial physician practice in November 1993.
Mullikin Medical Enterprises, L.P. ("MME") was formed by the merger of several
physician partnerships in 1994, and the original business was organized in 1957.
MedPartners/Mullikin, Inc. was formed as a result of the November 1995 business
combination between the Original Predecessor and MME. In February and September
of 1996, MedPartners/Mullikin, Inc. combined with Pacific Physician Services,
Inc. ("PPSI") and Caremark International Inc. ("Caremark"), respectively. These
business combinations were accounted for as poolings of interests. The combined
companies were renamed MedPartners, Inc. (herein referred to as the "Company" or
"MedPartners") in conjunction with the business combination with Caremark. 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.
MedPartners is the largest physician practice management ("PPM") company in
the United States. The Company develops, consolidates and manages integrated
healthcare delivery systems. Through its network of affiliated group and
independent practice association ("IPA") physicians, the Company provides
primary and specialty healthcare services to prepaid enrollees and
fee-for-service patients. The Company also operates one of the largest
independent prescription benefit management ("PBM") programs in the United
States and provides 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 outcome measurement. The Company
provides affiliated physicians with access to capital and advanced management
information systems. In addition, MedPartners 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 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
equity exchange, or by affiliation on a contractual basis. The Company enters
into long-term practice management agreements with the affiliated physicians
that provide for the management of their practices by the Company while at the
same time providing for the clinical independence of the physicians.
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 national 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 its
PBM program with the PPM business by providing pharmaceutical 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.
34
<PAGE> 37
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Presentation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly owned
subsidiaries. Through the 20 to 40-year practice management agreements between
the Company's wholly owned subsidiaries and the various professional
corporations (PCs), the Company has assumed full responsibility for the
operating expenses in return for the assignment of the revenue of the PCs. The
Company believes it has, as opposed to affiliates of the Company, perpetual,
unilateral control over the assets and operations of the various PCs, and
notwithstanding the lack of technical majority ownership of the stock of such
entities, consolidation of the various PCs is necessary to present fairly the
financial position and results of operations of the Company because there exists
a parent-subsidiary relationship by means other than record ownership of a
majority of voting stock. Control by the Company is perpetual rather than
temporary because of (i) the length of the original terms of the agreements,
(ii) the continuing investment of capital by the Company, (iii) the employment
of the majority of the nonphysician personnel, and (iv) the nature of the
services provided to the PCs by the Company. The Company's financial
relationship with each practice offers the physicians access to capital,
management expertise, sophisticated information systems, and managed care
contracts. The Company's revenue is derived from medical services provided by
physicians under the practice management agreements, which revenue has been
assigned to the Company. During 1996, approximately 55% of physician services
revenue was derived through contracts for prepaid healthcare with HMOs. The
Company contracts directly with the HMOs to provide medical services to HMO
enrollees who have chosen the Company's affiliated physicians, or, in some
cases, physicians who are members of the Company's IPAs. The Company also
contracts with hospitals to provide medical staff for various hospital
departments. The Company's profitability depends on enhancing operating
efficiency, expanding healthcare services provided, increasing market share and
assisting affiliated physicians in managing the delivery of medical care.
Nature of Physician Compensation Arrangements
The Company compensates PCs with which it has contracted to provide
healthcare services to the Company's clinics primarily under four basic
arrangements. In all circumstances, the Company is responsible for the billing
and collection of the revenue related to services provided at the Company's
clinics as well as for paying all expenses of the clinic including physician
compensation. The Company records all such revenue for services performed by the
physicians at the clinics. In no instance is the Company paid a fixed fee to
cover clinic operating expenses. The Company remains at risk for the expenses of
the clinics operations. In the four types of arrangements described below, the
Company is not sharing revenue with the PCs or its physician owners.
Approximately 55% of the Company's revenues from physician practice
management during 1996 was received under capitation arrangements. Under these
arrangements, the Company contracts with licensed HMOs for a broad range of
health care services and in turn subcontracts for the delivery of health care
with hospitals, ancillary providers, and professional medical organizations,
including PCs that are affiliated with the Company through management
agreements. Pursuant to these arrangements the PC is paid on a per member per
month basis by the Company. From this amount, the PC pays liability insurance
premiums and compensates its physician owners. The PCs do not have the authority
to participate in the negotiations of contracts with HMOs.
Under the second type of arrangement, which represents approximately 20% of
the Company's revenues from physician practice management during 1996, the
Company pays the PC for the health care services provided at MedPartners'
clinics at a negotiated fixed dollar amount. At the Company's sole discretion,
the physicians are eligible to receive a bonus based on performance criteria and
goals. The amount of the discretionary bonus is determined solely by the
Company's management and is not directly correlated to clinic revenue and gross
profit. In these arrangements, the Company is responsible for the billing and
collection of all
35
<PAGE> 38
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues for the services provided at its clinics as well as paying all
expenses, including physician compensation.
Under the third type of arrangement, which represents approximately 16% of
the Company's revenues from physician practice management during 1996, the PC is
compensated on a negotiated fee-for-service basis for health care services
performed at the Company's clinics. In these arrangements the Company bills and
collects for all services rendered at its clinics and pays all expenses of the
clinics, including physician compensation, which is based on the fee for service
revenue generated at the clinics (which typically represents between 40 to 70
percent of the clinic's net revenues). Again, the Company is not reimbursed for
the clinic expenses, rather it is responsible and at risk for all such expenses.
Under the fourth type of arrangement, representing approximately 9% of the
Company's revenues from physician practice management during 1996, the PC
receives a salary plus bonus and a profit sharing payment of a percentage of
clinic earnings net of certain expenses.
The fee retained by the Company includes direct management expenses of
operating the clinics plus additional amounts which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation (including discretionary bonuses, if any), other medical costs and
management expenses. Under the four basic arrangements discussed above, these
additional amounts (representing clinic earnings) retained by MedPartners take
the following forms: (1) 100% of clinic earnings (as defined above); (2) 100% of
clinic earnings; (3) 100% of clinic earnings; and (4) a variable percentage of
the clinic's earnings (as defined above).
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
of all cash and cash equivalents approximate fair value.
Marketable Securities
Effective August 1, 1994, the Company adopted Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires that investments in equity securities
that have readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity unless a decline in value is judged other than temporary.
When this is the case, unrealized losses are reflected in income. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. The cost of securities sold is based on the specific
identification method.
36
<PAGE> 39
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories, which are primarily finished goods, consist of pharmaceutical
drugs, medical equipment and supplies and are stated at the lower of cost
(first-in, first-out method) or market.
Property and Equipment
Property and equipment are stated at cost, which for the used assets being
acquired is usually determined by an independent appraisal. Depreciation of
property and equipment is calculated using either the declining balance or the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the underlying leases. Estimated useful lives range from 3
to 10 years for equipment, 10 to 20 years for leasehold improvements and 10 to
40 years for buildings and improvements based on type and condition of assets.
Routine maintenance and repairs are charged to expense as incurred, while costs
of betterments and renewals are capitalized.
Interest costs associated with the construction of certain capital assets
are capitalized as part of the cost of those assets. Interest costs
approximating $4.3 million were capitalized in 1996. The Company also
capitalizes purchased and internally developed software costs to the extent they
are expected to benefit future operations.
Intangible Assets
Excess of cost over fair value of assets acquired (goodwill) is being
amortized using the straight-line method over terms of the related practice
management agreements, generally 20 to 40 years. The carrying value of goodwill
is reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined based
on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the carrying value of the goodwill is reduced by the
estimated shortfall of cash flows. Costs of obtaining practice management
agreements are capitalized as incurred and are amortized using the straight-line
method. These costs include all direct costs of obtaining such agreements, which
include such items as filing fees, legal fees and travel and related development
costs. The Company has elected to amortize these costs over a period not to
exceed the term of the related practice management agreements. Other intangible
assets include costs associated with obtaining long-term financing, which are
being amortized, and included in interest expense, systematically over the terms
of the related debt agreements.
Restatement of Financial Statements
The Company has merged with several entities during 1996 in transactions
that were accounted for as poolings of interests. Accordingly, the financial
statements for all periods prior to the effective dates of these mergers have
been restated to include these entities (see Note 11).
Income Taxes
The Company is a corporation subject to federal and state income taxes.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting relating primarily to net operating losses which must
be carried forward to future periods for income tax reporting purposes.
Prior to the poolings of interests noted previously, several entities were
S Corporations and MME and related real estate entities were partnerships and
were therefore not subject to federal and state income taxes. Pro forma income
tax provisions are reflected in income tax expense in the consolidated
statements of operations for 1994 to provide for additional federal and state
income taxes which would have been incurred had these entities been taxed as C
Corporations. The pro forma income tax expense included in 1994 operations was
$2.3 million.
37
<PAGE> 40
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Revenue
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined.
During 1994, 1995 and 1996, approximately 6% of net revenue was received
from governmental programs. Governmental programs pay physician services based
on fee schedules which are determined by the related government agency.
The Company has contracts with various managed care organizations to
provide physician services based on negotiated fee schedules. Under various
contracts with HMOs, capitation is received to cover all physicians and hospital
services needed by the HMO members. Capitation payments are recognized as
revenue on the accrual basis, and represents approximately 24%, 28% and 29% of
the Company's total net revenue in 1994, 1995 and 1996, respectively.
Liabilities for physician services provided and hospital services incurred are
accrued in the month services are rendered. The provision for accrued claims
payable, which represents the amount payable for services incurred by patients
not yet paid, is validated by actuarial review. Management believes that the
provision at December 31, 1996 is adequate to cover claims which will ultimately
be paid.
Reclassifications
Certain prior-year balances have been reclassified to conform with the
current year's presentation. Such reclassifications had no material effect on
the previously reported consolidated financial position, results of operations
or cash flows of the Company.
Fiscal Year
At January 1, 1996, PPSI changed its fiscal year-end from July 31 to
December 31. Amounts consolidated for PPSI prior to January 1, 1996 were based
on an October 31 year-end. As a result, the consolidated financial statements
for the years ended December 31, 1994 and 1995 include the 12 months of
operations of PPSI for the years ended October 31, 1994 and 1995.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock-based compensation plans. The
Company applies APB 25 and related interpretations in accounting for its plans
because the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Impairment of Long-Lived Assets
Effective December 31, 1995, the Company adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The Statement also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
121 is applicable for most long-lived assets, identifiable intangibles and
goodwill related to those assets; it does not apply to financial instruments and
deferred taxes. Management has determined that long-lived assets are fairly
stated in the accompanying balance sheets, and that no indicators
38
<PAGE> 41
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of impairment are present. In accordance with the new rules, the Company's prior
year financial statements have not been restated to reflect the change in
accounting principle.
2. DISCONTINUED OPERATIONS
During 1995, Caremark divested several non-strategic businesses. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the Company's Consolidated Financial Statements present the
operating results and net assets of discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.
Effective March 31, 1995, Caremark sold its Clozaril(R) Patient Management
System to Health Management, Inc. for $23.3 million in cash and notes. This
business involved managing the care of schizophrenia patients nationwide through
the distribution of the Clozaril drug and related testing services to monitor
patients for potentially serious side effects. Net revenue of this business was
$12.3 million for the three months ended March 31, 1995 and $84.0 million for
the year ended December 31, 1994. The after-tax gain on disposition of this
business was $11.1 million.
Effective April 1, 1995, Caremark sold its home infusion business to Coram
Healthcare Corporation ("Coram") for $309 million in cash and securities,
subject to post-closing adjustments based on the net assets transferred. The
sale included Caremark's home intravenous infusion therapy, women's health
services and the Home Care Management System. Certain severance and legal
obligations remained with Caremark (see Note 13). Net revenue of this business
was $96.1 million for the period ended April 1, 1995 and $441.9 million for the
year ended December 31, 1994. The after-tax loss on disposition of this business
was $4.0 million. In 1995 net losses from this business reflected in
discontinued operations include $154.8 million related to the legal settlement
discussed in Note 13.
Effective September 15, 1995, Caremark sold its Oncology management
services business to Preferred Oncology Networks of America, Inc., for
securities valued at $3.6 million. The business provides management services to
single-specialty oncology practices. Net revenue of this business for the 1995
period up to the date of sale was $8.9 million and $29.4 million for the year
ended December 1994. There was no after-tax gain or loss on the disposition.
Effective December 1, 1995, Caremark sold its Caremark Orthopedic Services,
Inc. subsidiary to HealthSouth Corporation for $127.0 million in cash, subject
to post-closing adjustments. This business provides outpatient physical therapy
and rehabilitation services. Net revenue of this business for the 1995 period up
to the date of sale was $69.1 million and $55.8 million for the year ended
December 31, 1994. The after-tax gain on disposition of this business was $24.7
million.
Effective February 29, 1996, Caremark sold its Nephrology Services business
to Total Renal Care, Inc. for $49.0 million in cash, subject to certain
post-closing adjustments. The after-tax gain on disposition of this business,
net of disposal costs, was $2.1 million, which was included in 1995 discontinued
operations.
3. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
investments in marketable and non-marketable securities and debt obligations.
The carrying value of marketable and non-marketable securities, which
approximated fair value, was $84.1 and $44.8 million at December 31, 1995 and
1996, respectively. The carrying value of debt obligations was $168.6 and $450.0
million at December 31, 1995 and 1996, respectively. The fair value of these
obligations approximated $156.4 and $451.9 million at December 31, 1995 and
1996, respectively. The fair value of marketable securities is determined using
market quotes and rates. The fair value of non-marketable securities are
estimated based on information provided by these companies. The fair value of
long-term debt has been estimated using market quotes.
39
<PAGE> 42
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company recorded a pre-tax charge to income of $86.6
million ($52.0 million after tax) to reflect unrealized losses on investments
that were judged other than temporary.
Interest expense totaled $21.8, $31.0 and $34.5 million in 1994, 1995 and
1996, respectively. Interest income totaled $6.6, $13.4 and $10.6 million in
1994, 1995 and 1996, respectively.
4. INTANGIBLE ASSETS
Goodwill, which totaled $327.0 and $610.9 million at December 31, 1995 and
1996, respectively, represents the excess of consideration paid for companies
acquired in purchase transactions over the fair value of net assets acquired.
Also included in intangible assets for the years ended December 31, 1995 and
1996 were organizational costs of $20.3 and $23.1 million, respectively. As of
December 31, 1995 and 1996, intangible assets, including goodwill, are stated
net of accumulated amortization of $26.8 and $55.3 million, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 38,498 $ 54,340
Buildings and leasehold improvements........................ 191,937 184,817
Equipment................................................... 305,076 386,059
Construction in progress.................................... 81,879 91,923
-------- --------
617,390 717,139
Less accumulated depreciation and amortization.............. (158,610) (212,079)
-------- --------
$458,780 $505,060
======== ========
</TABLE>
The net book value of capitalized lease property approximated $9.8 and
$11.1 million at December 31, 1995 and 1996, respectively. Capitalized software
costs included in construction in progress approximated $56.5 million at
December 31, 1996, the majority of which was placed into service on January 1,
1997.
40
<PAGE> 43
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances under Credit Facility, due 2001.................... $290,000 $213,000
6 7/8% Senior Notes due 2003, less unamortized discount of
$0.4 million.............................................. 99,600 --
Bonds Payable with interest at 7 3/8%, interest only paid
semi-annually, due in 2006................................ -- 450,000
Convertible subordinated debentures with interest at 5.50%,
interest only paid semi-annually, due in 2003............. 69,000 --
Notes payable to physicians and stockholders in annual
installments through 2001, interest rates ranging from 5%
to 12%.................................................... 15,329 14,118
Other long-term notes payable............................... 60,739 48,370
Capital lease obligations................................... 12,746 18,253
-------- --------
547,414 743,741
-------- --------
Less amounts due within one year............................ (15,640) (28,084)
-------- --------
$531,774 $715,657
======== ========
</TABLE>
The Company entered into a $1 billion Revolving Credit and Reimbursement
Agreement (the "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 December 31, 1996, there was $213 million outstanding
under the facility. The rate approximated 6.5% at December 31, 1996. The Credit
Facility contains affirmative and negative covenants which, among other things,
require the Company to maintain certain financial ratios (including minimum net
worth, minimum fixed charge coverage ratio, maximum indebtedness to cash flow),
and set 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 which have more
than half of the consideration paid in cash. The Credit Facility is unsecured
but provides a negative pledge on substantially all assets of the Company. As of
December 31, 1996, 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. The ten year notes carry a coupon rate of 7 3/8%. Interest on the
notes is payable semi-annually on April 1 and October 1 of each year. 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 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
secured indebtedness of the Company and to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. Net proceeds from the note
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, approximately $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.
41
<PAGE> 44
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of principal maturities of long-term debt as of
December 31, 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................................ $ 30,093
1998........................................................ 17,745
1999........................................................ 7,924
2000........................................................ 6,449
2001........................................................ 215,674
Thereafter.................................................. 469,984
Amounts representing interest and discounts................. (4,128)
--------
Total............................................. $743,741
========
</TABLE>
Operating Leases: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are located
and administrative office space. These leases generally have five-year terms
with renewal options. The following is a schedule of future minimum lease
payments under noncancelable operating leases as of December 31, 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................................ $ 76,481
1998........................................................ 77,351
1999........................................................ 60,837
2000........................................................ 51,660
2001........................................................ 43,734
Thereafter.................................................. 170,794
--------
Total............................................. $480,857
========
</TABLE>
7. INCOME TAX EXPENSE
At December 31, 1996, the Company had a cumulative net operating loss
("NOL") carryforward for federal income tax purposes of approximately $184
million available to reduce future amounts of taxable income. If not utilized to
offset future taxable income, the net operating loss carryforwards will expire
on various dates through 2011.
42
<PAGE> 45
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Merger/acquisition costs.................................. $38,326 $51,696
Bad debts................................................. 15,007 15,971
Securities write-down..................................... 33,708 --
Accrued and deferred compensation benefits................ 6,780 --
Accrued vacation.......................................... -- 5,427
NOL carryforward.......................................... 23,970 72,484
Alternative minimum tax credit carryforward............... -- 20,195
Other..................................................... 17,273 29,190
------- -------
Gross deferred tax assets................................... 135,064 194,963
Valuation allowance for deferred tax assets................. (1,249) (2,419)
Deferred tax liabilities
State taxes............................................... 1,721 2,264
Merger reserves........................................... -- 4,235
Legal reserve............................................. 26,800 4,400
Shared risk receivable.................................... 7,182 7,135
Securities write-down..................................... -- 13,449
Excess tax depreciation................................... 2,974 30,363
Goodwill.................................................. 8,103 9,648
Other amortization........................................ -- 31,115
Other..................................................... 16,004 19,123
------- -------
Gross deferred tax liabilities.............................. 62,784 121,732
------- -------
Net deferred tax asset...................................... $71,031 $70,812
======= =======
</TABLE>
Income tax expense (benefit) on continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $24,580 $ 44,640 $ 28,205
State................................................. 7,017 8,841 3,848
------- -------- --------
31,597 53,481 32,053
Deferred:
Federal............................................... 10,722 (59,602) (31,125)
State................................................. 1,729 (9,671) (6,225)
------- -------- --------
12,451 (69,273) (37,350)
------- -------- --------
$44,048 $(15,792) $ (5,297)
======= ======== ========
</TABLE>
43
<PAGE> 46
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate........................... $34,367 $ 1,788 $(33,295)
Add (deduct):
State income tax, net of federal tax benefit.......... 5,284 (2,037) (1,369)
Increase (decrease) in valuation allowance............ -- (14,240) 1,170
Non deductible merger expense......................... -- -- 24,786
Other................................................. 4,397 (1,303) 3,411
------- -------- --------
$44,048 $(15,792) $ (5,297)
======= ======== ========
</TABLE>
8. CAPITALIZATION
The Company's Third Restated Certificate of Incorporation provides that the
Company may issue 9.5 million shares of Preferred Stock, par value $0.001 per
share, .5 million shares of Series C Junior Participating Preferred Stock, par
value $0.001 per share, and 400 million shares of Common Stock, par value $0.001
per share. As of December 31, 1996 no shares of the preferred stock were
outstanding.
On February 28, 1995, the Company completed an initial public offering of
5.1 million shares of its common stock. Gross and net proceeds of the offering
were $65.8 million and $60.4 million, respectively. Proceeds of the offering
were used to pay outstanding indebtedness under the bank credit facility. Net
proceeds were also used to fund acquisitions of certain assets of physician
practices, expansion of physician services, working capital and other general
corporate purposes.
On March 13, 1996, the Company completed a secondary public offering of 6.6
million shares of its common stock. The net proceeds of the offering were $194.0
million. Proceeds of the offering were used to pay outstanding indebtedness
under the then existing credit facility. In April 1996, $69 million of the
proceeds were used to repay PPSI's convertible subordinated debentures. The
remainder of the net proceeds were used to fund acquisitions of certain assets
of physician practices, expansion of physician services, working capital and
other general corporate purposes.
9. STOCK BASED COMPENSATION PLANS
The Company sponsors employee stock purchase plans that promote the sale of
its common stock to employees. The purchase price to employees is the lower of
85% of the closing market price on the date of subscription or 85% of the
closing market price on the date funds are actually used to purchase stock for
employees. Under the plans the Company sold 743,117, 582,132 and 267,232 shares
to employees in 1994, 1995 and 1996, respectively. The compensation cost for the
stock purchase plan is included in the pro forma information below. Compensation
cost is recognized for the fair value of the employee's purchase rights, which
was estimated using the same valuation model and assumptions below with the
exception of an expected purchase right expected life of 1 year. The
weighted-average fair value of those purchase rights granted in 1995 and 1996
was $6.47 and $8.66, respectively.
The Company offers participation in stock option plans to certain employees
and individuals. All of the outstanding options under these plans were granted
at 100% of the market value of the stock on the dates of grant. Awarded options
typically vest and become exercisable in incremental installments over five
years and expire no later than ten years and one day from the date of grant. The
number of shares authorized under the various plans was 22.5 million as of
December 31, 1996.
44
<PAGE> 47
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option activity for the indicated
years:
<TABLE>
<CAPTION>
1995 1996
------------------------------- -------------------------------
WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE
(IN THOUSANDS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding:
Beginning of year................ 13,895 $ 10.39 15,292 $ 13.73
Granted.......................... 5,681 19.19 11,641 19.26
Exercised........................ (1,796) (6.78) (4,130) (10.78)
Canceled/expired................. (2,488) (12.55) (5,841) (24.04)
------ ------
End of year...................... 15,292 13.73 16,962 14.69
Exercisable at end of year......... 4,926 13.66 11,611 13.75
Weighted-average fair value of
options granted during the
year............................. $10.13 $12.45
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
RANGE AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
under $12.00....... 547 7.28 $ 0.55 246 $ 0.57
$12.00-$16.99...... 13,933 7.93 14.31 10,758 13.71
$17.00 and above... 2,482 9.57 19.89 607 19.74
</TABLE>
Under various plans, the Company has made grants of restricted common stock
to provide incentive compensation to key employees. Restricted stock activity is
summarized below:
<TABLE>
<CAPTION>
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Restricted stock outstanding:
Beginning of year......................................... 320 278
Granted................................................... 339 1
Canceled.................................................. (26) (6)
Vested (free of restrictions)............................. (355) (97)
---- ---
End of year............................................... 278 176
==== ===
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock-based compensation plans under the fair value method as
described in Statement 123. The fair value for these options and employee
purchase rights was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Risk-free interest rates.................................... 6.16% 6.28%
Expected volatility......................................... .431 .431
Expected option lives (years)............................... 5.6 5.6
Expected stock purchase lives (years)....................... 1.0 1.0
</TABLE>
45
<PAGE> 48
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the Company's net income and
earnings per share would have been reduced to pro forma net income (loss) from
continuing operations of $9.7 and $(134.6) million and pro forma net losses of
$(126.8) and $(203.3) million for the years ended December 31, 1995 and 1996,
respectively. Per share amounts would have been reduced to pro forma net income
(loss) from continuing operations of $0.07 and $(0.87) and pro forma net losses
per share of $(0.90) and $(1.31) for the years ended December 31, 1995 and 1996,
respectively.
10. ACQUISITIONS
During the years ended December 31, 1994, 1995 and 1996, the Company,
through its wholly-owned subsidiaries, acquired certain operating assets of
various medical practices. Simultaneously with each medical practice
acquisition, the Company entered into a practice management agreement which
generally has a 20-40 year term. Pursuant to the practice management agreements,
the Company manages all aspects of the affiliated practice other than the
provision of medical services, which is controlled by the physician groups. For
providing services under the practice management agreement, the physicians
receive compensation which varies from practice to practice.
In May 1995, Caremark entered into a long-term affiliation agreement with
Friendly Hills HealthCare Network ("Friendly Hills"), an integrated health care
delivery system headquartered in La Habra, California. Friendly Hills operates
18 medical offices and an acute care hospital. Caremark acquired substantially
all of the assets of Friendly Hills for approximately $140 million and agreed to
provide various management and administrative services. The transaction has been
accounted for by the purchase method of accounting. The Company invested
approximately $143.2 million in cash, stock and notes for other acquisitions in
1995.
In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed healthcare subsidiary of CIGNA Corporation, to acquire
substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los
Angeles area staff model delivery system ("CIGNA") for approximately $80.4
million in cash. The transaction has been accounted for by the purchase method
of accounting. During the year ended December 31, 1996, $157.4 million in cash
and 2 million shares of stock valued at $39.9 million were given in exchange for
the net assets of CIGNA and other entities. Results of operations would not have
been materially different in 1994, 1995 and 1996 had these transactions occurred
as of the beginning of the respective years.
All of the aforementioned acquisitions have been accounted for by the
purchase method of accounting. As such, operating results of acquired businesses
are included in the Company's Consolidated Financial Statements as of their
respective dates of acquisition.
46
<PAGE> 49
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. MERGERS
Effective February 22, 1996 and September 5, 1996, the Company merged with
PPSI and Caremark, respectively, in transactions that were accounted for as
poolings of interests. The Company exchanged 10,981,904 and 90,508,558 shares of
its common stock for all of the outstanding common stock of PPSI and Caremark,
respectively. During the year ended December 31, 1996, the Company also
exchanged 11,296,786 shares of its common stock in additional transactions
accounted for as poolings of interests. The Company's historical financial
statements for all periods have been restated to include the results of all
material transactions accounted for as poolings of interests.
<TABLE>
<CAPTION>
OTHER
POOLINGS COMBINED
MEDPARTNERS PPSI CAREMARK OF INTERESTS (AS REPORTED)
----------- -------- ---------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Net revenue................. $ 506,818 $308,226 $1,775,200 $ 48,410 $2,638,654
Net (loss) income........... (10,660) 7,598 80,400 2,708 80,046
Year ended December 31,1995
Net revenue................. 742,388 411,132 2,374,300 55,557 3,583,377
Net (loss) income........... (9,717) 10,205 (116,300) 185 (115,627)
Year ended December 31, 1996
Net revenue................. 1,071,819 410,102 3,203,512 128,066 4,813,499
Net (loss) income........... (141,680) (10,464) (3,359) (3,026) (158,529)
</TABLE>
Prior to its merger with the Company, PPSI reported on a fiscal year ending
on July 31. The restated financial statements for all periods prior to and
including December 31, 1995 are based on a combination of the Company's results
for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two months
ending December 31,1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for the effect of excluding
PPSI's results of operations for the two months ending December 31, 1995. The
following is a summary of operations and cash flow for the two months ending
December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Statement of Operations Data:
Net revenue............................................... $ 69,850
Operating expenses:
Affiliated physician services............................. 32,600
Outside medical expenses.................................. 14,861
Clinic expenses........................................... 26,034
General and administrative expenses....................... 5,235
Depreciation and amortization............................. 2,371
Net interest expense...................................... 426
Loss on disposal of assets................................ 41
--------
Net operating expenses................................. 81,568
--------
Loss before taxes......................................... (11,718)
Income tax benefit........................................ (3,661)
--------
Net loss.................................................. $ (8,057)
========
</TABLE>
47
<PAGE> 50
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flow Data:
Net cash used by operating activities..................... $ (3,569)
Net cash provided by investing activities................. 4,455
Net cash used in financing activities..................... (81)
--------
Net increase in cash and cash equivalents................. $ 805
========
Included in pre-tax loss for the year ended December 31, 1996 are merger
costs totaling $308.7 million. Approximately $32.5 and $251.3 million relate to
the mergers with PPSI and Caremark, respectively. The components of this cost
are as follows (in thousands):
<TABLE>
<S> <C>
Investment banking fees..................................... $ 31,774
Professional fees........................................... 16,674
Other transaction costs..................................... 11,645
Transition and debt restructuring........................... 39,011
Severance costs for identified employees.................... 56,948
Impairment of assets........................................ 41,616
Abandonment of facilities................................... 15,921
Noncompatible technology.................................... 9,498
Conforming of accounting policies........................... 23,728
Operational restructuring................................... 30,324
Other charges............................................... 31,556
--------
Total....................................................... $308,695
========
</TABLE>
12. RETIREMENT SAVINGS PLAN
Effective April 4, 1994, the Company adopted the MedPartners, Inc. and
Subsidiaries Employee Retirement Savings Plan (the "Plan"). The Plan is a Code
Section 401(k) Plan which requires the attainment of age 21 and one year of
service, with a minimum of 1,000 hours worked to become a participant in the
Plan. Service for a predecessor employer will be considered for participation
requirements in the Plan for all employees employed through acquisition
activities. The Company, at its sole discretion, may contribute an amount which
it designates as a qualified nonelective contribution. The Company made a
required contribution of approximately 3% percent of non-key employee salaries
for the Plan year ended December 31, 1996, however, no additional contributions
are anticipated at this time. Company contributions are gradually vested over a
six-year service period. The various entities that were acquired or merged into
the Company during 1996 also had various employee retirement plans, that will or
have been incorporated into the Company's Plan. Participants of Caremark's
401(k) Plan may contribute up to 12% of their annual compensation to the plan
and Caremark matches the participants' contributions up to 3% of compensation.
The expenses related to all plans during the years ended December 31, 1994, 1995
and 1996 were approximately $7.9 million, $6.0 million and $7.7 million,
respectively.
Caremark sponsored retirement plans for all qualifying domestic employees
and certain employees in other countries. Benefits are typically based on years
of service and the employee's compensation during five of the last 10 years of
employment as defined by the plans. Caremark's funding policy is to make
contributions that meet or exceed the minimum requirements of the Employee
Retirement Income Security Act of 1974, based on the projected unit credit
actuarial cost method, and to limit such contributions to amounts currently
deductible for federal income tax reporting purposes.
48
<PAGE> 51
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the components of net pension expense and
related actuarial assumptions used at the January 1 valuation date for the
respective years related to the Caremark sponsored defined benefit plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Assumptions:
Discount rate............................................. 8.75% 7.25% 8.75%
Increase in compensation levels........................... 5.0% 5.0% 5.0%
Expected long-term return on assets....................... 10.5% 9.5% 9.5%
Components (in thousands):
Service cost-benefits earned.............................. $4,600 $2,100 $3,024
Interest cost on projected obligation..................... 2,300 2,200 2,635
Actual return on assets................................... (1,300) (1,700) (3,121)
Net amortizations......................................... 700 100 698
Deferred asset gain....................................... -- -- 1,233
Merger expenses:
Special termination benefits.............................. -- -- 4,675
Curtailment loss.......................................... -- -- 502
------ ------ ------
Net pension expense....................................... $6,300 $2,700 $9,646
====== ====== ======
</TABLE>
The following table presents the funded status of the Caremark plans, the
net pension liability recognized in the consolidated balance sheets and related
actuarial assumptions as of December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Assumptions:
Discount rate............................................. 7.25% 8.75%
Increase in compensation levels........................... 5.0% 5.0%
Funded status and net pension liability (in thousands):
Actuarial present value of benefit obligations:
Vested benefits........................................ $22,200 $37,453
Accumulated benefits................................... 25,000 41,141
Effect of future salary increases...................... 7,200 --
------- -------
Projected benefits..................................... 32,200 41,141
Less: plan assets at fair value(1).......................... 20,900 24,977
------- -------
Projected benefit obligations in excess of plan assets...... 11,300 16,164
Less: unrecognized net loss................................. (4,800) --
------- -------
Net pension liability....................................... $ 6,500 $16,164
======= =======
</TABLE>
- ---------------
(1) Primarily equity and fixed income securities.
13. CONTINGENCIES
On September 11, 1995, Coram Healthcare Corporation ("Coram") filed a
complaint in the San Francisco Superior Court against Caremark International
Inc. and its subsidiary, Caremark Inc., and 50 unnamed individual defendants.
The complaint, which arises 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, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended on April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent
49
<PAGE> 52
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint includes specific performance, declaratory relief,
injunctive relief and damages of $5.2 billion. Caremark filed counterclaims
against Coram in this lawsuit and also filed a lawsuit in the United States
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremark's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase, with a scheduled trial date during the second quarter of 1997. In October
1996, Coram agreed to merge with Integrated Health Services, Inc. ("IHS"). In
connection with the merger agreement, IHS and the Company have agreed to a
settlement of the Coram litigation, contingent upon consummation of the proposed
merger, expected to be completed sometime during the second quarter of 1997.
Under the settlement proposal, the notes that are now payable by Coram to
Caremark will be canceled and replaced with a new two-year note in the
approximate principal amount of $57.5 million. Caremark had previously
established a reserve for a portion of the $100 million in securities and,
therefore, the terms of the new note will not require any additional charge
against earnings by the Company.
In March 1996, Caremark agreed to settle all disputes with a number of
private payors. The settlements resulted in an after-tax charge of $42.3
million. These disputes related to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark agreed to pay $23.3 million after-tax to cover the private
payors' pre-settlement and settlement-related expenses. An after-tax charge for
the above amounts has been recorded in first quarter 1996 discontinued
operations. During the year ended December 31, 1996, Caremark paid $105.1
million, with an additional $3.3 million plus interest to be paid over the next
six months, related to the settlements.
In June 1995, Caremark agreed to settle an investigation of Caremark with
the U.S. Department of Justice, the Office of the Inspector General of the U.S.
Department of Health and Human Services, the Veterans Administration, the
Federal Employees Health Benefits Program, the Civilian Health and Medical
Program of the Uniformed Services and related state investigative agencies in
all 50 states and the District of Columbia (the "OIG investigation"). 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 federal funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. Caremark took an after-tax charge to discontinued operations
of $154.8 million in 1995 for these settlement payments, costs to defend ongoing
derivative, security and related lawsuits and other associated costs.
The Company cannot determine at this time what costs may be incurred in
connection with future disposition of nongovernmental claims or litigation. The
Company does not believe that the above-referenced settlements will materially
affect its ability to pursue its long-term business strategy. There can be no
assurances, however, that additional costs, claims and damages will not occur or
that the ultimate costs related to the settlements will not exceed estimates in
the preceding paragraphs.
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 International Inc.,
Caremark, Inc. 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 practice statute. The
complaint seeks unspecified treble damages, attorneys' fees and expenses. The
Company intends to defend this case vigorously. Management is unable at this
time to estimate the impact, if any, of the ultimate resolution of this matter.
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
50
<PAGE> 53
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Northern District of Illinois, alleging violations of the Securities Act of 1933
and the Securities Exchange Act of 1934, 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 Securities Exchange Act of 1934 only, was certified
as a class. The parties to all of the complaints 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 late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of a 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
filed 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. In July 1995, another patient of the same physician filed a separate
complaint in the District of South Dakota against the physician, Caremark and
another 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. Management is unable at this time to
estimate the impact, if any, of the ultimate resolution of these matters.
Beginning in September 1994, Caremark was named as a defendant in a series
of new 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 new 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 the class action (which does
not include Caremark) of approximately $351.0 million to class
51
<PAGE> 54
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
members in settlement of conspiracy claims 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 pharmaceuticals 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 Federal Trade Commission
(the "FTC") that it was conducting a civil investigation of the industry
concerning whether acquisitions, alliances, agreements or activities between
pharmacy 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 this 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.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.
In May 1996, two stockholders, each purporting to represent a class, filed
complaints against Caremark and each of its directors in the Court of Chancery
of the State of Delaware alleging breaches of the directors' fiduciary duty in
connection with Caremark's then proposed merger with the Company. The complaints
seek unspecified damages, injunctive relief, and attorneys' fees and expenses.
The plaintiffs in these actions have made no effort to pursue these claims and
the Company does not believe that these complaints will have a material adverse
effect on the operating results and financial condition of the Company.
Although the Company cannot predict with certainty the outcome of
proceedings described above, based on information currently available,
management believes that the ultimate resolution of such proceedings,
individually and in the aggregate, is not likely to have a material adverse
effect on the Company.
The Company is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Management does not
believe that the result of such commitments, claims and litigation, individually
or in the aggregate, will have a material adverse effect on the Company's
business or its results of operations, cash flows or financial condition.
14. SUBSEQUENT EVENTS
On January 20, 1997, the Company agreed to merge with InPhyNet Medical
Management Inc. ("InPhyNet"), a provider of hospital based physician services
headquartered in the Ft. Lauderdale area. In 1996, InPhyNet provided physician
practice management services at 188 service sites in 26 states with
hospital-based services and capitated networks. The consideration for this
transaction is based on a fixed exchange ratio of 1.311 shares of MedPartners
common stock for each share of InPhyNet common stock. Based on this ratio,
approximately 22 million shares of the Company's common stock will be issued in
exchange for all outstanding shares of InPhyNet common stock, valuing the
transaction at approximately $493 million. The transaction is expected to be
accounted for as a pooling of interests and is expected to close during the
first six months of 1997.
52
<PAGE> 55
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma effect on the consolidated statement of operations of the
Company had the transaction occurred on January 1, 1994 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net revenue........................................ $2,909,024 $3,908,717 $5,222,019
Pro forma net income (loss)........................ 89,412 (104,339) (141,837)
Pro forma net income (loss) per share.............. 0.60 (0.65) (0.80)
Number of shares used in pro forma net income
(loss) per share calculations.................... 148,437 160,079 176,368
</TABLE>
53
<PAGE> 56
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND FINANCIAL
DISCLOSURE
The Company has not changed independent accountants within the twenty-four
months prior to December 31, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 Board, President and Chief Executive
Officer and Director
Mark L. Wagar............................... 45 President -- Western Operations
John J. Gannon.............................. 58 President -- Eastern Operations
James G. Connelly, III...................... 51 President -- Caremark
H. Lynn Massingale, M.D..................... 44 President -- Team Health
Harold O. Knight, Jr........................ 38 Executive Vice President and Chief Financial
Officer
Tracy P. Thrasher........................... 34 Executive Vice President and Corporate Secretary
William R. Dexheimer........................ 40 Executive Vice President and Chief Operating
Officer -- East
J. Rodney Seay.............................. 49 Executive Vice President of Mergers and
Acquisitions
J. Brooke Johnston, Jr...................... 57 Senior Vice President and General Counsel
Peter J. Clemens, IV........................ 32 Vice President of Finance and Treasurer
Richard M. Scrushy.......................... 44 Director
Larry D. Striplin, Jr....................... 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.(2)................... 44 Director
Richard J. Kramer........................... 54 Director
C.A. Lance Piccolo.......................... 56 Director
Roger L. Headrick(1)........................ 60 Director
Thomas W. Hodson(2)......................... 50 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 President and Chief Executive Officer of the
Company since August 1993, and has been Chairman of the Board since January
1993. 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 -- Western Operations of the Company since
January 1996. From January 1995 through December 1995, Mr. Wagar was Chief
Operating Officer of MME. From March 1994
54
<PAGE> 57
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 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 -- Eastern Operations of the Company
since July 1996. 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.
James G. Connelly, III has been President and Chief Operating Officer of
Caremark since August 1992. Mr. Connelly was the President of a subsidiary of
Caremark from April 1992 to November 1992. From May 1990 to November 1992, Mr.
Connelly was a Group Vice President of Baxter International Inc., a publicly
traded company that is a leading manufacturer and marketer of healthcare
products and services ("Baxter"). Prior to 1990, he was a Corporate Vice
President of Baxter, responsible for its hospital supply business group. Mr.
Connelly also serves as a director of Boise Cascade Office Products Corporation,
a publicly traded company.
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 has been Executive Vice President of the Company since
November 1994 and has been 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.
William R. Dexheimer has been Executive Vice President and Chief Operating
Officer -- East of the Company since August 1993. From 1989 to 1993, Mr.
Dexheimer was a principal stockholder and Chief Executive Officer of Strategic
Health Resources of the South, Inc., a healthcare development and consulting
firm. From 1986 to 1989, Mr. Dexheimer was employed by AMI Brookwood Medical
Center as Senior Vice President of Development and Chief Executive Officer of
AMI Brookwood Primary Care Centers, Inc.
J. Rodney Seay has been Executive Vice President of Mergers and
Acquisitions of the Company since April 1995. From August 1993 to April 1995, he
served as Executive Vice President of Development of the Company. Mr. Seay was
also Secretary of the Company from August 1993 to March 1994. From 1992 to 1993,
he was Vice President of Finance of HEALTHSOUTH. From 1988 to 1992, Mr. Seay was
a Senior Manager with KPMG Peat Marwick. From 1982 to 1988, he served as Chief
Executive Officer of Medical Data Services, a physician practice management
company with over 650 employees and over 1,500 physician clients.
55
<PAGE> 58
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.
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.
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 shareholder 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 shareholder 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. 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 acted as a director and a Vice
President of MME's principal professional corporation. He is also a director and
shareholder of MIPA.
56
<PAGE> 59
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") and
Baxter, each of 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.
Thomas W. Hodson has been a member of the Company's Board of Directors
since September 1996, and was the Senior Vice President and Chief Financial
Officer of Caremark from August 1992 until September 1996. Mr. Hodson was a
Group Vice President of Baxter, from April 1992 to November 1992, and from 1990
to 1992 he was a Senior Vice President of Baxter responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. From 1988 to 1990, Mr. Hodson was a corporate vice president of
Baxter. Mr. Hodson also serves as a director of APACHE Medical Systems, Inc., a
publicly traded provider of clinically-based decision support information
systems to the healthcare industry.
Harry M. Jansen Kraemer, Jr. has been a member of the Company's Board of
Directors since September 1996, and is a Vice President and Chief Financial
Officer of Baxter, having served in that capacity since November 1993. 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. In addition to
his duties as its chief financial officer he is responsible for Baxter's Global
Hospital Business, Global Renal Business, and the Baxter Japan subsidiary. 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.
The executive employment agreement of Mr. House requires that he be
nominated as a director during the term of the employment agreement. Drs.
Mullikin and Lopez and Messrs. McDonald and Kramer initially became members of
the Board of Directors in connection with the acquisition of MME, and Messrs.
Piccolo, Headrick, Hodson and Kraemer became members of the Board of Directors
in connection with the Caremark Acquisition, where it was agreed that at least
four members of the Company's thirteen member Board of Directors would be
designated by Caremark to serve for a three-year period. There are no family
relationships between any Directors, nominees for director or executive officers
of the Company. The Board of Directors of the Company held a total of eight
meetings and acted by unanimous written consent nine times during 1996.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the terms of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors is divided into three classes, with each class
being as nearly equal in number as reasonably possible. One class
57
<PAGE> 60
holds office for a term that will expire at the Annual Meeting of Stockholders
to be held in 1997, a second class holds office for a term that will expire at
the Annual Meeting of Stockholders to be held in 1998 and a third class holds
office for a term that will expire at the Annual Meeting of Stockholders to be
held in 1999. Each director holds office for the term to which he is elected and
until his successors is duly elected and qualified. At each annual meeting of
stockholders of the Company, the successors to the class of directors whose
terms expire at such meeting are elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election. Messrs. Scrushy, McCourtney and Piccolo and Dr. Lopez have terms
expiring in 1997, Messrs. House, McDonald, Kramer, Newhall and Headrick have
terms expiring in 1998, and Messrs. Striplin, Kraemer and Hodson and Dr.
Mullikin have terms expiring in 1999. The Company's Board of Directors elect
officers annually and such officers serve at the discretion of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company currently has two committees: the
Audit Committee and the Compensation Committee.
The Audit Committee has the responsibility for reviewing and supervising
the financial controls of the Company. The Audit Committee makes recommendations
to the Board of Directors of the Company with respect to the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices, meets with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports, and reviews the performance of overall accounting and
financial controls of the Company. The Audit Committee consists of Messrs.
McCourtney and Hodson and Dr. Lopez. During 1996, there were three meetings of
the Audit Committee.
The Compensation Committee has the responsibility for reviewing the
performance of the officers of the Company and recommending to the Board of
Directors of the Company's annual salary and bonus amounts for all officers of
the Company. The Compensation Committee also administers the Company's 1993
Stock Option Plan, 1995 Stock Option Plan, MedPartners Incentive Compensation
Plan and the MedPartners 1997 Long Term Incentive Compensation Plan. The
Compensation Committee consists of Messrs. Newhall, McDonald and Headrick.
During 1996, there were two meetings of the Compensation Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the New York Stock
Exchange. Officers, directors and beneficial owners of more than 10% of the
Company's Common Stock are required by regulations promulgated by the Securities
and Exchange Commission to furnish the Company with copies of all Section 16(a)
forms that they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no reports on Form 5
were required, the Company believes that during 1996, all of its officers,
directors and greater-than-10% beneficial owners complied with Section 16(a)
filing requirements to them, except that Harold O. Knight, Jr. filed a Form 4
due March 10, 1996 late as a result of an exchange of shares of MedPartners
Common Stock by operation of law, and John J. Gannon filed his Form 3 late as a
result of a difficult travel schedule.
58
<PAGE> 61
ITEM 11. EXECUTIVE COMPENSATION.
Executive Officer Compensation. The following table presents certain
information concerning compensation paid or accrued for services rendered to the
Company in all capacities during the years ended December 31, 1996, 1995 and
1994, for the Chief Executive Officer and the four other most highly compensated
executive officers of the Company whose total annual salary and bonus in the
last fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- AWARDS
OTHER ------------
ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL COMPENSATION UNDERLYING COMPENSATION
POSITION HELD YEAR SALARY ($) BONUS ($) ($)(1) OPTIONS (#) ($)
------------------ ---- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House(2)............. 1996 $717,852 $1,786,429 -- 2,700,000(6) $ 25,000(8)
Chairman of the Board, 1995 349,908 600,000 -- 828,000 28,335
President and Chief
Executive 1994 335,000 -- -- 457,000 25,474
Officer
Mark L. Wagar(3).............. 1996 350,002 317,174 -- 700,000(7) 25,750(8)
President -- Western
Operations 1995 346,601 -- -- 250,000 30,485
James G. Connelly, III(4)..... 1996 383,852 2,827,968(5) $ 74,400 230,000 405,996(8)
President -- Caremark
Kristen E. Gibney(4).......... 1996 330,147 2,153,582(5) 620,200 175,000 427,566(8)
Vice President -- Caremark
Michelle J. Hooper(4)......... 1996 253,641 1,318,713(5) -- 100,000 184,448(8)
Vice President -- Caremark
</TABLE>
- ---------------
(1) Dollar value of perquisites and other benefits were less than the lesser of
$50,000 or 10% of total salary and bonus for each Named Executive Officer.
(2) Pursuant to a reimbursement agreement, the Company paid HEALTHSOUTH the sum
of $150,195 as reimbursement for services rendered by Mr. House from
January 1, 1994 to August 31, 1994, when the agreement terminated. See
"-- Compensation Committee Interlocks and Insider Participation".
(3) Mr. Wagar commenced employment on January 1, 1995.
(4) These Named Executive Officers commenced employment on September 5, 1996,
at the time of the Caremark Acquisition but the table includes all
compensation paid to them in 1996.
(5) Bonuses for these Named Executive Officers include the following amounts:
Mr. Connelly -- $2,707,968 retention bonus; Ms. Gibney -- $1,962,174
retention bonus, and $55,800 restricted stock option; Ms.
Hooper -- $1,127,305 retention bonus, and $55,800 restricted stock option.
(6) Includes 500,000 options originally granted in 1995 and repriced in 1996,
and 600,000 options granted in 1996 but effectively cancelled by subsequent
repricing.
(7) Includes 250,000 options originally granted in 1995 and repriced in 1996,
and 150,000 options granted in 1996 but effectively cancelled by subsequent
repricing.
(8) Other compensation shown for the Named Executive Officers in 1996 includes
contributions by the Company in the following amounts: Mr. House -- $25,750
split dollar life insurance; Mr. Wagar -- $25,000 split dollar life
insurance, and $750 401k plan; Mr. Connelly -- $10,357 split dollar life
insurance, $21,946 401k plan, and $373,693 non-qualified pension plan; Ms.
Hooper -- $2,994 split dollar life insurance, $15,384 401k plan, and
$166,070 non-qualified pension plan; and Ms. Gibney -- $4,916 split dollar
life insurance, $17,919 401k plan, and $404,731 non-qualified pension plan.
59
<PAGE> 62
Option Grants in 1996. The following table contains information concerning
the grant of stock options under the Stock Option Plans (as defined below) to
the Named Executive Officers in 1996:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
---------------------------------------------------------------- OF STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION -------------------------
NAME GRANTED (#)(1) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------------ ---------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House.......... 500,000(3)(4) 4.4% $16.625 11/21/05 $ 4,791,434 $11,911,841
600,000(3)(5) 5.3 25.759 4/10/06
9,716,422 24,623,321
600,000(3)(6) 5.3 16.625 4/10/06
6,046,764 15,197,843
1,000,000(3) 8.9 16.625 7/24/06
10,455,373 26,495,968
Mark L. Wagar........... 150,000(4) 1.3% $16.625 11/29/05 $ 1,441,636 $ 3,586,240
100,000(3)(4) 0.9 16.625 11/29/05
961,091 2,390,827
150,000(5) 1.3 25.750 4/10/06
2,429,105 6,155,830
150,000(6) 1.3 16.625 4/10/06
1,511,691 3,799,461
150,000 1.3 16.625 7/24/06
1,568,306 3,974,395
James G. Connelly, $ 2,874,835 $ 7,285,395
III................... 230,000 2.0% $19.875 9/5/06
Kristen E. Gibney....... 175,000 1.6% $19.875 9/5/06 $ 2,187,374 $ 5,543,235
Michele J. Hooper....... 100,000 0.9% $19.875 9/5/06 $ 1,249,928 $ 3,167,563
</TABLE>
- ---------------
(1) The vesting of each option is cumulative and no vested portion expires until
the expiration of the option. Unless otherwise noted, options vest at the
rate of 20% per year over a 5-year period beginning on the original grant
date.
(2) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) or its time of repricing (remaining term),
as applicable. It is calculated by assuming that the stock price on the date
of grant appreciates at the indicated annual rate compounded annually for
the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.
(3) These options are 100% vested.
(4) These options were originally granted in 1995, but were repriced in 1996.
See "Repricing of Outstanding Options".
(5) These options were granted in 1996, but were effectively cancelled by
subsequent repricing. See "Repricing of Outstanding Options".
(6) These options are the repriced options that effectively replaced options
granted earlier in 1996. See "Repricing of Outstanding Options".
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<PAGE> 63
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table provides information with respect to options
exercised by the Named Executive Officers during 1996 and the number and value
of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
OPTIONS AT FY-END(#) FY-END($)(1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry R. House........... 55,000 $1,694,000 2,428,000/ -- $11,532,500/$--
Mark L. Wagar............ -- $ -- 220,000/330,000 $ 907,500/$1,361,250
James G. Connelly, III... -- $ -- 610,465/184,000 $ 5,401,324/$161,000
Kristen E. Gibney........ 47,388(2) $ 620,200 211,236/ -- $1,408,721/$--
Michele J. Hooper........ -- $ -- 213,170/ 80,000 $1,588,429/$70,000
</TABLE>
- ---------------
(1) Based on December 31, 1996 closing price for MedPartners Common Stock of
$20.75.
(2) Includes options to purchase shares of Caremark exercised prior to the
Caremark Acquisition and gives effect to the exchange ratio of 1.21 shares
of MedPartners Common Stock for each share of Caremark.
DIRECTOR COMPENSATION
Officers of the Company do not receive any additional compensation for
serving as members of the Board of Directors or any of its committees. Effective
January 1, 1996 and prior to July 25, 1996, non-employee directors were paid
directors' fees of $2,500 for each meeting of the Board of Directors attended in
person, $500 for each meeting of the Board of Directors attended by phone, and
$1,000 for each meeting of the Audit Committee or the Compensation Committee
attended in person. Directors were reimbursed for travel costs and other
out-of-pocket expenses incurred in attending each meeting of the Board of
Directors or one of its committees. In addition, non-employee directors received
an annual grant of stock options for 10,000 shares of the Company's Common Stock
under the Stock Option Plans (as hereinafter defined). Such options vest in 20%
increments and expire ten years after the grant date. The exercise price of such
options was determined by the closing price of the Company's Common Stock on the
NYSE on the date of the option grant. Effective July 26, 1996, non-employee
directors were paid directors' fees of $3,000 for each meeting of the Board of
Directors attended in person, $1,000 for each meeting of the Board of Directors
attended by phone, and $1,000 for each meeting of the Audit Committee or the
Compensation Committee attended in person. In addition, non-employee directors
receive an annual grant of stock options for 25,000 shares of the Company's
Common Stock under the Stock Option Plans. In July 1996, each of Messrs. Kramer,
McCourtney, McDonald, Mullikin, Newhall, Scrushy and Striplin were granted an
option to purchase 10,000 shares of Common Stock, all at an exercise price of
$16.625 per share, the market price on the grant date. See "Executive Officer
Compensation and Other Matters -- Option Grants in 1996".
Dr. Lopez was granted an option to purchase 30,000 shares of Common Stock
in April 1996 and 35,000 shares of Common Stock in September 1996, which shares
have an exercise price of $16.625 per share and $19.875 per share, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Newhall, McCourtney and McDonald served on the Compensation
Committee of the Board of Directors of the Company throughout 1996, joined by
Mr. Headrick in September 1996. Mr. House served on the Compensation Committee
until February 1996.
In connection with the MME Acquisition, the Company entered into a
Termination and a Consulting Agreement with Mr. McDonald. Under the Termination
Agreement, Mr. McDonald's employment agreement with MME was terminated in
consideration for which Mr. McDonald received a lump sum payment of $796,000,
continuation of certain fringe benefits and perquisites under the former
employment agreement for
61
<PAGE> 64
36 months, access to an office and support staff until death or disability,
payments from the Company and a trust set up by the Company to fund the
remainder of MME's pension obligations to Mr. McDonald, and payment of all
health and medical care (including prescriptions) for Mr. McDonald for the
remainder of his life through a Company-sponsored health insurance plan. Under
the five-year Consulting Agreement, Mr. McDonald will receive in consideration
for his services a consulting fee of $2,230,000, to be paid over the term of the
agreement with an initial payment of $669,000 on November 29, 1995, and equal
payments of $390,250 on each anniversary of such date, access to an office and
support staff and certain other benefits. See "Certain Relationships and Related
Transactions -- MME Acquisition Agreements".
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. House and Wagar
(individually, the "Executive" and collectively, the "Executives"). Mr. House's
employment agreement, which has a term of five years, provides that Mr. House
shall be employed as the Chairman of the Board, President and Chief Executive
Officer and shall be nominated as a director of the Company during such term.
The agreement provides for a base salary of $935,700, an annual incentive bonus
of up to $776,700, based on the achievement of certain performance standards
established by the Compensation Committee, and eligibility for other benefits
normally found in executive employment agreements. The employment agreement for
Mr. Wagar provides for a base salary of $350,000 and for an annual incentive and
performance bonus of up to 75% of base salary in addition to employee benefits
similar to those provided in Mr. House's agreement. Each of the employment
agreements is automatically extended for an additional year on the anniversary
thereof unless the Company shall give prior notice of non-extension.
The Executives are entitled to certain compensation upon termination of
their employment agreement prior to its expiration. If the Company terminates
the agreement for "Cause" (as defined) or if the Executive terminates without
"Good Reason" (as defined), the Executive will receive a lump sum payment of six
months base salary (12 months in the case of Mr. House) plus certain employment
benefits. If the agreement terminates due to the Executive's death, disability
or retirement, the Executive will receive a lump sum payment of six months base
salary (12 months in the case of Mr. House), accrued bonus and immediate vesting
of all stock options. If the Executive terminates the agreement for "Good
Reason" and no "Change in Control" (as defined) of the Company has occurred, the
Executive will receive continued salary and bonus payments for three years (or,
if greater, for the remainder of the contract term in the case of Mr. House),
continued participation in employee benefit plans for such period and immediate
vesting of all stock options. If the Company terminates the agreement without
Cause after a Change in Control or if the Executive terminates after a Change in
Control for Good Reason, the Executive shall receive a lump sum payment equal to
three times the Executive's base salary and bonus at the time of termination,
continued benefits for a term of three years and immediate vesting of all stock
options. The agreements provide that any payment by the Company to the Executive
which is subject to the excise tax imposed by Section 4999 of the Code shall be
"grossed up" such that the Executive retains an amount of the "gross up" payment
equal to the excise tax imposed on the original payment.
62
<PAGE> 65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
stock ownership of the Company as of March 1, 1997: (i) each director and Named
Executive Officer of the Company, (ii) all directors and executive officers as a
group, and (iii) each stockholder known by the Company to be the beneficial
owner of more than 5% of the outstanding MedPartners Common Stock. Except as
otherwise indicated, each person or entity listed below has sole voting and
investment power with respect to all shares shown to be beneficially owned by
him or it except to the extent such power is shared by a spouse under applicable
law.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
MEDPARTNERS %
NAME OF BENEFICIAL OWNER POSITION HELD COMMON STOCK OWNED
------------------------ ------------- ------------ -----
<S> <C> <C> <C>
Larry R. House....................... Chairman of the Board, President and
Chief Executive Officer 4,820,522(1) 2.76%
Mark L. Wagar........................ President -- Western Operations 331,005(2) *
James G. Connelly, III............... President -- Caremark 649,145(3) *
Kristen E. Gibney.................... Vice President -- Caremark 19,633(4) *
Michele J. Hooper.................... Vice President -- Caremark 267,584(5) *
Roger L. Headrick.................... Director 91,938(6) *
Thomas W. Hodson..................... Director 584,046(7) *
Harry M. Jansen Kraemer, Jr.......... Director 5,565(8) *
Richard J. Kramer.................... Director 1,876,974(9) *
Rosalio J. Lopez, M.D................ Director 120,069(10) *
Ted H. McCourtney.................... Director 63,841(11) *
John S. McDonald, J.D................ Director 310,281(12) *
Walter T. Mullikin, M.D.............. Director 439,424(13) *
Charles W. Newhall, III.............. Director 1,509,000(14) *
C. A. Lance Piccolo.................. Director 1,427,519(15) *
Richard M. Scrushy................... Director 1,927,500(16) 1.13%
Larry D. Striplin, Jr................ Director 110,100(17) *
All executive officers & directors as
a group (23 persons)............... 15,925,703(18) 8.95%
</TABLE>
- ---------------
* Less than one percent.
(1) Includes options to purchase 3,653,000 shares.
(2) Includes options to purchase 328,000 shares.
(3) Includes options to purchase 610,465 shares.
(4) Includes no options.
(5) Includes options to purchase 213,170 shares.
(6) Includes options to purchase 59,208 shares, and 1,210 shares held by
spouse.
(7) Includes options to purchase 5,000 shares, and 6,142 shares held by the
Hodson Foundation.
(8) Includes options to purchase 5,000 shares, and 50 shares held by spouse.
(9) Includes options to purchase 9,000 shares, and 1,867,674 shares held by
DCNHS -- West Partnership, L.P. ("DCNHS"). Mr. Kramer is the President and
Chief Executive Officer of Catholic Healthcare West, which is the sole
general partner of DCNHS. Mr. Kramer disclaims beneficial ownership of the
shares held by DCNHS.
(10) Includes options to purchase 31,000 shares, and 81,293 shares held in trust
for the benefit of Dr. Lopez and members of his family.
(11) Includes options to purchase 9,000 shares.
(12) Includes options to purchase 9,000 shares, and 301,281 shares held by
certain trusts for the benefit of Mr. McDonald.
(13) Includes options to purchase 9,000 shares, and 430,424 shares held by the
Mullikin Family Trust U/D/T, dated February 10, 1976, for the benefit of
Dr. Mullikin and members of his family.
63
<PAGE> 66
(14) Includes options to purchase 9,000 shares, and 1,500,000 shares held by New
Enterprise Associates VI, Limited Partnership ("NEA"). Mr. Newhall is a
general partner of NEA Partners VI, Limited Partnership, which is the
general partner of NEA. Mr. Newhall disclaims beneficial ownership of the
shares held by NEA.
(15) Includes options to purchase 1,317,126 shares.
(16) Includes options to purchase 29,000 shares, 250,000 shares held in trust
for minor children, and 1,098,500 shares held by HEALTHSOUTH Rehabilitation
Corporation ("HEALTHSOUTH"). Mr. Scrushy is Chairman of the Board,
President and Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy disclaims
beneficial ownership of the shares held by HEALTHSOUTH.
(17) Includes options to purchase 13,000 shares.
(18) Includes options to purchase 7,055,599 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
MME ACQUISITION AGREEMENTS
Termination Agreements. In November 1995 in connection with the MME
Acquisition, the Company and each of Dr. Walter T. Mullikin, M.D. and John S.
McDonald, J.D., entered into a Termination Agreement that terminated their
previous employment agreements with MME, in consideration of which they
received, or shall receive, a lump sum payment of $1,064,000, in the case of Dr.
Mullikin, and $796,000 in the case of Mr. McDonald, continuation of certain
fringe benefits and perquisites for 36 months, payments from the Company and a
trust set up by the Company to fund the remainder of MME's pension obligations
to Dr. Mullikin or to Dr. Mullikin's spouse, should she survive him, and Mr.
McDonald, payment of all health and medical care (including prescriptions) for
Dr. Mullikin and his spouse and Mr. McDonald for the remainder of their lives
through a Company-sponsored health insurance plan, a death payment benefit to be
paid to Dr. Mullikin's designated beneficiary or estate of $2,700,000, and
certain other benefits.
Consulting Agreements. In November 1995, the Company and each of Dr.
Mullikin and Mr. McDonald entered into five-year Consulting Agreements whereby
they will receive in consideration for their services: consulting fees of
$2,480,000 to Dr. Mullikin, to be paid over the term of the agreement with an
initial payment of $744,000 on November 29, 1995 and equal payments of $434,000
on each anniversary of such date, and $2,230,000 to Mr. McDonald, to be paid
over the term of the agreement with an initial payment of $669,000 on November
29, 1995 and equal payments of $390,250 on each anniversary thereof, access to
an office and support staff and certain other benefits.
CAREMARK ACQUISITION AGREEMENTS
Termination Agreements. In September 1996 in connection with the Caremark
Acquisition, the employment of Messrs. Piccolo and Hodson was terminated,
entitling them to severance payments of $2,805,426 and $1,052,138, respectively,
and certain other benefits provided in their severance agreements. See
"Executive Compensation and Other Information -- Compensation Committee
Interlocks and Insider Participation".
Consulting Agreements. In September 1996, the Company and each of Messrs.
Piccolo and Hodson, non-directors of the Company, entered into a consulting
agreement (the "Piccolo Agreement" and "Hodson Agreement", respectively). The
term of the Piccolo Agreement is ten years, unless terminated sooner. Over the
course of such ten-year period, Mr. Piccolo will be paid consulting fees
totaling approximately $5.4 million. The "gross up" provisions of that severance
agreement will apply to payments made pursuant to the Piccolo Agreement in the
event such consulting payments are determined to be "excess parachute" payments.
Mr. Piccolo or his spouse will be eligible to participate in all health and
medical employee benefit plans and programs available, from time to time, to
employees of the Company and Caremark until he reaches the age of 65. After age
65, Mr. Piccolo and his spouse will be provided with a prescription drug program
comparable to that provided Caremark employees through Caremark's prescription
drug benefit program. Mr. Piccolo will be provided with an adequate office and
secretarial support, as well as reimbursement of reasonable expenses, and will
be subject to certain non-compete and confidentiality restrictions.
64
<PAGE> 67
The term of the Hodson Agreement is one year, unless terminated sooner.
Over the term, Mr. Hodson will be paid consulting fees of $318,856. The Hodson
Agreement may be extended on the same terms for an additional one-year period.
The "gross up" provisions of that severance agreement will apply to payments
made pursuant to the Hodson Agreement in the event such consulting payments are
determined to be "excess parachute" payments.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
1. Financial Statements.
The consolidated financial statements of the Company and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of the
Annual Report on Form 10-K, which listing is hereby incorporated herein by
reference.
2. Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Commission have been omitted because they are not required
under the related instructions, or are inapplicable, or because the information
has been provided in the consolidated financial statement or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item 14(c)
of this Annual Report on Form 10-K, which is hereby incorporated herein by
reference.
(B) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed during the fourth quarter of
1996.
(a) Current Report on Form 8-K filed October 29, 1996 reporting the
agreement with Integrated Health Services, Inc. related to the settlement
of the Coran litigation.
(b) Current Report on Form 8-K filed December 5, 1996 reporting the
updating of certain information about the Company as a result of
acquisitions during 1996.
(c) Current Report on Form 8-K filed December 6, 1996 reporting the
acquisition of Drs. Sheer, Ahearn and Associates, P.A. and Cardinal
Healthcare, P.A. and the earnings of the Company for October, 1996.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
(2)-1 -- Amended and Restated Agreement to Purchase Assets, dated as
of March 11, 1996, as amended by Amendment No. 1 dated June
28, 1996, by and among MedPartners/Mullikin, Inc.,
MedPartners, Inc. and New Management, filed as Exhibit (2)-2
to the Company's Registration Statement on Form S-4
(Registration No. 333-4348), is hereby incorporated herein
by reference.
(2)-2 -- Plan and Agreement of Merger, dated as of May 13, 1996,
among MedPartners/Mullikin, Inc., PPM Merger Corporation and
Caremark International, Inc., filed as Exhibit (2)-1 to the
Company's Registration Statement on Form S-4 (Registration
No. 333-09767), is hereby incorporated herein by reference.
(2)-3 -- Amended and Restated Plan of Agreement of Merger, dated as
of October 24, 1996, among MedPartners, Inc. and Cardinal
HealthCare, P.A.
</TABLE>
65
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
(2)-4 -- Plan and Agreement of Merger, dated as of November 20, 1996,
among MedPartners, Inc., SA Merger Corporation and Drs.
Sheer Ahearn & Associates, P.A.
(3)-1 -- MedPartners, Inc. Third Restated Certificate of
Incorporation.
(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 Plan, 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.
(4)-3 -- Amendment No. 2 to the Rights Plan 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.
(10)-1 -- Consulting Agreement, dated as of August 7, 1996, by and
among Caremark International Inc., MedPartners, Inc. and
C.A. Lance Piccolo, filed as Exhibit (10)-1 to the Company's
Registration Statement on Form S-4 (Registration No.
333-09767), is hereby incorporated herein by reference.
(10)-2 -- Consulting Agreement, dated as of August 7, 1996, by and
among Caremark International Inc., MedPartners, Inc. and
Thomas W. Hodson, filed as Exhibit (10)-2 to the Company's
Registration Statement on Form S-4 (Registration No.
333-09767), is hereby incorporated herein by reference.
(10)-3 -- Consulting Agreement, dated as of November 29, 1995, by and
between MedPartners, Inc. and Walter T. Mullikin, M.D.,
filed as Exhibit (10)-1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-4 -- Termination Agreement, dated as of November 29, 1995, by and
between MedPartners/Mullikin, Inc. and Walter T. Mullikin,
filed as Exhibit (10)-2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-5 -- Consulting Agreement, dated as of November 29, 1995, by and
between MedPartners/Mullikin, Inc. and John S. McDonald,
filed as Exhibit (10)-3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-6 -- Termination Agreement, dated as of November 29, 1995, by and
between MedPartners/Mullikin, Inc. and John S. McDonald,
filed as Exhibit (10)-4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-7 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Larry R. House, filed as Exhibit
(10)-7 to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
(10)-8 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Mark L. Wagar, filed as Exhibit (10)-8
to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
(10)-9 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Harold O. Knight, Jr., filed as
Exhibit (10)-9 to the Company's Registration Statement on
Form S-1 (Registration No. 333-12465), is hereby
incorporated herein by reference.
(10)-10 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Tracy P. Thrasher, filed as Exhibit
(10)-10 to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
(10)-11 -- Credit Agreement, dated September 5, 1996, by and among
MedPartners, Inc., NationsBank, National Association
(South), as administrative agent for the Lenders, The First
National Bank of Chicago, as Documentation Agent for the
Lenders, and the Lenders thereto, filed as Exhibit (10)-17
to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
</TABLE>
66
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
(10)-12 -- Amendment No. 1 to Credit Agreement and Consent, dated
September 5, 1996, by and among MedPartners, Inc.,
NationsBank, National Association (South), as administrative
agent for the Lenders, The First National Bank of Chicago,
as Documentation Agent for the Lenders, and the Lenders
thereto, filed as Exhibit (10)-18 to the Company's
Registration Statement on Form S-1 (Registration No.
333-12465), is hereby incorporated herein by reference.
(10)-13 -- MedPartners/Mullikin, Inc. 1993 Stock Option Plan, filed as
Exhibit (4)-1 to the Company's Registration Statement on
Form S-8 (Registration No. 333-00234), is hereby
incorporated herein by reference.
(10)-14 -- MedPartners/Mullikin, Inc. 1995 Stock Option Plan, as
amended, filed as Exhibit (4)-2 to the Company's
Registration Statement on Form S-4 (Registration No.
333-00774), is hereby incorporated herein by reference.
(10)-15 -- MedPartners Incentive Compensation Plan, filed as Exhibit
(4)-2 to the Company's Registration Statement on Form S-8
(Registration No. 333-11875), is hereby incorporated herein
by reference.
(10)-16 -- Caremark International Inc. 1992 Stock Option Plan for
Non-Employee Directors, filed as Exhibit (4)-2 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-14163), is hereby incorporated herein by reference.
(10)-17 -- MedPartners 1997 Long Term Incentive Compensation Plan,
dated as of February 25, 1997.
(11) -- Statement re: Earnings per share.
(21) -- Subsidiaries of MedPartners, Inc.
(23) -- Consent of Ernst & Young LLP.
(27) -- Financial Data Schedule (for SEC use only)
</TABLE>
67
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDPARTNERS, INC.
By /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
Chairman, President
and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ S. LARRY R. HOUSE Chairman of the Board, March 28, 1997
- ----------------------------------------------------- President and Chief
Larry R. House Executive Officer and
Director
/s/ HAROLD O. KNIGHT, JR. Executive Vice President and March 28, 1997
- ----------------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr.
/s/ RICHARD M. SCRUSHY Director March 28, 1997
- -----------------------------------------------------
Richard M. Scrushy
/s/ LARRY D. STRIPLIN, JR. Director March 28, 1997
- -----------------------------------------------------
Larry D. Striplin, Jr.
/s/ CHARLES W. NEWHALL, III Director March 28, 1997
- -----------------------------------------------------
Charles W. Newhall, III
/s/ TED H. MCCOURTNEY Director March 28, 1997
- -----------------------------------------------------
Ted H. McCourtney
/s/ WALTER T. MULLIKIN, M.D. Director March 28, 1997
- -----------------------------------------------------
Walter T. Mullikin, M.D.
/s/ JOHN S. MCDONALD, J.D. Director March 28, 1997
- -----------------------------------------------------
John S. McDonald, J.D.
/s/ RICHARD J. KRAMER Director March 28, 1997
- -----------------------------------------------------
Richard J. Kramer
/s/ ROSALIO J. LOPEZ, M.D. Director March 28, 1997
- -----------------------------------------------------
Rosalio J. Lopez, M.D.
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ C.A. LANCE PICCOLO Director March 28, 1997
- -----------------------------------------------------
C.A. Lance Piccolo
/s/ THOMAS W. HODSON Director March 28, 1997
- -----------------------------------------------------
Thomas W. Hodson
/s/ ROGER L. HEADRICK Director March 28, 1997
- -----------------------------------------------------
Roger L. Headrick
/s/ HARRY M. JANSEN KRAEMER, JR. Director March 28, 1997
- -----------------------------------------------------
Harry M. Jansen Kraemer, Jr.
</TABLE>
69
<PAGE> 1
EXHIBIT(2)-3
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
DATED AS OF OCTOBER 24TH, 1996
BY AND BETWEEN
MEDPARTNERS, INC.
AND
CARDINAL HEALTHCARE, P.A.
<PAGE> 2
TABLE OF CONTENTS
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
BY AND BETWEEN
MEDPARTNERS, INC.
AND
CARDINAL HEALTHCARE, P.A.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Parties.................................................................... A-5
Recitals................................................................... A-5
Section 1. THE MERGER.................................................. A-5
1.1 The Merger.................................................. A-5
1.2 The Closing................................................. A-5
1.3 Effective Time.............................................. A-6
1.4 Effect of the Merger........................................ A-6
Section 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES...................... A-6
2.1 Effect on Capital Stock..................................... A-6
2.2 Exchange of Certificates.................................... A-7
2.3 Certificate of Incorporation of Surviving Corporation....... A-9
2.4 By-laws of the Surviving Corporation........................ A-9
2.5 Directors and Officers of the Surviving Corporation......... A-9
2.6 Assets, Liabilities, Reserves and Accounts.................. A-9
2.7 Corporate Acts of Cardinal.................................. A-9
Section 3. REPRESENTATIONS AND WARRANTIES OF CARDINAL.................. A-9
3.1 Organization, Existence and Good Standing................... A-9
3.2 Cardinal Capital Stock...................................... A-10
3.3 Subsidiaries................................................ A-10
3.4 Foreign Qualifications...................................... A-10
3.5 Power and Authority......................................... A-10
3.6 Cardinal Financial Information.............................. A-10
3.7 Contracts, etc.............................................. A-11
3.8 Properties and Assets....................................... A-11
3.9 Legal Proceedings........................................... A-11
3.10 Subsequent Events........................................... A-11
3.11 Accounts Receivable......................................... A-12
3.12 Tax Returns................................................. A-12
3.13 Employee Benefit Plans; Employment Matters.................. A-12
3.14 Compliance with Laws in General............................. A-13
3.15 Regulatory Approvals........................................ A-13
3.16 Commissions and Fees........................................ A-13
3.17 Retirement or Re-Acquisition of MedPartners Common Stock.... A-13
3.18 Disposition of Assets of Surviving Corporation.............. A-13
3.19 Vote Required............................................... A-13
3.20 No Untrue Representations................................... A-13
3.21 Cardinal Shareholder Investment Qualification............... A-13
Section 4. REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS............... A-14
4.1 Organization, Existence and Good Standing................... A-14
4.2 MedPartners Capitalization.................................. A-14
4.3 MedPartners Common Stock.................................... A-14
</TABLE>
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<TABLE>
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<S> <C> <C> <C>
4.4 Subsidiaries and Affiliated Entities........................ A-14
4.5 Organization, Existence and Good Standing of MedPartners
Subsidiaries and MedPartners Professional Corporations...... A-15
4.6 Foreign Qualifications...................................... A-15
4.7 Power and Authority......................................... A-15
4.8 MedPartners Public Information.............................. A-15
4.9 Legal Proceedings........................................... A-16
4.10 Subsequent Events........................................... A-16
4.11 Compliance with Laws in General............................. A-16
4.12 Regulatory Approvals........................................ A-16
4.13 Investment Intent........................................... A-17
4.14 Commissions and Fees........................................ A-17
4.15 Retirement or Re-Acquisition of MedPartners Common Stock.... A-17
4.16 Disposition of Assets of Surviving Corporation.............. A-17
4.17 No Untrue Representations................................... A-17
Section 5. ACCESS TO INFORMATION AND DOCUMENTS......................... A-17
5.1 Access to Information....................................... A-17
5.2 Return of Records........................................... A-18
5.3 Effect of Access............................................ A-18
Section 6. COVENANTS................................................... A-18
6.1 Preservation of Business.................................... A-18
6.2 Material Transactions....................................... A-18
6.3 Meeting of Cardinal Shareholders............................ A-19
6.4 Securities Matters.......................................... A-19
6.5 Exemption from State Takeover Laws.......................... A-20
6.6 Public Disclosures.......................................... A-20
6.7 Resignation of Cardinal Directors........................... A-20
6.8 Practice Integration........................................ A-20
6.9 Notice of Subsequent Events................................. A-20
6.10 No Solicitations............................................ A-20
6.11 Other Actions............................................... A-20
6.12 Cardinal Conversion......................................... A-21
6.13 Accounting Methods.......................................... A-21
6.14 Pooling and Tax-Free Reorganization Treatment............... A-21
6.15 Affiliate and Pooling Agreements............................ A-21
6.16 Cooperation................................................. A-21
6.17 Publication of Combined Results............................. A-21
6.18 Transfer of Cardinal Assets................................. A-22
6.19 Stock Purchase Plan......................................... A-22
6.20 MedPartners Employment...................................... A-22
6.21 Spin-Off Subsidiary......................................... A-22
6.22 Clinic Services Agreement................................... A-22
6.23 Employee Benefit Plans...................................... A-22
Section 7. TERMINATION, AMENDMENT AND WAIVER........................... A-23
7.1 Termination................................................. A-23
7.2 Effect of Termination....................................... A-24
7.3 Amendment................................................... A-24
7.4 Extension; Waiver........................................... A-24
7.5 Procedure for Termination, Amendment, Extension or Waiver... A-24
7.6 Expenses.................................................... A-24
</TABLE>
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<TABLE>
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Section 8. CONDITIONS TO CLOSING....................................... A-25
8.1 Mutual Conditions........................................... A-25
8.2 Conditions to Obligations of MedPartners.................... A-25
8.3 Conditions to Obligations of Cardinal....................... A-26
Section 9. MISCELLANEOUS............................................... A-27
9.1 Nonsurvival of Representations and Warranties............... A-27
9.2 Notices..................................................... A-27
9.3 Further Assurances.......................................... A-28
9.4 Indemnification............................................. A-28
9.5 Governing Law............................................... A-28
9.6 "Including"................................................. A-28
9.7 "Knowledge"................................................. A-28
9.8 "Material adverse change" or "material adverse effect"...... A-28
9.9 "Hazardous Materials"....................................... A-28
9.10 Environmental Laws.......................................... A-29
9.11 Captions.................................................... A-29
9.12 Integration of Exhibits..................................... A-29
9.13 Entire Agreement............................................ A-29
9.14 Counterparts................................................ A-29
9.15 Binding Effect.............................................. A-29
9.16 No Rule of Construction..................................... A-29
Testimonium................................................................ A-29
Signatures................................................................. A-29
</TABLE>
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<PAGE> 5
AMENDED AND RESTATED
PLAN AND AGREEMENT OF MERGER
AMENDED AND RESTATED PLAN AND AGREEMENT OF MERGER ("Plan of Merger"), made
and entered into as of the 24th day of October, 1996, by and between
MEDPARTNERS, INC. a Delaware corporation ("MedPartners"), and CARDINAL
HEALTHCARE, P.A., a North Carolina professional association ("Cardinal")
(Cardinal and MedPartners being sometimes collectively referred to herein as the
"Constituent Corporations").
WITNESSETH:
WHEREAS, the respective Boards of Directors of MedPartners and Cardinal
have approved the merger of Cardinal with and into MedPartners (the "Merger"),
upon the terms and conditions set forth in this Plan of Merger, amended and
restated as set forth herein, whereby each share of Common Stock, no par value
per share, of Cardinal (the "Cardinal Common Stock"), not owned directly or
indirectly by Cardinal, except Dissenting Shares (as herein defined), will be
converted into the right to receive the Merger Consideration (as herein defined)
(the Cardinal Common Stock may be sometimes hereinafter referred to as the
"Cardinal Shares");
WHEREAS, each of MedPartners and Cardinal desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, immediately prior to the Merger, certain of Cardinal's assets and
liabilities are to be transferred to a wholly-owned subsidiary of Cardinal (the
"Spin-Off Subsidiary"), including physician employment agreements, patient
records, Medicare employer identification number, pension, profit sharing and
welfare benefit plans, provider contracts, securities and certain obligations to
pay expenses, and the shares of the Spin-Off Subsidiary are to be distributed to
Cardinal's shareholders by dividend.
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1.
THE MERGER.
1.1 The Merger. Upon the terms and conditions set forth in this Plan of
Merger, and in accordance with the General Corporation Law of the State of
Delaware (the "DGCL") and the North Carolina Business Corporation Act (the
"NCBCA") Cardinal shall be merged with and into MedPartners at the Effective
Time (as defined in Section 1.3). Following the Effective Time, the separate
corporate existence of Cardinal shall cease and MedPartners shall continue as
the surviving corporation (the "Surviving Corporation") as a business
corporation incorporated under the laws of the State of Delaware under the name
MedPartners, Inc. and shall succeed to and assume all the rights and obligations
of Cardinal and MedPartners in accordance with the DGCL and the NCBCA.
1.2 The Closing. The closing of the Merger (the "Closing") will take place
at 10:00 a.m. Central Time on a date to be specified by the parties (the
"Closing Date"), which (subject to satisfaction or waiver of the conditions set
forth in Sections 8.2 and 8.3) shall be no later than the second business day
after satisfaction of the conditions set forth in Section 8.1 (other than
Section 8.1(a)), but in no event later than November 30, 1996, at the offices of
Alston & Bird, Atlanta, Georgia, unless another date or place is agreed to in
writing by the parties hereto.
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1.3 Effective Time. Subject to the provisions of this Plan of Merger,
MedPartners shall file a Certificate of Merger (the "Certificate of Merger")
executed by MedPartners in accordance with the relevant provisions of the DGCL
and MedPartners and Cardinal shall file Articles of Merger (the "Articles of
Merger") executed by MedPartners and Cardinal in accordance with the relevant
provisions of the NCBCA and shall make all other filings or recordings required
under the DGCL and the NCBCA and as soon as practicable on or after the Closing
Date. The Merger shall become effective at such time as the Certificate of
Merger is duly filed with the Secretary of State of the State of Delaware and
the Articles of Merger is duly filed with the Secretary of State of North
Carolina, or at such other time as MedPartners and Cardinal shall agree should
be specified in the respective Delaware Certificate of Merger and the Articles
of Merger (the "Effective Time").
1.4 Effect of the Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL and Section 55-11-06 of the NCBCA.
SECTION 2.
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES.
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of Cardinal
Common Stock:
(a) Cancellation of Treasury Stock. Each share of Cardinal Common
Stock that is owned by Cardinal or by any subsidiary of Cardinal shall
automatically be canceled and retired and shall cease to exist, and none of
the Common Stock, par value $.001 per share, of MedPartners ("MedPartners
Common Stock"), cash or other consideration shall be delivered in exchange
therefor.
(b) Conversion of Cardinal Shares. In the Merger, all of the Cardinal
Shares (other than Dissenting Shares and those shares cancelled pursuant to
Section 2.1 (a)) shall be converted into the right to receive that number
of shares of MedPartners Common Stock equal to the Merger Consideration (as
defined herein). All such shares of MedPartners Common Stock shall be fully
paid and nonassessable and are hereinafter sometimes referred to as the
"MedPartners Shares". Upon such conversion, all such Cardinal Shares shall
be canceled and cease to exist, and each holder thereof shall cease to have
any rights with respect thereto other than the right to receive MedPartners
Shares issued in exchange therefor on the terms provided herein.
"Merger Consideration" means the sum of (i) the Closing Date Share
Amount and (ii) the amount, if any, by which the Registration Date Share
Amount exceeds the Closing Date Share Amount (such difference, if any,
being referred to herein as the "Excess Shares"). "Closing Date Share
Amount" means that number of MedPartners Shares (rounded to the nearest
whole share) equal to $43,000,000 divided by the lesser of $23 or the
Closing Date Trading Price. "Registration Date Share Amount" means that
number of MedPartners Shares (rounded to the nearest whole share) equal to
$43,000,000 divided by the lesser of $23 or the Registration Date Trading
Price. "Closing Date Trading Price" means the average of the last reported
sale prices per share of the MedPartners Common Stock for the 10
consecutive trading days on which such shares are actually traded on the
New York Stock Exchange, Inc. (the "NYSE") ending at the close of trading
on the second trading day immediately preceding the Closing Date.
"Registration Date Trading Price" means the average of the last reported
sale prices per share of the MedPartners Common Stock for the 10
consecutive trading days on which such shares are actually traded on the
NYSE ending at the close of trading on the second trading day immediately
preceding the date on which the Shelf Registration, as defined in Section
6.4(f) hereof, is declared effective (the "Registration Effective Date").
(c) Dissenting Shares. Notwithstanding anything in this Plan of
Merger to the contrary, Cardinal Shares outstanding immediately prior to
the Effective Time held by a holder (if any) who is entitled to, and who
properly dissents in accordance with Article 13 of the NCBCA ("Dissenting
Shares") shall not be converted into a right to receive the Merger
Consideration and any cash in lieu of fractional shares of MedPartners
Common Stock unless such holder fails to perfect or otherwise loses such
holder's right to
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appraisal, if any. If, after the Effective Time , such holder fails to
perfect or loses any such right to appraisal, such shares shall be treated
as if they had been converted as of the Effective Time of the Merger into
the right to receive the Merger Consideration pursuant to Section 2.1(c)
and the cash in lieu of fractional shares of MedPartners Common Stock
specified in Section 2.2(e).
(d) Anti-Dilution Provisions. If after the date hereof and prior to
the date of effectiveness of the Shelf Registration, MedPartners shall have
declared a stock split (including a reverse split) of MedPartners Common
Stock or a dividend payable in MedPartners Common Stock, or any other
distribution of securities or dividend (in cash or otherwise) to holders of
MedPartners Common Stock with respect to their MedPartners Common Stock
(including without limitation such a distribution or dividend made in
connection with a recapitalization, reclassification, merger,
consolidation, reorganization or similar transaction) then the Merger
Consideration shall be appropriately adjusted to reflect such stock split,
dividend or other distribution of securities.
2.2 Exchange of Certificates. (a) Exchange Agent. Upon Cardinal's written
direction, MedPartners shall use its best efforts to arrange for delivery of all
MedPartners shares that are issuable as of the Effective Time pursuant to the
Merger to former Cardinal shareholders at Cardinal's address as provided in
Section 9.2 hereof. Such written direction shall be provided one day prior to
Closing and shall include the names of all such holders and numbers of shares to
be included in the certificate or certificates for each such holder. Shares
shall be placed into the custody of such courier no later than close of business
no later than the second business day following the Closing Date, for delivery
to Cardinal on the third business day following the Closing Date. In the event
that Cardinal does not provide the directions described above in this paragraph,
prior to the Effective Time, MedPartners shall enter into an agreement with
First Chicago Trust of New York, New York, New York (the "Exchange Agent"),
which provides that MedPartners shall deposit with the Exchange Agent as of the
Effective Time, for the benefit of the holders of Cardinal Shares, for exchange
in accordance with this Section 2, through the Exchange Agent, (i) certificates
representing the shares of MedPartners Common Stock in the Closing Date Share
Amount pursuant to Section 2.1 and (ii) cash in an amount equal to the aggregate
amount required to be paid in lieu of fractional interests of MedPartners Common
Stock pursuant to Section 2.2 (such shares of MedPartners Common Stock, together
with any dividends or distributions with respect thereto with a record date
after the Effective Time, and together with the cash referred to in clause (ii)
of this Section 2.2(a), being hereinafter referred to as the "Exchange Fund") in
exchange for outstanding Cardinal Shares. Excess Shares if any, shall be
issuable on the Registration Effective Date and shall be sent to former Cardinal
Shareholders entitled to such shares by overnight courier at the notice address
for Cardinal provided in Section 9 hereof.
(b) Exchange Procedures. As soon as reasonably practicable, but no later
than ten business days, after the Effective Time, MedPartners shall cause the
Exchange Agent to mail to each holder of record of a certificate or certificates
(to the extent such certificates have not already been submitted to the Exchange
Agent) which immediately prior to the Effective Time represented outstanding
Cardinal Shares (the "Certificates") whose shares were converted into the right
to receive the Merger Consideration pursuant to Section 2.1, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as MedPartners may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of MedPartners Common Stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of MedPartners Common Stock which such holder has the right to receive on
and as of the Closing Date pursuant to the provisions of this Section 2, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Cardinal Shares which is not registered in the transfer
records of Cardinal, a certificate representing the proper number of shares of
MedPartners Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes required by
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<PAGE> 8
reason of the issuance of shares of MedPartners Common Stock to a person other
than the registered holder of such Certificate or establish to the satisfaction
of MedPartners that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing shares of MedPartners
Common Stock and cash in lieu of any fractional shares of MedPartners Common
Stock as contemplated by this Section 2.2. No interest will be paid or will
accrue on any cash payable in lieu of any fractional shares of MedPartners
Common Stock. Former shareholders of record of Cardinal shall not be entitled to
vote after the Effective Time at any meeting of MedPartners stockholders unless
such holders have exchanged their Certificates for certificates representing
MedPartners Common Stock in accordance with this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to MedPartners Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of MedPartners Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.2(e) until the surrender of such Certificate
in accordance with this Section 2. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the holder
of the certificate representing whole shares of MedPartners Common Stock issued
in exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of MedPartners Common
Stock to which such holder is entitled pursuant to Section 2.2(e) and the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of MedPartners Common Stock,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of MedPartners Common Stock.
(d) No Further Ownership Rights in Cardinal Shares. All shares of
MedPartners Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Section 2 (including any cash paid pursuant
to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued (and paid) in
full satisfaction of all rights pertaining to the Cardinal Shares theretofore
represented by such Certificates. If, after the Effective Time, Certificates are
presented to the Surviving Corporation or the Exchange Agent for any reason,
they shall be canceled and exchanged as provided in this Section 2, except as
otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of MedPartners Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of MedPartners.
Notwithstanding any other provision of this Plan of Merger, each holder of
shares of Cardinal Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of MedPartners
Common Stock (after taking into account all Certificates delivered by such
holder) on and as of the Closing Date shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
MedPartners Common Stock multiplied by the lesser of the Closing Date Trading
Price or $23 as set forth in Section 2.1(b). No fractional shares or cash in
lieu thereof shall be issued in connection with amounts exceeding whole numbers
of Excess Shares, if any, determined to be issuable at the Registration
Effective Date.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to MedPartners, upon demand, and any
holders of the Certificates who have not theretofore complied with this Section
2 shall thereafter look only to MedPartners for payment of MedPartners Common
Stock, any cash in lieu of fractional shares of MedPartners Common Stock and any
dividends or distributions with respect to MedPartners Common Stock.
(g) No Liability. None of MedPartners, Cardinal or the Exchange Agent
shall be liable to any person in respect of any shares of MedPartners Common
Stock (or dividends or distributions with respect thereto) or
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<PAGE> 9
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to the end of the applicable period after the
Effective Time under escheat laws (or immediately prior to such earlier date on
which any shares of MedPartners Common Stock, any cash in lieu of fractional
shares of MedPartners Common Stock or any dividends or distributions with
respect to MedPartners Common Stock in respect of such Certificates would
otherwise escheat to or become the property of any governmental entity), any
such shares, cash, dividends or distributions in respect of such Certificates
shall, to the extent permitted by applicable law, become the property of the
Surviving Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
(i) If any certificate shall have been lost, stolen or destroyed, upon
execution by the holder of such certificate of an affidavit to the effect that
such certificate has been lost, stolen or destroyed, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed certificate the applicable
number of MedPartners Shares issuable to the former Cardinal shareholder, any
cash in lieu of fractional shares to which the former Cardinal shareholder is
entitled pursuant to Section 2.2(e) of this Agreement and any dividends or other
distributions to which the holder thereof is entitled pursuant to this
Agreement.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by MedPartners, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
MedPartners.
2.3 Certificate of Incorporation of Surviving Corporation. The Certificate
of Incorporation of MedPartners, effective immediately following the Effective
Time, shall become the Certificate of Incorporation of the Surviving Corporation
from and after the Effective Time and until thereafter amended as provided by
law.
2.4 By-laws of the Surviving Corporation. The By-laws of MedPartners shall
be the By-laws of the Surviving Corporation from and after the Effective Time
and until thereafter altered, amended or repealed in accordance with the DGCL,
the Certificate of Incorporation of the Surviving Corporation and the said By-
laws.
2.5 Directors and Officers of the Surviving Corporation. The directors and
officers of MedPartners immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation.
2.6 Assets, Liabilities, Reserves and Accounts. At the Effective Time, the
assets, liabilities, reserves and accounts of each of MedPartners and Cardinal
shall be taken up on the books of the Surviving Corporation at the amounts at
which they respectively shall be carried on the books of said corporations
immediately prior to the Effective Time, except as otherwise set forth in this
Plan of Merger and subject to such adjustments, or elimination of intercompany
items, as may be appropriate in giving effect to the Merger in accordance with
generally accepted accounting principles.
2.7 Corporate Acts of Cardinal. All corporate acts, plans, policies,
approvals and authorizations of Cardinal, its officers and agents, its
shareholders, its Board of Directors, and committees elected or appointed by the
Board of Directors, valid immediately prior to the Effective Time, shall be
those of the Surviving Corporation and shall be as effective and binding thereon
as they were with respect to Cardinal to the extent not inconsistent with the
terms of this Plan of Merger.
SECTION 3.
REPRESENTATIONS AND WARRANTIES OF CARDINAL.
Cardinal hereby represents and warrants to MedPartners as follows:
3.1 Organization, Existence and Good Standing. Cardinal is a professional
corporation duly organized, validly existing and in good standing under the laws
of the State of North Carolina. Cardinal has all necessary corporate power to
own its properties and assets and to carry on its business as presently
conducted. Cardinal
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does not, and has not within the two years immediately preceding the date of
this Plan of Merger owned, directly or indirectly, any shares of MedPartners
Common Stock.
3.2 Cardinal Capital Stock. Cardinal's authorized capital consists of
50,000 shares of Class A Common Stock, no par value per share, of which 54
shares are issued and outstanding as of September 30, 1996 and no shares are
held in treasury; 5,000 shares of Class B Cumulative Preferred Stock, no par
value per share, of which no shares are issued and outstanding and no shares are
held in treasury; and 45,000 shares of Class C Preferred Stock, no par value per
share, of which no shares are issued and outstanding and no shares are held in
treasury. All of the issued and outstanding Cardinal Shares are duly and validly
issued, fully paid and nonassessable. Except as set forth in Exhibit 3.2 to the
Disclosure Schedule delivered to MedPartners by Cardinal at the time of the
execution and delivery of this Plan of Merger (the "Cardinal Disclosure
Schedule"), there are no options, warrants, or similar rights granted by
Cardinal or outstanding securities convertible into Cardinal Common Stock, or
any other agreements to which Cardinal is a party providing for the issuance or
sale by it of any additional securities which would remain in effect after the
Effective Time. There is no liability for dividends declared or accumulated but
unpaid with respect to any of the Cardinal Shares. Cardinal has not made any
distributions to any holders of Cardinal Shares or participated in or effected
any issuance, exchange or retirement of Cardinal Shares, or otherwise changed
the equity interests of holders of Cardinal Shares in contemplation of effecting
the Merger within the two years immediately preceding the date of this Plan of
Merger. Any Cardinal Shares that Cardinal has re-acquired during the two years
immediately preceding the date of this Plan of Merger have been so re-acquired
only for purposes other than "business combinations", as such term is defined in
Accounting Principles Board Opinion No. 16, as amended ("Business
Combinations").
3.3 Subsidiaries. Except as set forth in Exhibit 3.3 to the Cardinal
Disclosure Schedule, Cardinal does not own stock in and does not control,
directly or indirectly, any other corporation, association or business
organization. Except as set forth in Exhibit 3.3 to the Cardinal Disclosure
Schedule, Cardinal does not own an equity interest in, nor does such entity
control, directly or indirectly, any other joint venture or partnership.
3.4 Foreign Qualifications. Cardinal is qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
nature or character of the property owned, leased or operated by it or the
nature of the business transacted by it makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
on its business or operations.
3.5 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, Cardinal has the corporate power to execute, deliver
and perform this Plan of Merger and all agreements and other documents executed
and delivered or to be executed and delivered by it pursuant to this Plan of
Merger, and, subject to the satisfaction of the conditions precedent set forth
herein has taken all action required by its Articles of Incorporation, By-laws
or otherwise, to authorize the execution, delivery and performance of this Plan
of Merger and such related documents. Except as set forth in Exhibit 3.5 to the
Cardinal Disclosure Schedule, the execution and delivery of this Plan of Merger
does not and, subject to the receipt of required stockholder and regulatory
approvals and any other required third-party consents or approvals, the
consummation of the Merger will not, violate any provisions of the Articles of
Incorporation or By-laws of Cardinal or any provisions of, or result in the
acceleration of any obligation under, any mortgage, lien, lease, agreement,
instrument, order, arbitration award, judgment or decree, to which Cardinal is a
party, or by which it is bound, or violate any restrictions of any kind to which
it is subject which, if violated or accelerated would have a material adverse
effect on Cardinal. The execution and delivery of this Plan of Merger has been
approved by the Board of Directors of Cardinal.
3.6 Cardinal Financial Information. Cardinal has heretofore furnished
MedPartners with a true and complete copy of the audited financial statements of
Cardinal as of and for the period ended, June 30, 1996, and such financial
statements are set forth in Exhibit 3.6 to the Cardinal Disclosure Schedule. The
financial statements, together with the notes thereto reflect all known
liabilities of Cardinal, fixed or contingent, required to be stated therein, and
present fairly the financial condition of Cardinal at said dates and the results
of operations and cash flows of Cardinal for the periods then ended MedPartners
has relied on such financial
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statements in evaluating the Merger and determining the Merger consideration.
The balance sheet of Cardinal at September 30, 1996, is herein sometimes
referred to as the "Cardinal Balance Sheet".
3.7 Contracts, etc. (a) All material contracts, leases, agreements and
arrangements to which Cardinal is a party are legally valid and binding in
accordance with their terms and in full force and effect and Cardinal has
provided MedPartners with copies of all such documents. To the knowledge of
Cardinal, all parties to such contracts, leases, agreements and arrangements
have complied with the provisions of such contracts, leases, agreements and
arrangements, and, to the knowledge of Cardinal, no party is in default
thereunder, and no event has occurred which, but for the passage of time or the
giving of notice or both, would constitute a default thereunder, except, in each
case, where the invalidity of the lease, contract, agreement or arrangement or
the default or breach thereunder or thereof would not, individually or in the
aggregate, have a material adverse effect on Cardinal.
(b) Except as set forth in Exhibit 3.7 to the Cardinal Disclosure Schedule,
no contract or agreement to which Cardinal is a party will, by its terms,
terminate as a result of the transactions contemplated hereby or require any
consent from any obligor thereto in order to remain in full force and effect
immediately after the Effective Time, except for contracts or agreements which,
if terminated, would not have a material adverse effect on Cardinal. Set forth
on Exhibit 3.7 to the Cardinal Disclosure Schedule is a list of all material
contracts to which Cardinal is a party which cannot be terminated on 90 days
notice, without cause.
(c) Except as set forth in Exhibit 3.7 to the Cardinal Disclosure Schedule,
Cardinal has not granted any right of first refusal or similar right in favor of
any third party with respect to any material portion of its properties or assets
(excluding liens described in Section 3.8) or entered into any non-competition
agreement or similar agreement restricting its ability to engage in any business
in any location.
3.8 Properties and Assets. Cardinal owns or leases all of the real and
personal property included in the Cardinal Balance Sheet (except assets recorded
under capital lease obligations and such property as has been disposed of during
the ordinary course of Cardinal's business since the date of the Cardinal
Balance Sheet), free and clear of any liens, claims, charges, exceptions or
encumbrances, except for those (i) if any, which in the aggregate are not
material and which do not materially affect continued use of such property, or
(ii) which are set forth in Exhibit 3.8 to the Cardinal Disclosure Schedule.
3.9 Legal Proceedings. Except as listed in Exhibit 3.9 to the Cardinal
Disclosure Schedule, there are no actions, suits or proceedings pending or, to
the knowledge of Cardinal, threatened against Cardinal, at law or in equity,
relating to or affecting Cardinal, including the Merger that would reasonably be
expected, individually or in the aggregate, to have a material adverse effect on
the business or assets of Cardinal. Cardinal does not know or have any
reasonable grounds to know of any justification for any such action, suit or
proceeding that would reasonably be expected, individually or in the aggregate,
to have a material adverse effect on the business or assets of Cardinal.
3.10 Subsequent Events. Except as set forth in Exhibit 3.10 to the
Cardinal Disclosure Schedule or as contemplated by this Plan of Merger, Cardinal
has not, since the date of the Cardinal Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid
or satisfied any material obligation or liability (absolute, accrued,
contingent or otherwise) other than (i) liabilities shown or reflected on
the Cardinal Balance Sheet or (ii) liabilities incurred since the date of
the Cardinal Balance Sheet in the ordinary course of business, which
discharge or satisfaction would not have a material adverse effect on
Cardinal.
(c) Increased or established any reserve for taxes or any other
liability on its books or otherwise provided therefor which would have a
material adverse effect on Cardinal, except as may have been required due
to income or operations of Cardinal since the date of the Cardinal Balance
Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of Cardinal.
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(e) Sold or transferred any of the assets material to the consolidated
business of Cardinal, canceled any material debts or claims or waived any
material rights, except in the ordinary course of business.
(f) Granted any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become payable
by Cardinal to any officer or employee, consultant or agent (other than
normal merit increases), or by means of any bonus or pension plan, contract
or other commitment, increased in a material respect the compensation of
any officer, employee, consultant or agent.
(g) Except for this Plan of Merger and any other agreement executed
and delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted
under other Sections of this Plan of Merger.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities.
3.11 Accounts Receivable. Since the date of the Cardinal Balance Sheet,
Cardinal has not changed any principle or practice with respect to the
recordation of accounts receivable or the calculation of reserves therefor, or
any material collection, discount or write-off policy or procedure. Cardinal is
in compliance with the terms and conditions of all third-party payor
arrangements relating to its accounts receivable, except to the extent that such
noncompliance would not have a material adverse effect on Cardinal.
3.12 Tax Returns. Cardinal has filed all tax returns required to be filed
by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on
Cardinal. Cardinal has made all payments shown as due on such returns. Cardinal
has not been notified that any tax returns of Cardinal are currently under audit
by the Internal Revenue Service or any state or local tax agency. No agreements
have been made by Cardinal for the extension of time or the waiver of the
statute of limitations for the assessment or payment of any federal, state or
local taxes.
3.13 Employee Benefit Plans; Employment Matters. (a) Except as set forth
in Exhibit 3.13(a) to the Cardinal Disclosure Schedule, Cardinal has neither
established nor maintains nor is obligated to make contributions to or under or
otherwise participate in (i) any bonus or other type of incentive compensation
plan, program or arrangement (whether or not set forth in a written document),
(ii) any pension, profit-sharing, retirement or other plan, program or
arrangement, or (iii) any other employee benefit plan, fund or program,
including, but not limited to, those described in Section 3(3) of ERISA. All
such plans listed in Exhibit 3.13(a) to the Cardinal Disclosure Schedule
(individually, a "Cardinal Plan" and collectively, the "Cardinal Plans") have
been operated and administered in all material respects in accordance with, as
applicable, ERISA, the Age Discrimination in Employment Act of 1967, as amended,
and the related rules and regulations adopted by those federal agencies
responsible for the administration of such laws. No act or failure to act by
Cardinal has resulted in a "prohibited transaction" (as defined in ERISA) with
respect to the Cardinal Plans that is not subject to a statutory or regulatory
exception and that could have a material adverse effect on Cardinal. No
"reportable event" (as defined in ERISA, but excluding any event for which
notice is waived under the ERISA regulations) has occurred with respect to any
of the Cardinal Plans which is subject to Title IV of ERISA. Cardinal has not
previously made, is not currently making, and is not obligated in any way to
make, any contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments Act of 1980.
(b) Except as disclosed in the Cardinal Documents or as set forth in
Exhibit 3.13(b) to the Cardinal Disclosure Schedule, Cardinal is not a party to
any oral or written (i) union, guild or collective bargaining agreement which
agreement covers employees in the United States (nor is it aware of any union
organizing activity currently being conducted in respect to any of its
employees), (ii) agreement with any executive officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this Plan of
Merger and which provides for the payment of in excess of $25,000, or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be
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increased, or the vesting of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Plan of Merger or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Plan of Merger.
3.14 Compliance with Laws in General. Except as set forth in Exhibit 3.14
to the Cardinal Disclosure Schedule, Cardinal has not received any notices of
material violations of any federal, state and local laws, regulations and
ordinances relating to its business and operations, including, without
limitation, the Occupational Safety and Health Act, the Americans with
Disabilities Act, the Medicare or applicable Medicaid statutes and regulations
and any Environmental Laws, and no notice of any pending inspection or violation
of any such law, regulation or ordinance has been received by Cardinal which, if
it were determined that a violation had occurred, would have a material adverse
effect on Cardinal.
3.15 Regulatory Approvals. Except as set forth in Exhibit 3.15 to the
Cardinal Disclosure Schedule, Cardinal holds all licenses, certificates of need
and other regulatory approvals required or necessary to be applied for or
obtained in connection with its business as presently conducted or as presently
proposed to be conducted, except where the failure to obtain such license,
certificate of need or regulatory approval would not have a material adverse
effect on Cardinal. All such licenses, certificates of need and other regulatory
approvals relating to the business, operations and facilities of Cardinal are in
full force and effect, except where any failure of such license, certificate of
need or regulatory approval to be in full force and effect would not have a
material adverse effect on Cardinal. Any and all past litigation concerning such
licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, has been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and no action (equitable, legal or
administrative), arbitration or other process is pending, or to the best
knowledge of Cardinal, threatened, which in any way challenges the validity of,
or seeks to revoke, condition or restrict any such license, certificate of need,
or regulatory approval. Subject to compliance with applicable securities laws,
the consummation of the Merger will not violate any law or restriction to which
Cardinal is subject which, if violated, would have a material adverse effect on
Cardinal.
3.16 Commissions and Fees. Except for fees payable to Shattuck Hammond
Partners pursuant to the engagement letter, dated December 20, 1995, there are
no valid claims for brokerage commissions or finder's or similar fees in
connection with the transactions contemplated by this Plan of Merger which may
be now or hereafter asserted against MedPartners resulting from any action taken
by Cardinal or its officers, directors or agents, or any of them.
3.17 Retirement or Re-Acquisition of MedPartners Common Stock. Cardinal is
not a party to any agreement the effect of which would be to require MedPartners
directly or indirectly to retire or re-acquire all or part of the shares of
MedPartners Common Stock issued pursuant to Section 2.1 hereof.
3.18 Disposition of Assets of Surviving Corporation. Cardinal is not a
party to any plan to dispose of a significant part of the assets of the
Surviving Corporation within two years after the Closing Date, other than
dispositions in the ordinary course of business of the Surviving Corporation and
dispositions intended to eliminate duplicate facilities or excess capacity.
3.19 Vote Required. The affirmative vote of the holders of a majority of
the outstanding Cardinal Shares entitled to vote thereon is the only vote of the
holders of any class or series of Cardinal capital stock necessary to approve
this Plan of Merger, the Merger and the transactions contemplated hereby.
3.20 No Untrue Representations. No representation or warranty by Cardinal
in this Plan of Merger, and no exhibit or certificate issued by Cardinal and
furnished or to be furnished to MedPartners pursuant hereto, or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact in response to the disclosure requested, or omits
or will omit to state a material fact necessary to make the statements or facts
contained therein in response to the disclosure requested not misleading in
light of all of the circumstances then prevailing.
3.21 Cardinal Shareholder Investment Qualification. More than nineteen of
Cardinal's shareholders earned more than $200,000 for each of the past two years
and are expected to earn more than $200,000 during the current year.
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SECTION 4.
REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS.
MedPartners hereby represents and warrants to Cardinal as follows:
4.1 Organization, Existence and Good Standing. MedPartners is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. MedPartners has all necessary corporate power
to own its properties and assets and to carry on its business as presently
conducted. MedPartners is not, and has not been within the two years immediately
preceding the date of this Plan of Merger, a subsidiary or division of another
corporation, nor has MedPartners within such time owned, directly or indirectly,
any Cardinal Shares.
4.2 MedPartners Capitalization. MedPartners has an authorized
capitalization of 9,500,000 shares of Preferred Stock, par value $.001 per
share, of which no shares are issued and outstanding, and no shares are held in
treasury, 500,000 shares of Series C Junior Participating Preferred Stock, par
value $.001 per share, of which no shares are issued and outstanding and no
shares are held in treasury and 200,000,000 shares of Common Stock, par value
$.001 per share, of which 146,208,305 shares were issued and outstanding at
September 13, 1996, and no shares are held in treasury. All of the issued and
outstanding shares of MedPartners Common Stock have been duly and validly issued
and are fully paid and nonassessable. Except as disclosed in the MedPartners
Documents (as herein defined), and except as described on Exhibit 4.2 to the
MedPartners Disclosure Schedule delivered to Cardinal at the time of the
execution and delivery of this Plan of Merger (the "MedPartners Disclosure
Schedule"), there are no options, warrants or similar rights granted by
MedPartners or outstanding securities convertible into MedPartners Common Stock,
or any other agreements to which MedPartners is a party providing for the
issuance or sale by it of any additional securities.
There is no liability for dividends declared or accumulated but unpaid with
respect to any shares of MedPartners Common Stock. MedPartners has not made any
distributions to any holder of MedPartners Common Stock or participated in or
effected any issuance, exchange or retirement of MedPartners Common Stock, or
otherwise changed the equity interests of holders of MedPartners Common Stock,
in contemplation of effecting the Merger within the two years immediately
preceding the date of this Plan of Merger. Any shares of MedPartners Common
Stock that MedPartners has re-acquired during the two years immediately
preceding the date of this Plan of Merger have been so re-acquired only for
purposes other than Business Combinations.
4.3 MedPartners Common Stock. On the Closing Date, MedPartners will have a
sufficient number of authorized but unissued shares of its Common Stock
available for issuance to the holders of Cardinal Shares in accordance with the
provisions of this Plan of Merger. The MedPartners Common Stock to be issued
pursuant to this Plan of Merger (i) will, when so delivered, be duly and validly
issued, fully paid and nonassessable, (ii) will be made the subject of an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), and (iii) will be listed on the NYSE, upon official
notice of issuance.
4.4 Subsidiaries and Affiliated Entities. (a) Attached as Exhibit 4.4 to
the MedPartners Disclosure Schedule is a list of all subsidiaries of MedPartners
(individually, a "MedPartners Subsidiary", and collectively, the "MedPartners
Subsidiaries") and their states of incorporation and all professional
corporations or professional associations of which MedPartners has control and
their states of incorporation ("MedPartners Professional Corporations"). Except
as set forth in Exhibit 4.4, MedPartners does not own stock in and does not
control, directly or indirectly, any other corporation, association, partnership
or business organization.
(b) Also disclosed in Exhibit 4.4 is a list of all general or limited
partnerships in which a general partner is MedPartners, a MedPartners Subsidiary
or another partnership controlled by MedPartners (individually a "MedPartners
Partnership" and collectively, the "MedPartners Partnerships"), and all limited
liability companies in which MedPartners, a MedPartners Subsidiary or a
MedPartners Partnership is a member (individually, a "MedPartners LLC" (the
MedPartners Professional Corporation and the MedPartners LLCs being collectively
called the "Other MedPartners Entities"), and their states of organization.
Except as set forth in Exhibit 4.4, neither MedPartners nor any MedPartners
Subsidiary nor any MedPartners Partnership
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owns an equity interest in, nor does such entity control, directly or
indirectly, any other joint venture, limited liability company or partnership.
4.5 Organization, Existence and Good Standing of MedPartners Subsidiaries
and MedPartners Professional Corporations. (a) Each MedPartners Subsidiary
(including MedPartners of Delaware and MAC (as defined herein)) and each
MedPartners Professional Corporation is a corporation duly organized, validly
existing and in good standing under the laws of its respective state of
incorporation. Each MedPartners Subsidiary and each MedPartners Professional
Corporation has all necessary corporate power to own its properties and assets
and to carry on its business as presently conducted.
(b) Each MedPartners Partnership that is a limited partnership is validly
formed, each MedPartners Partnership that is a general partnership has been duly
organized, and each MedPartners Partnership is in good standing under the laws
of its respective state of organization. Each MedPartners Partnership has all
necessary power to own its property and assets and to carry on its business as
presently conducted.
(c) Each MedPartners LLC is validly formed and in good standing under the
laws of its respective state of organization. Each MedPartners LLC has all
necessary power to own its property and assets and to carry on its business as
presently conducted.
4.6 Foreign Qualifications. MedPartners, each MedPartners Subsidiary and
each MedPartners LLC is qualified to do business as a foreign corporation or
foreign limited liability company and is in good standing in each jurisdiction
where the nature or character of the property owned, leased or operated by it or
the nature of the business transacted by it makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
on MedPartners.
4.7 Power and Authority. MedPartners has corporate power to execute,
deliver and perform this Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein has taken all actions required by law, its Certificate of
Incorporation, its By-laws or otherwise, to authorize the execution and delivery
of this Plan of Merger and such related documents. The execution and delivery of
this Plan of Merger does not and, subject to the receipt of required regulatory
approvals and any other required third-party consents or approvals, the
consummation of the Merger contemplated hereby will not, violate any provisions
of the Certificate of Incorporation or By-laws of MedPartners, or any provision
of, or result in the acceleration of any obligation under, any mortgage, lien,
lease, agreement, instrument, order, arbitration award, judgment or decree to
which MedPartners is a party or by which it is bound, or violate any
restrictions of any kind to which MedPartners is subject. The execution and
delivery of this Plan of Merger has been approved by the Board of Directors of
MedPartners.
4.8 MedPartners Public Information. MedPartners has heretofore furnished
Cardinal with information regarding MedPartners including its Prospectus dated
October 16, 1996 (Registration No. 333-13471) relating to shares of MedPartners
Common Stock (the "Prospectus"), its Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 ("10-K")and its Quarterly Report for the quarter
ended June 30, 1996 ("10-Q") filed with the Securities and Exchange Commission
("SEC") (as any such documents have been amended since their original filing,
the "MedPartners Documents"). As of their respective filing dates, the
MedPartners Documents did not contain any untrue statements of material facts or
omit to state material facts required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective filing dates, the MedPartners
Documents complied in all material respects with the applicable requirements of
the Securities Act and the Securities Exchange Act of 1934, as amended
("Exchange Act"), and the rules and regulations promulgated under such statutes.
The financial statements contained in the MedPartners Documents, together with
the notes thereto, have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods indicated
(except as may be indicated in the notes thereto, or, in the case of the
unaudited financial statements, as permitted by Form 10-Q), reflect all known
liabilities of MedPartners, fixed or contingent, required to be stated therein,
and present fairly the financial condition of MedPartners at said dates and the
consolidated results of operations and cash flows of MedPartners for the periods
then ended. The consolidated balance sheet of MedPartners at December 31,1995,
included in the 10-K is herein sometimes referred to as the "MedPartners Balance
Sheet".
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4.9 Legal Proceedings. There is no pending or threatened litigation,
governmental investigation, condemnation or other proceeding against or relating
to or affecting MedPartners, any MedPartners Subsidiary or any Other MedPartners
Entity or the transactions contemplated by this Plan of Merger for which
MedPartners is uninsured or which, if resolved adversely to MedPartners, any
MedPartners Subsidiary or any Other MedPartners Entity would have a material
adverse effect on MedPartners and, to the knowledge of MedPartners, no basis for
any such action exists.
4.10 Subsequent Events. Except as set forth in Exhibit 4.10 to the
MedPartners Disclosure Schedule, MedPartners (including the MedPartners
Subsidiaries and Other MedPartners Entities) has not, since the date of the
MedPartners Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid
or satisfied any material obligation or liability (absolute, accrued,
contingent or otherwise) other than (i) liabilities shown or reflected on
the MedPartners Balance Sheet or (ii) liabilities incurred since the date
of the MedPartners Balance Sheet in the ordinary course of business, which
discharge or satisfaction would not have a material adverse effect on
MedPartners.
(c) Increased or established any reserve for taxes or any other
liability on its books or otherwise provided therefor which would have a
material adverse effect on MedPartners, except as may have been required
due to income or operations of MedPartners since the date of the
MedPartners Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of
MedPartners.
(e) Sold or transferred any of the assets material to the consolidated
business of MedPartners, canceled any material debts or claims or waived
any material rights, except in the ordinary course of business.
(f) Granted any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become payable
by MedPartners to any officer or employee, consultant or agent (other than
normal merit increases), or by means of any bonus or pension plan, contract
or other commitment, increased in a material respect the compensation of
any officer, employee, consultant or agent.
(g) Except for this Plan of Merger and any other agreement executed
and delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted
under other Sections of this Plan of Merger.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon the
exercise of outstanding options under MedPartners' stock option plans or
stock options under such plans and except as set forth in Exhibit 4.10 to
the MedPartners Disclosure Schedule.
4.11 Compliance with Laws in General. None of MedPartners, any MedPartners
Subsidiary or any Other MedPartners Entity has received any notices of material
violations of any federal, state and local laws, regulations and ordinances
relating to its business and operations, including, without limitation, the
Occupational Safety and Health Act, the Americans with Disabilities Act, the
Medicare or applicable Medicaid statutes and regulations and any Environmental
Laws, and no notice of any pending inspection or violation of any such law,
regulation or ordinance has been received by MedPartners, any MedPartners
Subsidiary or any Other MedPartners Entity which, if it were determined that a
violation had occurred, would have a material adverse effect on MedPartners.
4.12 Regulatory Approvals. Except as disclosed in the MedPartners
Documents or in Exhibit 4.12 to the MedPartners Disclosure Schedule, MedPartners
and each MedPartners Subsidiary, as applicable, holds all licenses, certificates
of need and other regulatory approvals required or necessary to be applied for
or obtained in connection with its business as presently conducted or as
proposed to be conducted, except where the failure to obtain such license,
certificate of need or regulatory approval would not have a material adverse
effect on MedPartners. All such licenses, certificates of need and other
regulatory approvals relating to the
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business, operations and facilities of MedPartners and each MedPartners
Subsidiary are in full force and effect, except where any failure of such
license, certificate of need or regulatory approval to be in full force and
effect would not have a material adverse effect on MedPartners. Any and all past
litigation concerning such licenses, certificates of need and regulatory
approvals, and all claims and causes of action raised therein, has been finally
adjudicated. No such license, certificate of need or regulatory approval has
been revoked, conditioned (except as may be customary) or restricted, and no
action (equitable, legal or administrative), arbitration or other process is
pending, or to the best knowledge of MedPartners, threatened, which in any way
challenges the validity of, or seeks to revoke, condition or restrict any such
license, certificate of need, or regulatory approval. The consummation of the
Merger will not violate any law or restriction to which MedPartners is subject
which, if violated, would have a material adverse effect on MedPartners.
4.13 Investment Intent. MedPartners is acquiring the Cardinal Shares
hereunder for its own account and not with a view to the distribution or sale
thereof, and MedPartners has no understanding, agreement or arrangement to sell,
distribute, partition or otherwise transfer or assign all or any part of the
Cardinal Shares to any other person, firm or corporation.
4.14 Commissions and Fees. There are no claims for brokerage commissions,
investment bankers' fees or finder's fees in connection with the transactions
contemplated by this Plan of Merger resulting from any action taken by
MedPartners or any of its officers, Directors or agents.
4.15 Retirement or Re-Acquisition of MedPartners Common Stock. MedPartners
has not agreed directly or indirectly to retire or re-acquire all or part of the
shares of MedPartners Common Stock issued pursuant to Section 2.1 hereof.
4.16 Disposition of Assets of Surviving Corporation. MedPartners does not
intend or plan to dispose of, or to cause the Surviving Corporation to dispose
of, or to cause the Surviving Corporation to dispose of, a significant part of
the assets of the Surviving Corporation within two years after the Effective
Date, other than dispositions in the ordinary course of business of the
Surviving Corporation and dispositions intended to eliminate duplicate
facilities or excess capacity.
4.17 No Untrue Representations. No representation or warranty by
MedPartners in this Plan of Merger, and no exhibit or certificate issued by
MedPartners and furnished or to be furnished to Cardinal pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact in response to the disclosure requested,
or omits or will omit to state a material fact necessary to make the statements
or facts contained therein in response to the disclosure requested not
misleading in light of all of the circumstances then prevailing.
SECTION 5.
ACCESS TO INFORMATION AND DOCUMENTS.
5.1 Access to Information. (a) Between the date hereof and the Closing
Date, Cardinal will give to MedPartners and its counsel, accountants and other
representatives full access to all the properties, documents, contracts,
personnel files and other records and shall furnish MedPartners with copies of
such documents and with such information with respect to the affairs as
MedPartners may from time to time reasonably request. Cardinal will disclose and
make available to MedPartners and its representatives all books, contracts,
accounts, personnel records, letters of intent, papers, records, communications
with regulatory authorities and other documents relating to the business and
operations of Cardinal. In addition, Cardinal shall make available to
MedPartners all such banking, investment and financial information as shall be
necessary to allow for the efficient integration of Cardinal's banking,
investment and financial arrangements with those of MedPartners at the Effective
Time.
(b) Between the date hereof and the Closing Date, MedPartners will give to
Cardinal and its counsel, accountants and other representatives reasonable
access to all the properties, documents, contracts, personnel files and other
records and shall furnish Cardinal with copies of such documents and with such
information with respect to the affairs as Cardinal may from time to time
reasonably request. MedPartners will disclose
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and make available to Cardinal and its representatives all books, contracts,
accounts, personnel records, letters of intent, papers, records, communications
with regulatory authorities and other documents relating to the business and
operations of MedPartners. It is understood and agreed that no information or
document which is proprietary or not available to the public will be delivered
to Cardinal pursuant to this Section 5.1(b).
5.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 5 or otherwise.
5.3 Effect of Access. (a) Nothing contained in this Section 5 shall be
deemed to create any duty or responsibility on the part of either party to
investigate or evaluate the value, validity or enforceability of any contract,
lease or other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
SECTION 6.
COVENANTS.
6.1 Preservation of Business. Cardinal will use its reasonable best
efforts to preserve the business organization of Cardinal intact, to keep
available to MedPartners and the Surviving Corporation the services of the
present employees of Cardinal, and to preserve for MedPartners and the Surviving
Corporation the goodwill of the suppliers, customers and others having business
relations with Cardinal.
6.2 Material Transactions. Prior to the Effective Time, Cardinal will not
(other than as contemplated by the terms of this Plan of Merger and the related
documents, including, without limitation, the employment agreements by and
between Cardinal and the physician employees of Cardinal, and other than with
respect to transactions for which binding commitments have been entered into
prior to the date hereof and transactions described on Exhibit 6.2 to the
Cardinal Disclosure Schedule which do not vary materially from the terms set
forth on such Exhibit 6.2), without first obtaining the written consent of
MedPartners:
(a) Encumber any asset or enter into any transaction or make any
contract or commitment relating to the properties, assets and business of
Cardinal, other than in the ordinary course of business or as otherwise
disclosed herein.
(b) Enter into any employment contract which is not terminable upon
notice of 30 days or less, at will, and without penalty to Cardinal except
as provided herein.
(c) Enter into any contract or agreement (i) which cannot be performed
within three months or less, or (ii) which involves the expenditure of over
$150,000.
(d) Issue or sell, or agree to issue or sell, any shares of capital
stock or other securities of Cardinal.
(e) Make any payment or distribution to the trustee under any bonus,
pension, profit-sharing or retirement plan or incur any obligation to make
any such payment or contribution which is not in accordance with Cardinal's
usual past practice, or make any payment or contributions or incur any
obligation pursuant to or in respect of any other plan or contract or
arrangement providing for bonuses, executive incentive compensation,
pensions, deferred compensation, retirement payments, profit-sharing or the
like, establish or enter into any such plan, contract or arrangement, or
terminate any plan.
(f) Extend credit to anyone except in the ordinary course of business
consistent with prior practices.
(g) Guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with prior practices.
(h) Amend its Articles of Incorporation or By-laws.
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(i) Take any action of a character described in Section 3.10(a) to
3.10(h), inclusive.
6.3 Meeting of Cardinal Shareholders. Cardinal will take all steps
necessary in accordance with its Articles of Incorporation and By-laws to call,
give notice of, convene and hold a meeting of its shareholders (the
"Shareholders Meeting") as soon as practicable after the date of execution of
this Plan of Merger for the purpose of approving this Plan of Merger and for
such other purposes as may be necessary. Unless this Plan of Merger shall have
been validly terminated as provided herein, the Board of Directors of Cardinal
(subject to the provisions of Section 7.1(d) hereof) will (i) recommend to its
shareholders the approval of this Plan of Merger, the transactions contemplated
hereby and any other matters to be submitted to the Shareholders in connection
therewith, to the extent that such approval is required by applicable law in
order to consummate the Merger, and (ii) use its reasonable, good faith efforts
to obtain the approval by its Shareholders of this Plan of Merger and the
transactions contemplated hereby.
6.4 Securities Matters. (a) MedPartners and Cardinal shall prepare and
Cardinal shall distribute to the holders of Cardinal Shares an information
package, including an Offering Circular and Proxy Statement (collectively, the
"Information Package") designed to provide each shareholder with such
information needed about this Plan of Merger and the Merger in order to qualify
the private placement of MedPartners Shares into which the Cardinal Shares are
to be converted pursuant to this Plan of Merger for the exemption under the
Securities Act provided by Section 4(2). Cardinal shall provide MedPartners with
such information and documentation as shall be reasonably requested by
MedPartners in order to prepare the Information Package contemplated by this
Section 6.4(a).
(b) The information specifically designated as being supplied by Cardinal
for inclusion in the Information Package shall not, at the time the Information
Package is delivered to the shareholders of Cardinal, at the time of the meeting
of the Cardinal shareholders and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, not
misleading. If at any time prior to the Effective Time any event or circumstance
relating to Cardinal, or its officers or directors, should be discovered by
Cardinal which should be set forth in an amendment or a supplement to the
Information Package, Cardinal shall promptly inform MedPartners.
(c) The information supplied by MedPartners for inclusion in the
Information Package shall not, at the time the Information Package is delivered
to the shareholder of Cardinal, at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, not
misleading. If at any time prior to the Effective Time any event or circumstance
relating to MedPartners, or its officers or Directors, should be discovered by
MedPartners which should be set forth in an amendment or a supplement to the
Information Package, MedPartners shall promptly inform Cardinal and shall
promptly prepare and distribute such amendment or supplement to the Information
Package.
(d) Prior to the Closing Date, MedPartners shall cause, to the extent
required, the shares of MedPartners Common Stock to be issued pursuant to the
Merger to be registered or qualified under all applicable securities or Blue Sky
laws of each of the states and territories of the United States, and to take any
other actions which may be necessary to enable the MedPartners Common Stock to
be issued pursuant to the Merger to be distributed in each such jurisdiction.
(e) Prior to the Closing Date, MedPartners shall file a Subsequent Listing
Application with the NYSE relating to the shares of MedPartners Common Stock to
be issued in connection with the Merger, and shall cause such shares of
MedPartners Common Stock to be listed on the NYSE, upon official notice of
issuance, prior to the Closing Date.
(f) Immediately after the Closing Date, MedPartners shall file with the SEC
a Registration Statement on Form S-1, or on Form S-3 if then eligible (the
"Shelf Registration"), as contemplated in Section 3(a) of a Registration Rights
Agreement, in substantially the form attached hereto as Exhibit 6.4(f).
MedPartners shall use its reasonable best efforts to cause such Shelf
Registration to be declared effective as soon as practicable thereafter. In
connection with the Shelf Registration, Cardinal shall and shall use its best
effort to cause the
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holders of Cardinal Shares to provide all information regarding Cardinal and
such holders as MedPartners shall reasonably require in the preparation of the
Shelf Registration.
6.5 Exemption from State Takeover Laws. Cardinal shall take all reasonable
steps necessary and within its power to exempt the Merger from the requirements
of any state takeover statute or other similar state law which would prevent or
impede the consummation of the transactions contemplated hereby, by action of
Cardinal's Board of Directors.
6.6 Public Disclosures. MedPartners and Cardinal will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Plan of Merger, and shall
not issue any such press release or make any such public statement prior to such
consultation except as may be required by applicable law or requirements of the
NYSE. The parties shall issue a joint press release, mutually acceptable to
MedPartners and Cardinal, promptly upon execution and delivery of this Plan of
Merger.
6.7 Resignation of Cardinal Directors. On or prior to the Closing Date,
Cardinal shall deliver to MedPartners evidence satisfactory to MedPartners of
the resignation of the Directors of Cardinal, such resignations to be effective
on the Closing Date.
6.8 Practice Integration. MedPartners will use its best efforts to
integrate into Cardinal the 16 primary care physicians managed by a subsidiary
of MedPartners as a result of its acquisition of Pacific Physician Services,
Inc., in a method agreeable to MedPartners, Cardinal and such physicians.
6.9 Notice of Subsequent Events. Each party hereto shall notify the other
parties of any changes, additions or events of which they have knowledge which
would cause any material change in or material addition to any exhibit delivered
by the notifying party under this Plan of Merger, promptly after the occurrence
of the same. If the effect of such change or addition would, individually or in
the aggregate with the effect of changes or additions previously disclosed
pursuant to this Section 6.9, constitute a material adverse effect on the
notifying party, the non-notifying party may, within ten days after receipt of
such notice, elect to terminate this Plan of Merger. If the non-notifying party
does not give written notice of such termination within such 10-day period, the
non-notifying party shall be deemed to have consented to such change or addition
and shall not be entitled to terminate this Plan of Merger by reason thereof.
6.10 No Solicitations. Either MedPartners or Cardinal may, directly or
indirectly, furnish information and access, in response to unsolicited requests
therefor, to the same extent permitted by Section 5.1, to any corporation,
partnership, person or other entity or group, pursuant to appropriate
confidentiality agreements, and may participate in discussions and negotiate
with such corporation, partnership, person or other entity or group concerning
any proposal to acquire such party upon a merger, purchase of assets, purchase
of or tender offer for shares of its Common Stock or similar transaction (an
"Acquisition Transaction"), if the Board of Directors of MedPartners or
Cardinal, as the case may be, determines in its good faith judgment in the
exercise of its fiduciary duties or the exercise of its duties under Rule 14e-2
under the Exchange Act, after consultation with legal counsel and its financial
advisors, that such action is appropriate in furtherance of the best interest of
its stockholders. Except as set forth above, MedPartners or Cardinal shall not,
and will direct each officer, director, employee, representative and agent of
such party not to, directly or indirectly, encourage, solicit, participate in or
initiate discussions or negotiations with or provide any information to any
corporation, partnership, person or other entity or group (other than
MedPartners or an affiliate or associate or agent of MedPartners) concerning any
merger, sale of assets, sale of or tender offer for its shares or similar
transactions involving such party. Such party shall promptly notify the other
party if it shall, on or after the date hereof, have entered into a
confidentiality agreement with any third party in response to any unsolicited
request for information and access in connection with a possible Acquisition
Transaction involving such party, such notification to include the identity of
such third party and the proposed terms of such possible Acquisition
Transaction.
6.11 Other Actions. Subject to the provisions of Section 6.10 hereof, none
of Cardinal, MedPartners and the Subsidiary shall knowingly or intentionally
take any action, or omit to take any action, if such action or omission would,
or reasonably might be expected to, result in any of its representations and
warranties set forth
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herein being or becoming untrue in any material respect, or in any of the
conditions to the Merger set forth in this Plan of Merger not being satisfied,
or (unless such action is required by applicable law) which would materially
adversely affect the ability of Cardinal or MedPartners to obtain any consents
or approvals required for the consummation of the Merger without imposition of a
condition or restriction which would have a material adverse effect on the
Surviving Corporation or which would otherwise materially impair the ability of
Cardinal or MedPartners to consummate the Merger in accordance with the terms of
this Plan of Merger or materially delay such consummation.
6.12 Cardinal Conversion. Prior to the Effective Time, Cardinal and or its
shareholders shall take such action as is required to convert Cardinal to a
business corporation organized under the NCBCA. This Plan of Merger shall apply
as to such business corporation in the same manner as if such corporation were a
party hereto.
6.13 Accounting Methods. Neither MedPartners nor Cardinal shall change, in
any material respect, its methods of accounting in effect at its most recent
fiscal year end, except as required by changes in generally accepted accounting
principles as concurred by such parties' independent accountants.
6.14 Tax-Free Reorganization Treatment. Neither MedPartners nor Cardinal
shall intentionally take or cause to be taken any action, whether on or before
the Effective Time, which would disqualify the Merger as a "reorganization"
within the meaning of Section 368(a) of the Code.
6.15 Affiliate Agreements. MedPartners and Cardinal will each use their
respective reasonable, good faith efforts to cause each of their respective
Directors and executive officers and each of their respective "affiliates"
(within the meaning of Rule 145 under the Securities Act) to execute and deliver
to MedPartners as soon as practicable an agreement substantially in the form
attached hereto as Exhibit 6.15 relating to the disposition of shares of
Cardinal Common Stock and shares of MedPartners Common Stock held by such person
and the shares of MedPartners Common Stock issuable pursuant to this Plan of
Merger.
6.16 Cooperation. (a) MedPartners and Cardinal shall together, or pursuant
to an allocation of responsibility agreed to between them, (i) cooperate with
one another in determining whether any filings required to be made or consents
required to be obtained in any jurisdiction prior to the Effective Time in
connection with the consummation of the transactions contemplated hereby and
cooperate in making any such filings promptly and in seeking to obtain timely
any such consents, (ii) use their respective best efforts to cause to be lifted
any injunction prohibiting the Merger, or any part thereof, or the other
transactions contemplated hereby, and (iii) furnish to one another and to one
another's counsel all such information as may be required to effect the
foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless this
Plan of Merger shall have been validly terminated as provided herein, each of
MedPartners and Cardinal shall use all reasonable efforts (i) to take, or cause
to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party (or any subsidiaries or
affiliates of such party) with respect to the Plan of Merger and to consummate
the transactions contemplated hereby, subject to the vote of its shareholders
described above, and (ii) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any governmental entity and/or any other public or private third party which is
required to be obtained or made by such party or any of its subsidiaries or
affiliates in connection with this Plan of Merger and the transactions
contemplated hereby. Each of MedPartners and Cardinal will promptly cooperate
with and furnish information to the other in connection with any such burden
suffered by, or requirement imposed upon, either of them or any of their
subsidiaries or affiliates in connection with the foregoing.
6.17 Publication of Combined Results. MedPartners agrees that
approximately 30 days after the end of the first full calendar quarter following
the Effective Time, MedPartners shall cause publication of the combined results
of operations of MedPartners and Cardinal, provided however that such period
shall be tolled for such period as the financial statements required for the
preparation of such financial statements for such publication are not reasonably
available to MedPartners. For purposes of this Section 6.17, the term
"publication" shall have the meaning provided in SEC Accounting Series Release
No. 135.
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6.18 Transfer of Cardinal Assets. Following the Effective Time,
MedPartners will transfer the assets and liabilities of Cardinal acquired in the
Merger to the wholly-owned subsidiary of MedPartners which is to manage the
practice of Cardinal Healthcare, P.A.
6.19 Stock Purchase Plan. MedPartners will allow Cardinal IPA physicians
to participate in the MedPartners Stock Purchase Plan at such time as the plan
is adopted and instituted, provided (i) MedPartners shall have entered into a
contractual relationship with Cardinal I.P.A. for the provision of management
services and (ii) there are no legal or other restrictions that would preclude
such participation. If such participation is so precluded, MedPartners will use
its best efforts to provide a substitute program of stock purchase that is at
least as favorable to such physicians as the MedPartners Stock Purchase Program
would have been.
6.20 MedPartners Employment. The current administrative staff and
physicians of Cardinal will be given preferred consideration for positions with
MedPartners as Regional Vice President of Operations and Regional Medical
Director. Final selection of individuals from Cardinal for these positions will
be made based on numerous factors including agreement by the Cardinal Board of
Directors. MedPartners represents that there is no current Regional Medical
Director.
6.21 Spin-Off Subsidiary. (a) Immediately prior to the Effective Time and
pursuant to the terms and provisions for the Agreement and Plan of
Reorganization and Corporate Separation, in substantially the form attached
hereto as Exhibit 6.21, Cardinal shall form and duly organize the Spin-Off
Subsidiary and transfer to such subsidiary certain of Cardinal's assets and
liabilities as agreed upon by the parties, including physician employment and
independent contractor agreements, patient records, Medicare provider
number,certain pension, profit sharing, welfare benefit plans and qualified
retirement plans, all shares of Cardinal Physician Practice Management
Corporation then owned by Cardinal, professional liability insurance policies
and obligations to pay certain expenses.
(b) By letter dated October 1, 1996, James M. Poole, M.D. ("Poole")
provided Cardinal with notice of termination of his employment. Cardinal has not
yet had the opportunity to quantify the amounts, if any, which may be due to
Poole with respect to his termination. Pursuant to the Spin-Off, Cardinal will
transfer Poole's employment contract to the Spin-Off Subsidiary which shall
assume all obligations and liabilities due to Poole thereunder and shall treat
as a Practice Expense under the Clinic Services Agreement any liability incurred
with respect to Poole's equity interest, if any, in Cardinal. Furthermore, with
respect to the employment contracts of Philip Burton, M.D. ("Burton") and
Stephen Marsh, M.D. ("Marsh"), Cardinal will transfer the employment contracts
of Burton and Marsh to the SpinOff Subsidiary, and shall treat as a Practice
Expense under the Clinic Services Agreement any liability incurred with respect
to respective equity interests of Burton and Marsh, if any, in Cardinal.
6.22 Clinic Services Agreement. Prior to the Effective Time, Cardinal and
the SpinOff Subsidiary shall enter into a Clinic Services Agreement
substantially in the form of Exhibit 8.1(g) hereto.
6.23 Employee Benefit Plans. (a) MedPartners shall (i) provide coverage to
each individual who is an employee of Cardinal immediately prior to the
Effective Time and will become an employee of MedPartners as of the Effective
Time (an "Affected Employee") under MedPartners' 401(k) retirement plan (the
"MedPartners 401(k) Plan") effective immediately following the Effective Time;
(ii) make profit sharing and/or matching contributions under the MedPartners
401(k) Plan on behalf of the Affected Employees for each plan year of the
MedPartners 401(k) Plan in an amount equal to at least 3% of the compensation of
the Affected Employees or, to the extent such contributions are not made, treat
an equivalent amount of profit sharing and/or matching contributions made on
behalf of the Affected Employees under the 401(k) retirement plan maintained by
New Cardinal as MedPartners Expenses as provided in the Clinic Services
Agreement; (iii) provide coverage to each Affected Employee under the group
medical plan, group dental plan, group vision plan, group long-term disability
insurance plan, group short-term disability plan, flexible benefits plan, and
another benefit plan or arrangement maintained by MedPartners for the benefit of
its employees (collectively, the "MedPartners Welfare Plans") effective either
immediately following the Effective Time or as of the first date subsequent to
the Effective Time on which it is administratively feasible to provide such
coverage to the Affected Employees, provided that MedPartners shall ensure that
the Affected
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Employees will be eligible for group medical plan coverage, group dental plan
coverage, group short-term disability plan coverage, group long-term disability
plan coverage and flexible benefit plan coverage during any period following the
Effective Time during which the Affected Employees are not yet eligible for
coverage under the corresponding MedPartners Welfare Plan(s); (iv) recognize
accumulated service of the Affected Employees with Cardinal for purposes of
eligibility and vesting under the MedPartners 401(k) Plan and the MedPartners
Welfare Plans; and (v) waive, or cause any insurance carriers providing benefits
under the MedPartners Welfare Plans to waive, any preexisting condition
requirements under the MedPartners Welfare Plans with respect to the Affected
Employees.
(b) To the extent that the New Cardinal desires to adopt the MedPartners
401(k) Plan, MedPartners shall take all actions necessary to allow New Cardinal
to adopt the MedPartners 401(k) Plan, modified to the extent necessary or
desirable, as mutually determined acceptable by New Cardinal and MedPartners, to
reflect the manner in which New Cardinal shall participate in the MedPartners
401(k) Plan, provided that such modifications are consistent with applicable
law.
(c) To the extent that New Cardinal desires to participate in the group
medical plan, group dental plan and/or group vision plan maintained by
MedPartners (collectively, the "MedPartners Health Plans"), MedPartners shall
take all actions necessary to allow New Cardinal to participate in the
MedPartners Health Plans, provided that MedPartners shall ensure that such
participation by New Cardinal in the MedPartners Health Plans is in accordance
with the terms of the MedPartners Health Plans and applicable law.
(d) MedPartners shall allow each individual who is an employee of Cardinal
immediately prior to the Effective Time and who will become an employee of New
Cardinal as of the Effective Time (the "New Cardinal Employees") to continue to
receive reimbursements from his or her flexible spending accounts maintained
under the Cardinal Healthcare, P.A. Flexible Benefits Plan for qualifying
expenses incurred (i) prior to the Effective Time, or (ii) subsequent to the
Effective time but on or before January 31, 1997.
(e) MedPartners shall offer continued coverage to the New Cardinal
Employees under the group health plans currently maintained by the Cardinal (the
"Cardinal Health Plans") or, to the extent the Cardinal Health Plans are
terminated, under MedPartners' group health plans, in accordance with the
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
SECTION 7.
TERMINATION, AMENDMENT AND WAIVER.
7.1 Termination. This Plan of Merger may be terminated at any time prior
to the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the holders of Cardinal Common Stock:
(a) by mutual written consent of MedPartners and Cardinal:
(b) by either MedPartners or Cardinal;
(i) if, upon a vote at a duly held meeting of shareholders or any
adjournment thereof, any required approval of the holders of Cardinal
Shares shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before
November 30, 1996, unless the failure to consummate the Merger is the
result of a willful and material breach of this Plan of Merger by the
party seeking to terminate this Plan of Merger; provided, however, that
the passage of such period shall be tolled for any part thereof (but not
exceeding 60 days in the aggregate) during which any party shall be
subject to a nonfinal order, decree, ruling or action restraining,
enjoining or otherwise prohibiting the consummation of the Merger or the
calling or holding of a meeting of shareholders;
(iii) if any court of competent jurisdiction or other governmental
entity shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise
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prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable;
(iv) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Plan of Merger which (A) would give rise to the failure of a condition
set forth in Section 8.2(a) or (b) or Section 8.3(a) or (b), as
applicable, and (B) cannot be or has not been cured within 30 days after
the giving of written notice to the breaching party of such breach (a
"Material Breach") (provided that the terminating party is not then in
Material Breach of any representation, warranty, covenant or other
agreement contained in this Plan of Merger); or
(v) if either MedPartners or Cardinal gives notice of termination
pursuant to Section 6.9;
(c) by either MedPartners or Cardinal in the event that (i) all of the
conditions to the obligation of such party to effect the Merger set forth
in Section 8.1 shall have been satisfied and (ii) any condition to the
obligation of such party to effect the Merger set forth in Section 8.2 (in
the case of MedPartners) or Section 8.3 (in the case of Cardinal) is not
capable of being satisfied prior to the end of the period referred to in
Section 7.1(b)(ii);
(d) By Cardinal, if Cardinal's Board of Directors shall have (i)
determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the holders of Cardinal Shares or shall have
withdrawn such recommendation or (ii) approved, recommended or endorsed any
Acquisition Transaction (as defined in Section 6.10) other than this Plan
of Merger or (iii) resolved to do any of the foregoing; or
(e) By MedPartners, if the holders of more than 10% of the Cardinal
Shares shall have dissented as provided in Chapter 13 of the NCBCA before
the taking of a vote on the Merger at the Shareholders Meeting.
7.2 Effect of Termination. In the event of termination of this Plan of
Merger as provided in Section 7.1, this Plan of Merger shall forthwith become
void and have no effect, without any liability or obligation on the part of any
party, other than the provisions of Sections 5.2 and 7.6, and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or other agreements
set forth in this Plan of Merger.
7.3 Amendment. This Plan of Merger may be amended by the parties at any
time before or after any required approval of matters presented in connection
with the Merger by the holders of Cardinal Shares; provided, however, that after
any such approval, there shall be made no amendment that pursuant to the NCBCA
requires further approval by such shareholders. This Plan of Merger may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c) subject to the proviso
of Section 7.3, waive compliance with any of the agreements or conditions
contained in this Plan of Merger. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this Plan of
Merger to assert any of its rights under this Plan of Merger or otherwise shall
not constitute a waiver of such rights, except as otherwise provided in Section
6.9.
7.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Plan of Merger pursuant to Section 7.1, an amendment of this
Plan of Merger pursuant to Section 7.3, or an extension or waiver pursuant to
Section 7.4 shall, in order to be effective, require in the case of MedPartners
or Cardinal, action by its Board of Directors or the duly authorized designee of
the Board of Directors.
7.6 Expenses. All costs and expenses incurred in connection with the Plan
of Merger and the transactions contemplated hereby shall be paid by the party
incurring such expense, it being understood that if
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the Merger is consummated, by reason thereof, MedPartners will indirectly bear
the expenses incurred by Cardinal.
SECTION 8.
CONDITIONS TO CLOSING.
8.1 Mutual Conditions. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction, at or prior to the Closing
Date, of the following conditions (any of which may be waived in writing by
MedPartners and Cardinal):
(a) Neither MedPartners nor Cardinal nor any of their respective
subsidiaries, if any, shall be subject to any order, decree or injunction
by a court of competent jurisdiction which (i) prevents or materially
delays the consummation of the Merger or (ii) would impose any material
limitation on the ability of MedPartners effectively to exercise full
rights of ownership of the Common Stock of the Surviving Corporation or any
material portion of the assets or business of Cardinal, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state,
municipality or other political subdivision thereof that makes the
consummation of the Merger and any other transaction contemplated hereby
illegal.
(c) The holders of shares of Cardinal Common Stock shall have approved
the adoption of this Plan of Merger and any other matters submitted to them
in accordance with the provisions of Section 6.3 hereof.
(d) The shares of MedPartners Common Stock to be issued in connection
with the Merger shall have been listed on the NYSE, upon official notice of
issuance, and shall have been issued in transactions qualified or exempt
from registration under applicable securities or Blue Sky laws of such
states and territories of the United States as may be required.
(e) MedPartners and Cardinal shall have received all consents,
approvals and authorizations of third parties with respect to all material
leases and management agreements to which such parties are parties, which
consents, approvals and authorizations are required of such third parties
by such documents, in form and substance acceptable to MedPartners or
Cardinal, as the case may be, except where the failure to obtain such
consent, approval or authorization would not have a material effect on the
business of the Surviving Corporation.
(f) MedPartners and Cardinal and the shareholders of Cardinal shall
have entered into the Stock Restriction and Registration Rights Agreement
set forth in Exhibit 6.4(f) attached hereto.
(g) Cardinal and the Spin-Off Subsidiary shall have entered into the
Clinic Services Agreement in the form of Exhibit 8.1(g) hereto.
8.2 Conditions to Obligations of MedPartners. The obligations of
MedPartners to consummate the Merger and the other transactions contemplated
hereby shall be subject to the satisfaction, at or prior to the Closing Date, of
the following conditions (any of which may be waived by MedPartners and
Cardinal):
(a) Each of the agreements of Cardinal to be performed at or prior to
the Closing Date pursuant to the terms hereof shall have been duly
performed in all material respects, and Cardinal shall have performed, in
all material respects, all of the acts required to be performed by it at or
prior to the Closing Date by the terms hereof.
(b) The representation and warranty of Cardinal set forth in Section
3.10(a) shall be true and correct as of the date of this Plan of Merger and
as of the Closing Date. The representations and warranties of Cardinal set
forth in this Plan of Merger that are qualified as to materiality shall be
true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of the date of this Plan of Merger and
as of the Closing Date as though made at and as of such time, except to the
extent such representations and warranties expressly relate to an earlier
date (in which case such
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representations and warranties that are qualified as to materiality shall
be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of such earlier date); provided,
however, that Cardinal shall not be deemed to be in breach of any such
representations or warranties by taking any action permitted (or approved
by MedPartners) under Section 6.2 or otherwise permitted herein.
MedPartners shall have been furnished with a certificate, executed by a
duly authorized officer of Cardinal, dated the Closing Date, certifying in
such detail as MedPartners may reasonably request as to the fulfillment of
the foregoing conditions.
(c) MedPartners shall have obtained, or obtained the transfer of, any
licenses and other regulatory approvals necessary to allow the Surviving
Corporation to operate Cardinal's business, unless the failure to obtain
such transfer or approval would not have a material adverse effect on
Cardinal.
(d) MedPartners shall have received an opinion from Haskell Slaughter
& Young, L.L.C., to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, which
opinion may be based upon reasonable representations of fact provided by
officers of MedPartners and Cardinal.
(e) MedPartners shall have received an opinion from Alston & Bird, in
customary form and reasonably satisfactory to MedPartners.
(f) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Plan of Merger shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time.
(g) MedPartners shall have received "Affiliate Letters" as provided in
Section 6.15 herein from each of the affiliates of Cardinal.
(h) Each of the shareholders of Cardinal shall have executed and
delivered to MedPartners an investment letter in the form of Exhibit 8.2(h)
attached to this Plan of Merger.
(i) Each of the shareholders of Cardinal shall have executed and
delivered to MedPartners a Financial Data Sheet in the form included in the
Information Package.
(j) Each of the shareholders of Cardinal shall have executed and
delivered an Indemnification Agreement covering uninsured medical
malpractice liability in the form of Exhibit 8.2(j) attached to this Plan
of Merger.
(k) No more than five shareholders of Cardinal shall have voted
against the Merger.
8.3 Conditions to Obligations of Cardinal. The obligations of Cardinal to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions (any of which may be waived by Cardinal):
(a) Each of the agreements of MedPartners to be performed at or prior
to the Closing Date pursuant to the terms hereof shall have been duly
performed, in all material respects, and MedPartners shall have performed,
in all material respects, all of the acts required to be performed by them
at or prior to the Closing Date by the terms hereof.
(b) The representation and warranty of MedPartners set forth in
Section 4.10(a) shall be true and correct as of the date of the Plan of
Merger and as of the Closing Date. The representations and warranties of
MedPartners set forth in this Plan of Merger that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of the date of this
Plan of Merger and as of the Closing as though made at and as of such time,
except to the extent such representations and warranties expressly relate
to an earlier date (in which case such representations and warranties that
are qualified as to materiality shall be true and correct, and those that
are not so qualified shall be true and correct in all material respects, as
of such earlier date). Cardinal shall have been furnished with a
certificate, executed by duly authorized officers of MedPartners, dated
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<PAGE> 27
the Closing Date, certifying in such detail as Cardinal may reasonably
request as to the fulfillment of the foregoing conditions.
(c) Cardinal shall have received an opinion from Alston & Bird to the
effect that the Merger will constitute a reorganization with the meaning of
Section 368(a) of the Code which opinion may be based upon reasonable
representations of fact provided by officers of MedPartners and Cardinal.
(d) Cardinal shall have received an opinion from Haskell Slaughter &
Young, L.L.C., in customary form and reasonably satisfactory to Cardinal.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Plan of Merger shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time.
(f) MedPartners shall have either extinguished the underlying
indebtedness or arranged for the release from personal liability of any
indebtedness to third party lenders with respect to which any Cardinal
shareholder is personally liable.
SECTION 9.
MISCELLANEOUS.
9.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
9.2 Notices. Any communications required or desired to be given hereunder
shall be deemed to have been properly given if sent by hand delivery or by
facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to MedPartners:
MedPartners, Inc.
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
Attention: J. Brooke Johnston, Jr., Esq.
Senior Vice President and General Counsel
Facsimile: (205) 982-7709
with a copy to:
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Attention: F. Hampton McFadden, Jr., Esq.
Haskell Slaughter & Young, L.L.C.
Facsimile: (205) 324-1133
If to Cardinal:
Cardinal Healthcare, P.A.
3320 Wake Forest Road
Suite 300
Raleigh, North Carolina 27609
Attention: D. Allen Hayes, M.D.
Facsimile: (919)878-9260
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with a copy to:
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: Jonathan W. Lowe, Esq.
Facsimile: (404)881-4777
All such communications shall be deemed to have been delivered on the date
of hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
9.3 Further Assurances. Each party hereby agrees to perform any further
acts and to execute and deliver any documents which may be reasonably necessary
to carry out the provisions of this Plan of Merger.
9.4 Indemnification. MedPartners agrees that all rights to indemnification
for acts or omissions occurring prior to the Effective Time now existing in
favor of the current or former directors or officers of Cardinal as provided in
their respective certificates or articles of incorporation or by-laws shall
survive the Merger and shall continue in full force and effect in accordance
with their terms. The provisions of this Section 9.4 are intended to be for the
benefit of, and shall be enforceable by, each such indemnified party and each
such indemnified party's heirs and representatives.
9.5 Governing Law. This Plan of Merger shall be interpreted, construed and
enforced in accordance with the laws of the State of Delaware, applied without
giving effect to any conflicts-of-law principles.
9.6 "Including". The word "including", when following any general
statement, term or matter, shall not be construed to limit such statement, term
or matter to the specific terms or matters as provided immediately following the
word "including" or to similar items or matters, whether or not non-limiting
language (such as "without limitation", "but not limited to", or words of
similar import) is used with reference to the word "including" or the similar
items or matters, but rather shall be deemed to refer to all other items or
matters that could reasonably fall within the broadest possible scope of the
general statement, term or matter.
9.7 "Knowledge". "To the knowledge", "to the best knowledge, information
and belief", or any similar phrase shall be deemed to refer to the knowledge of
the Chairman of the Board, Chief Executive Officer or Chief Financial Officer of
a party and to include the assurance that such knowledge is based upon a
reasonable investigation, unless otherwise expressly provided.
9.8 "Material adverse change" or "material adverse effect". "Material
adverse change" or "material adverse effect" means, when used in connection with
Cardinal or MedPartners, any change, effect, event or occurrence that has, or is
reasonably likely to have, individually or in the aggregate, a material adverse
impact on the business or financial position of such party and its subsidiaries,
if any, taken as a whole; provided, however, that "material adverse change" and
"material adverse effect" shall be deemed to exclude the impact of (i) changes
in generally accepted accounting principles, (ii) changes in applicable law, and
(iii) any changes resulting from any restructuring or other similar charges or
write-offs taken by Cardinal with the consent of MedPartners; provided, however,
that no such charges or write-offs will be taken if such would adversely affect
pooling-of-interests accounting treatment for the Merger. Moreover, it shall not
be deemed a "material adverse change" or "material adverse effect" so long as
future financial performance shall be consistent with discussions between the
parties in connection with the Merger.
9.9 "Hazardous Materials". The term "Hazardous Materials" means any
material which has been determined by any applicable governmental authority to
be harmful to the health or safety of human or animal life or vegetation,
regardless of whether such material is found on or below the surface of the
ground, in any surface or underground water, airborne in ambient air or in the
air inside any structure built or located upon or below the surface of the
ground or in building materials or in improvements of any structures, or in any
personal property located or used in any such structure, including, but not
limited to, all hazardous substances, imminently hazardous substances, hazardous
wastes, toxic substances, infectious wastes, pollutants and contaminants from
time to time defined, listed, identified, designated or classified as such under
any Environmental Laws (as defined in Section 9.10) regardless of the quantity
of any such material.
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9.10 "Environmental Laws". The term "Environmental Laws" means any
federal, state or local statute, regulation, rule or ordinance, and any judicial
or administrative interpretation thereof, regulating the use, generation,
handling, storage, transportation, discharge, emission, spillage or other
release of Hazardous Materials or relating to the protection of the environment.
9.11 Captions. The captions or headings in this Plan of Merger are made
for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this Plan of
Merger.
9.12 Integration of Exhibits. All Exhibits attached to this Plan of Merger
are integral parts of this Plan of Merger as if fully set forth herein, and all
statements appearing therein shall be deemed disclosed for all purposes and not
only in connection with the specific representation in which they are explicitly
referenced.
9.13 Entire Agreement. This instrument, including all Exhibits attached
hereto and the Confidentiality Agreement contain the entire agreement of the
parties and supersede any and all prior or contemporaneous agreements between
the parties, written or oral, with respect to the transactions contemplated
hereby. Such agreement may not be changed or terminated orally, but may only be
changed by an agreement in writing signed by the party or parties against whom
enforcement of any waiver, change, modification, extension, discharge or
termination is sought.
9.14 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
9.15 Binding Effect. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Plan of Merger. No party may assign any right or obligation hereunder
without the prior written consent of the other parties.
9.16 No Rule of Construction. The parties acknowledge that this Plan of
Merger was initially prepared by MedPartners, and that all parties have read and
negotiated the language used in this Plan of Merger. The parties agree that,
because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
IN WITNESS WHEREOF, MedPartners and Cardinal have caused this Amended and
Restated Plan and Agreement of Merger to be executed by their respective duly
authorized officers, all as of the day and year first above written.
MEDPARTNERS, INC.
By
--------------------------------------
Its:
--------------------------------------
CARDINAL HEALTHCARE, P.A.
By
--------------------------------------
D. Allen Hayes, M.D.
President
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<PAGE> 1
EXHIBIT (2)-4
PLAN AND AGREEMENT OF MERGER
DATED AS OF NOVEMBER 30, 1996
BY AND AMONG
MEDPARTNERS, INC.,
SA MERGER CORPORATION
AND
DRS. SHEER, AHEARN AND ASSOCIATES, P.A.
<PAGE> 2
TABLE OF CONTENTS
PLAN AND AGREEMENT OF MERGER
BY AND AMONG
MEDPARTNERS, INC.,
SA MERGER CORPORATION
AND
DRS. SHEER, AHEARN AND ASSOCIATES, P.A.
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<TABLE>
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Page
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Parties...................................................................................................1
Recitals..................................................................................................1
Section 1. THE MERGER.....................................................................................2
1.1 The Merger...................................................................................2
1.2 The Closing..................................................................................2
1.3 Effective Time...............................................................................3
1.4 Effect of the Merger.........................................................................3
Section 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES....................................................................3
2.1 Effect on Capital Stock......................................................................3
2.2 Exchange of Certificates.....................................................................5
2.3 Articles of Incorporation of Surviving Corporation...........................................9
2.4 By-laws of the Surviving Corporation.........................................................9
2.5 Directors and Officers of the Surviving Corporation..........................................9
2.6 Assets, Liabilities, Reserves and Accounts...................................................9
2.7 Corporate Acts of the Subsidiary............................................................10
Section 3. REPRESENTATIONS AND WARRANTIES OF SHEER, AHEARN..............................................10
3.1 Organization, Existence and Good Standing...................................................10
3.2 Sheer, Ahearn Capital Stock.................................................................10
3.3 Foreign Qualifications......................................................................11
</TABLE>
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<TABLE>
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3.4 Power and Authority.........................................................................11
3.5 Sheer, Ahearn Financial Information.........................................................12
3.6 Contracts, etc..............................................................................12
3.7 Properties and Assets.......................................................................13
3.8 Legal Proceedings...........................................................................14
3.9 Subsequent Events...........................................................................14
3.10 Accounts Receivable........................................................................15
3.11 Tax Returns................................................................................16
3.12 Employee Benefit Plans; Employment Matters.................................................16
3.13 Compliance with Laws in General............................................................17
3.14 Regulatory Approvals.......................................................................18
3.15 Commissions and Fees.......................................................................18
3.16 Retirement or Re-Acquisition of MedPartners Common Stock...................................18
3.17 Disposition of Assets of Surviving Corporation.............................................19
3.18 Vote Required..............................................................................19
3.19 No Untrue Representations..................................................................19
Section 4. REPRESENTATIONS AND WARRANTIES OF THE SUBSIDIARY..............................................20
4.1 Organization, Existence and Capital Stock...................................................20
4.2 Power and Authority.........................................................................20
4.3 Commissions and Fees........................................................................20
4.4 Legal Proceedings...........................................................................21
Section 5. REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS.................................................21
5.1 Organization, Existence and Good Standing...................................................21
5.2 MedPartners Capitalization..................................................................21
5.3 MedPartners Common Stock....................................................................22
5.4 Subsidiaries and Affiliated Entities........................................................22
5.5 Organization, Existence and Good Standing of MedPartners Subsidiaries and
Other MedPartners Entities.............................................................23
5.6 Foreign Qualifications......................................................................24
5.7 Subsidiary Common Stock.....................................................................24
5.8 Power and Authority.........................................................................24
5.9 MedPartners Public Information............................................................25
5.10 Legal Proceedings..........................................................................26
5.11 Subsequent Events..........................................................................26
5.12 Investment Intent..........................................................................26
5.13 Commissions and Fees.......................................................................27
5.14 Retirement or Re-Acquisition of MedPartners Common Stock...................................27
5.15 Disposition of Assets of Surviving Corporation.............................................27
5.16 No Untrue Representations..................................................................27
</TABLE>
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<TABLE>
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Section 6. ACCESS TO INFORMATION AND DOCUMENTS..........................................................27
6.1 Access to Information.......................................................................27
6.2 Return of Records...........................................................................28
6.3 Effect of Access............................................................................28
Section 7. COVENANTS....................................................................................29
7.1 Preservation of Business....................................................................29
7.2 Material Transactions.......................................................................29
7.3 Meeting of Sheer, Ahearn's Shareholders.....................................................30
7.4 Securities Matters..........................................................................31
7.5 Exemption from State Takeover Laws..........................................................31
7.6 Public Disclosures..........................................................................31
7.7 Resignation of Sheer, Ahearn Directors......................................................33
7.8 Notice of Subsequent Events.................................................................33
7.9 No Solicitations............................................................................34
7.10 Other Actions..............................................................................34
7.11 Sheer, Ahearn Conversion...................................................................34
7.12 Accounting Methods.........................................................................35
7.13 Pooling and Tax-Free Reorganization Treatment..............................................35
7.14 Affiliate and Pooling Agreements...........................................................35
7.15 Cooperation................................................................................35
7.16 Publication of Combined Results............................................................36
Section 8. TERMINATION, AMENDMENT AND WAIVER............................................................37
8.1 Termination.................................................................................37
8.2 Effect of Termination.......................................................................39
8.3 Amendment...................................................................................39
8.4 Extension; Waiver...........................................................................39
8.5 Procedure for Termination, Amendment, Extension or Waiver...................................40
8.6 Expenses....................................................................................40
Section 9. CONDITIONS TO CLOSING........................................................................40
9.1 Mutual Conditions...........................................................................40
9.2 Conditions to Obligations of MedPartners and the Subsidiary.................................41
9.3 Conditions to Obligations of Sheer, Ahearn..................................................46
Section 10. MISCELLANEOUS...............................................................................48
10.1 Nonsurvival of Representations and Warranties..............................................48
10.2 Notices....................................................................................48
10.3 Further Assurances.........................................................................49
</TABLE>
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10.4 Indemnification............................................................................49
10.5 Governing Law..............................................................................50
10.6 "Including"................................................................................50
10.7 "Knowledge"................................................................................50
10.8 "Material adverse change" or "material adverse effect".....................................50
10.9 "Hazardous Materials"......................................................................51
10.10 Environmental Laws........................................................................52
10.11 Captions..................................................................................52
10.12 Integration of Exhibits...................................................................52
10.13 Entire Agreement..........................................................................52
10.14 Counterparts..............................................................................52
10.15 Binding Effect............................................................................52
10.16 No Rule of Construction...................................................................52
Testimonium..............................................................................................53
Signatures...............................................................................................53
</TABLE>
iv
<PAGE> 6
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER ("Plan of Merger"), made and entered into
as of the 30th day of November, 1996, by and among MEDPARTNERS, INC., a Delaware
corporation ("MedPartners"), SA MERGER CORPORATION, a Delaware corporation and
wholly owned subsidiary of MedPartners (the "Subsidiary"), DRS. SHEER, AHEARN
AND ASSOCIATES, P.A., a Florida professional corporation ("Sheer, Ahearn") (the
Subsidiary and Sheer, Ahearn being sometimes collectively referred to herein as
the "Constituent Corporations").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of MedPartners, the
Subsidiary and Sheer, Ahearn have approved the merger of the Subsidiary, with
and into Sheer, Ahearn (the "Merger"), upon the terms and conditions set forth
in this Plan of Merger, whereby each share of Common Stock, par value $1.00 per
share, of Sheer, Ahearn (the "Sheer, Ahearn Common Stock"), not owned directly
or indirectly by Sheer, Ahearn, will be converted into the right to receive the
Merger Consideration (as herein defined) (the Sheer, Ahearn Common Stock may be
sometimes hereinafter referred to as the "Sheer, Ahearn Shares");
WHEREAS, the principal negotiations with regard to the transactions
contemplated hereby have been conducted by and between Sheer, Ahearn on the one
hand and Team Health Group, Inc. ("Team"), a wholly owned subsidiary of
MedPartners, and MedPartners on the other hand;
WHEREAS, each of MedPartners, the Subsidiary and Sheer, Ahearn desire
to make certain representations, warranties, covenants and agreements in
connection with the Merger and also to prescribe various conditions to the
Merger.
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<PAGE> 7
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization under the provisions of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall
be accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants and agreements contained herein, the parties hereto do hereby agree as
follows:
Section 1. THE MERGER.
1.1 The Merger. Upon the terms and conditions set forth in this
Plan of Merger, and in accordance with the General Corporation Law of the
State of Delaware (the "DGCL") and the Florida Business Corporation Act
(the "FBCA"), the Subsidiary shall be merged into Sheer, Ahearn, or Sheer,
Ahearn, BC (as defined in Section 7.11) at the Effective Time (as defined in
Section 1.3). Following the Effective Time, the separate corporate existence of
the Subsidiary shall cease and Sheer, Ahearn shall continue as the surviving
corporation (the "Surviving Corporation") as a business corporation and wholly
owned subsidiary of MedPartners, incorporated under the laws of the State of
Florida under the name Drs. Sheer, Ahearn and Associates, Inc. and shall
succeed to and assume all the rights and obligations of the Subsidiary and
Sheer, Ahearn in accordance with the DGCL and the FBCA.
1.2 The Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. Central Time on a date to be specified by the parties (the
"Closing Date"), which (subject to satisfaction or waiver of the conditions set
forth in Sections 9.2 and 9.3) shall be no later than the second business day
after satisfaction of the conditions set forth in Section 9.1 (other than
Section 9.1(a)), but in no event later than December 31, 1996, at the offices of
Haskell, Slaughter & Young, L.L.C., unless another date or place is agreed to in
writing by the parties hereto. The Merger will close in Escrow (the "Escrow
Closing") immediately following the approval of the
2
<PAGE> 8
plan of Merger by the shareholders of Sheer, Ahearn. In the Escrow Closing, the
Articles of Merger and the Certificate of Merger will be filed with the
respective Secretaries of State of Florida and Delaware on the first business
day following the Escrow Closing. The Merger Consideration (as defined in
Section 2.1(c)) will be deposited with Foley & Lardner, counsel to Sheer, Ahearn
(the "Escrow Agent"). The Merger Consideration will be held by the Escrow Agent
until disbursed in accordance with the Closing Letter attached as Exhibit 1.2.
1.3 Effective Time. Subject to the provisions of this Plan of Merger,
Sheer, Ahearn and the Subsidiary shall file a Certificate of Merger (the
"Florida Certificate of Merger") in accordance with the relevant provisions of
the FBCA, and Sheer, Ahearn shall file a Certificate of Merger (the "Delaware
Certificate of Merger") executed by Sheer, Ahearn in accordance with the
relevant provisions of the DGCL and shall make all other filings or recordings
required under the DGCL and the FBCA and as soon as practicable on or after the
Closing Date. The Merger shall become effective at such time as the Delaware
Certificate of Merger is duly filed with the Delaware Secretary of State and the
Certificate of Merger is duly filed with the Florida Secretary of State, or at
such other time as the Subsidiary and Sheer, Ahearn shall agree should be
specified in the Certificates of Merger (the "Effective Time").
1.4 Effect of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL and Section 607.1106 of the FBCA.
Section 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES.
2.1 Effect on Capital Stock2.1Effect on Capital Stock. As of the
Effective Time, by virtue of the Merger and without any action on the part of
any holder of shares of Sheer, Ahearn Common Stock or any shares of capital
stock of the Subsidiary:
3
<PAGE> 9
(a) Subsidiary Common Stock. Each share of capital stock of the
Subsidiary issued and outstanding immediately prior to the Effective Time of the
Merger shall be converted into one issued and outstanding and nonassessable
share of Common Stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Sheer, Ahearn Common
Stock that is owned by Sheer, Ahearn shall automatically be canceled and retired
and shall cease to exist, and none of the Common Stock, par value $.001 per
share, of MedPartners Common Stock ("MedPartners Common Stock"), cash or other
consideration shall be delivered in exchange therefor.
(c) Conversion of Sheer, Ahearn Shares. In the Merger, all of the
Sheer, Ahearn Shares (other than Dissenting Shares, if any) shall be converted
into the right to receive that number of shares of MedPartners Common Stock
equal to the Merger Consideration (as defined herein). All such shares of
MedPartners Common Stock shall be fully paid and nonassessable and are
hereinafter sometimes referred to as the "MedPartners Shares". Upon such
conversion, all such Sheer, Ahearn Shares shall be canceled and cease to exist,
and each holder thereof shall cease to have any rights with respect thereto
other than the right to receive MedPartners Shares issued in exchange therefor
on the terms provided herein.
"Merger Consideration" means that number of MedPartners Shares (rounded
to the nearest whole share) equal to $49 million divided by the MedPartners
Trading Price. As defined herein, "MedPartners Trading Price" shall mean the
average of the last reported sale price of the MedPartners Common Stock on the
New York Stock Exchange on each of the 15 consecutive trading days ending on
November 27, 1996.
(d) Dissenting Shares. Notwithstanding anything in this Plan of Merger
to the contrary, Sheer, Ahearn shares which are not voted in favor of the Merger
("Dissenting Shares") shall not be converted into a right to receive the Merger
Consideration or any cash in lieu of
4
<PAGE> 10
fractional shares of MedPartners Common Stock. If, after the Effective Time, a
holder of Dissenting Shares fails to perfect or loses any dissenters' rights,
such shares shall be treated as if they had been converted as of the Effective
Time into the right to receive the Merger Consolidation pursuant to Section
2.1(c) and the cash in lieu of fractional shares of MedPartners Common stock
specified in Section 2.2. It is understood and agreed that in no event shall the
Merger be consummated if greater than 10% of the issued and outstanding Sheer,
Ahearn Shares are not voted in favor of the Merger.
(e) Anti-Dilution Provisions. If after the date hereof and prior to the
Effective Time MedPartners shall have declared a stock split (including a
reverse split) of MedPartners Common Stock or a dividend payable in MedPartners
Common Stock, or any other distribution of securities or dividend (in cash or
otherwise) to holders of MedPartners Common Stock with respect to their
MedPartners Common Stock (including without limitation such a distribution or
dividend made in connection with a recapitalization, reclassification, merger,
consolidation, reorganization or similar transaction) then the Merger
Consideration shall be appropriately adjusted to reflect such stock split,
dividend or other distribution of securities.
2.2 Exchange of Certificates. (a) Exchange Agent. In the event that
the outstanding Sheer, Ahearn Shares are not exchanged at the Closing, prior
to the Effective Time, MedPartners shall enter into an agreement with First
Chicago Trust Company of New York, New York, New York or such other party as
shall then be acting as the transfer agent for the MedPartners Common Stock
(the "Exchange Agent"), which shall provide that MedPartners shall deposit with
the Exchange Agent as of the Effective Time, for the benefit of the holders of
Sheer, Ahearn Shares, for exchange in accordance with this Section 2, through
the Exchange Agent, (i) certificates representing the shares of MedPartners
Common Stock issuable pursuant to Section 2.1 and (ii) cash in an amount equal
to the aggregate amount required to be paid in lieu of fractional interests of
MedPartners Common Stock pursuant to Section 2.2 (such shares of MedPartners
Common Stock, together with any dividends or distributions with respect thereto
with a record date after the Effective Time, and together with the cash
referred to in clause (ii) of
5
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this Section 2.2(a), being hereinafter referred to as the "Exchange Fund") in
exchange for outstanding Sheer, Ahearn Shares.
(b) Exchange Procedures. As soon as reasonably practicable, but no
later than ten business days after the Effective Time, the Exchange Agent shall
mail to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding Sheer, Ahearn Shares (the
"Certificates") whose shares were converted into the right to receive the Merger
Consideration pursuant to Section 2.1, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as MedPartners
may reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of
MedPartners Common Stock. Upon surrender of a Certificate for cancellation to
the Exchange Agent, together with such letter of transmittal, duly executed, and
such other documents as may reasonably be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a certificate representing that number of whole shares of MedPartners Common
Stock which such holder has the right to receive pursuant to the provisions of
this Section 2 and (ii) cash in lieu of any fractional share interest as set
forth in Section 2.2(e), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of Sheer, Ahearn Shares which
is not registered in the transfer records of Sheer, Ahearn, a certificate
representing the proper number of shares of MedPartners Common Stock may be
issued to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such payment
shall pay any transfer or other taxes required by reason of the issuance of
shares of MedPartners Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of MedPartners that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing shares of MedPartners Common
6
<PAGE> 12
Stock and cash in lieu of any fractional shares of MedPartners Common Stock as
contemplated by this Section 2.2. No interest will be paid or will accrue on any
cash payable in lieu of any fractional shares of MedPartners Common Stock.
Former shareholders of record of Sheer, Ahearn shall not be entitled to vote
after the Effective Time at any meeting of MedPartners stockholders the number
of whole shares of MedPartners Common Stock into which their respective Sheer,
Ahearn Shares are converted until such holders have exchanged their Certificates
for certificates representing MedPartners Common Stock in accordance with this
Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to MedPartners Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of MedPartners Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.2(e) until the surrender of such Certificate
in accordance with this Section 2. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the holder
of the certificate representing whole shares of MedPartners Common Stock issued
in exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of MedPartners Common
Stock to which such holder is entitled pursuant to Section 2.2(e) and the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of MedPartners Common Stock,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of MedPartners Common Stock.
(d) No Further Ownership Rights in Sheer, Ahearn Shares. All shares of
MedPartners Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Section 2 (including any cash paid pursuant
to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued (and paid) in
full satisfaction of all rights pertaining to the Sheer, Ahearn Shares
theretofore represented by such Certificates. If, after the Effective
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Time, Certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they shall be canceled and exchanged as provided in this
Section 2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing
fractional shares of MedPartners Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
MedPartners. Notwithstanding any other provision of this Plan of Merger, each
holder of shares of Sheer, Ahearn Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
MedPartners Common Stock (after taking into account all Certificates delivered
by such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of MedPartners Common Stock
multiplied by the MedPartners Trading Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of the Certificates for six months
after the Effective Time shall be delivered to MedPartners, upon demand, and any
holders of the Certificates who have not theretofore complied with this Section
2 shall thereafter look only to MedPartners for payment of MedPartners Common
Stock, any cash in lieu of fractional shares of MedPartners Common Stock and any
dividends or distributions with respect to MedPartners Common Stock.
(g) No Liability. None of MedPartners, the Subsidiary, Sheer, Ahearn or
the Exchange Agent shall be liable to any person in respect of any shares of
MedPartners Common Stock (or dividends or distributions with respect thereto) or
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to the end of the applicable period after the
Effective Time under escheat laws (or immediately prior to such earlier date on
which any shares of MedPartners Common Stock, any cash in lieu of fractional
shares of MedPartners Common Stock or any dividends or distributions with
respect to MedPartners Common Stock in respect of such Certificates would
otherwise escheat to or become the property of any governmental entity), any
such shares, cash, dividends or distributions in
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respect of such Certificates shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by MedPartners, on a daily
basis. Any interest and other income resulting from such investments shall be
paid to MedPartners.
2.3 Articles of Incorporation of Surviving Corporation. The Articles
of Incorporation of Sheer, Ahearn, effective immediately following the Effective
Time, in form satisfactory to MedPartners, shall be the Articles of
Incorporation of the Surviving Corporation from and after the Effective Time and
until thereafter amended as provided by law.
2.4 By-laws of the Surviving Corporation. The Bylaws of Sheer, Ahearn,
effective immediately following the Effective Time, in form satisfactory to
MedPartners, shall be the By-laws of Sheer, Ahearn from and after the Effective
Time and until thereafter altered, amended or repealed in accordance with the
FBCA, the Articles of Incorporation of Sheer, Ahearn and said By-laws.
2.5 Directors and Officers of the Surviving Corporation. The directors
and officers of the Subsidiary immediately prior to the Effective Time shall be
the directors and officers of Sheer, Ahearn, each to hold office in accordance
with the Articles of Incorporation and By-laws of Sheer, Ahearn.
2.6 Assets, Liabilities, Reserves and Accounts. At the Effective Time,
the assets, liabilities, reserves and accounts of each of the Subsidiary and
Sheer, Ahearn shall be taken up on the books of Sheer, Ahearn at the amounts at
which they respectively shall be carried on the books of said corporations
immediately prior to the Effective Time, except as otherwise set forth
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in this Plan of Merger and subject to such adjustments, or elimination of
intercompany items, as may be appropriate in giving effect to the Merger in
accordance with generally accepted accounting principles.
2.7 Corporate Acts of the Subsidiary. All corporate acts, plans,
policies, approvals and authorizations of the Subsidiary, its stockholder, its
Board of Directors, committees elected or appointed by the Board of Directors,
and all officers and agents, valid immediately prior to the Effective Time,
shall be those of the Surviving Corporation and shall be as effective and
binding thereon as they were with respect to the Subsidiary to the extent not
inconsistent with the terms of this Plan of Merger.
Section 3. REPRESENTATIONS AND WARRANTIES OF SHEER, AHEARN
Sheer, Ahearn hereby represents and warrants to MedPartners and the
Subsidiary as follows:
3.1 Organization, Existence and Good Standing. Sheer, Ahearn is a
Florida professional corporation duly organized, validly existing and in good
standing under the laws of the State of Florida. Sheer, Ahearn has all necessary
corporate power to own its properties and assets and to carry on its business as
presently conducted. Sheer, Ahearn does not, and has not within the two years
immediately preceding the date of this Plan of Merger owned, directly or
indirectly, any shares of MedPartners Common Stock or Common Stock of the
Subsidiary.
3.2 Sheer, Ahearn Capital Stock. Sheer, Ahearn's authorized capital
consists of shares of Common Stock, par value $1.00 per share, of which 621.47
shares are issued and outstanding as of the date of this Plan of Merger and no
shares are held in treasury. All of the issued and outstanding Sheer, Ahearn
Shares are duly and validly issued, fully paid and nonassessable. Except as set
forth in Exhibit 3.2 to the Disclosure Schedule delivered to MedPartners and the
Subsidiary by Sheer, Ahearn at the time of the execution and delivery of
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this Plan of Merger (the "Sheer, Ahearn Disclosure Schedule"), there are no
options, warrants, or similar rights granted by Sheer, Ahearn or any other
agreements to which Sheer, Ahearn is a party providing for the issuance or sale
by it of any additional securities which would remain in effect after the
Effective Time. There is no liability for dividends declared or accumulated but
unpaid with respect to any of the Sheer, Ahearn Shares. Sheer, Ahearn has not
made any distributions to any holders of Sheer, Ahearn Shares or participated in
or effected any issuance, exchange or retirement of Sheer, Ahearn Shares, or
otherwise changed the equity interests of holders of Sheer, Ahearn Shares in
contemplation of effecting the Merger within the two years immediately preceding
the date of this Plan of Merger. Any Sheer, Ahearn Shares that Sheer, Ahearn has
re-acquired during the two years immediately preceding the date of this Plan of
Merger have been so re-acquired only for purposes other than "business
combinations", as such term is defined in Accounting Principles Board Opinion
No. 16, as amended ("Business Combinations").
3.4 Foreign Qualifications. Sheer, Ahearn is qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
nature or character of the property owned, leased or operated by it or the
nature of the business transacted by it makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
on its business or operations.
3.5 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, Sheer, Ahearn has the corporate power to execute,
deliver and perform this Plan of Merger and all agreements and other documents
executed and delivered or to be executed and delivered by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein has taken all action required by its Articles of Incorporation,
By-laws or otherwise, to authorize the execution, delivery and performance of
this Plan of Merger and such related documents. Except as set forth in Exhibit
3.4 to the Sheer, Ahearn Disclosure Schedule, the execution and delivery of this
Plan of Merger does not and, subject to the receipt of required stockholder and
regulatory approvals and any other required third-party consents or
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approvals, the consummation of the Merger will not, violate any provisions of
the Articles of Incorporation or By-laws of Sheer, Ahearn or any provisions of,
or result in the acceleration of any obligation under, any mortgage, lien,
lease, agreement, instrument, order, arbitration award, judgment or decree, to
which Sheer, Ahearn is a party, or by which it is bound, or violate any
restrictions of any kind to which it is subject which, if violated or
accelerated would have a material adverse effect on Sheer, Ahearn. The execution
and delivery of this Plan of Merger has been approved by the Board of Directors
of Sheer, Ahearn.
3.5 Sheer, Ahearn Financial Information. Exhibit 3.5 to the Sheer,
Ahearn Disclosure Schedule contains the financial statements of Sheer, Ahearn
for the period ended September 30, 1996, which have been previously delivered to
MedPartners and on which MedPartners has relied in its evaluation of the Merger.
The financial statements, together with the notes thereto reflect all known
liabilities of Sheer, Ahearn, fixed or contingent, required to be stated
therein, and present fairly the financial condition of Sheer, Ahearn at said
dates and the results of operations and cash flows of Sheer, Ahearn for the
periods then ended and have been prepared in accordance with GAAP. The balance
sheet of Sheer, Ahearn at September 30, 1996, is herein sometimes referred to as
the "Sheer, Ahearn Balance Sheet".
3.6 Contracts, etc. (a) All material contracts, leases, agreements and
arrangements to which Sheer, Ahearn is a party are (i) legally valid and binding
upon Sheer, Ahearn in accordance with their terms, (ii) in full force and
effect, and (iii) to Sheer, Ahearn's knowledge do not violate any federal, state
or local law, rule, regulation or ordinance, and Sheer, Ahearn has provided
MedPartners and the Subsidiary with copies of all such documents. To the
knowledge of Sheer, Ahearn, (i) all parties to such contracts, leases,
agreements and arrangements have complied with the material provisions of such
contracts, leases, agreements and arrangements; (ii) no party is in material
default under such contract, lease, agreement or arrangement and no event has
occurred which, but for the passage of time or the giving of notice or both,
would constitute a material default thereunder, except, in each case, where the
invalidity of the lease, contract, agreement or arrangement or the default or
breach thereunder or thereof
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would not, individually or in the aggregate, have a material adverse effect on
Sheer, Ahearn; and (iii) Sheer, Ahearn has not received any notice of
termination or cancellation, or a request to renegotiate any material contracts,
leases, agreements or arrangements.
(b) Except as set forth in Exhibit 3.6 to the Sheer, Ahearn Disclosure
Schedule, no contract or agreement to which Sheer, Ahearn is a party will, by
its terms, terminate or become unenforceable as a result of the transactions
contemplated hereby or require any consent from any obligor thereto in order to
remain in full force and effect immediately after the Effective Time, except for
contracts or agreements which, if terminated, would not have a material adverse
effect on Sheer, Ahearn. Set forth on Exhibit 3.6 to the Sheer, Ahearn
Disclosure Schedule is a list of all material contracts to which Sheer, Ahearn
is a party which cannot be terminated on 90 or fewer days notice, without cause.
(c) Except as set forth in Exhibit 3.6 to the Sheer, Ahearn Disclosure
Schedule, Sheer, Ahearn has not granted any right of first refusal or similar
right in favor of any third party with respect to any material portion of its
properties or assets (excluding liens described in Section 3.7) or entered into
any non-competition agreement or similar agreement restricting its ability to
engage in any business in any location.
3.7 Properties and Assets. Sheer, Ahearn owns or leases all of the real
and personal property included in the Sheer, Ahearn Balance Sheet (except assets
recorded under capital lease obligations and such property as has been disposed
of during the ordinary course of Sheer, Ahearn's business since the date of the
Sheer, Ahearn Balance Sheet), free and clear of any liens, claims, charges,
exceptions or encumbrances, except for those (i) if any, which in the aggregate
are not material and which do not materially affect continued use of such
property, or (ii) which are set forth in Exhibit 3.7 to the Sheer, Ahearn
Disclosure Schedule.
3.8 Legal Proceedings. Except as listed in Exhibit 3.8 to the Sheer,
Ahearn Disclosure Schedule, there are no actions, suits or proceedings pending
or, to the knowledge of
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Sheer, Ahearn, threatened against Sheer, Ahearn, at law or in equity, relating
to or affecting Sheer, Ahearn, including the Merger. Sheer, Ahearn does not know
or have any reasonable grounds to know of any justification for any such action,
suit or proceeding, nor is Sheer, Ahearn aware of any facts which would give
rise to litigation or liability which would have a material adverse effect on
Sheer, Ahearn.
3.9 Subsequent Events. Except as set forth in Exhibit 3.9 to the Sheer,
Ahearn Disclosure Schedule or as contemplated by this Plan of Merger, Sheer,
Ahearn has not, since the date of the Sheer, Ahearn Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance,
or paid or satisfied any material obligation or liability (absolute,
accrued, contingent or otherwise) other than (i) liabilities shown or
reflected on the Sheer, Ahearn Balance Sheet or (ii) liabilities
incurred since the date of the Sheer, Ahearn Balance Sheet in the
ordinary course of business, which discharge or satisfaction would have
a material adverse effect on Sheer, Ahearn.
(c) Increased or established any reserve for taxes or any
other liability on its books or otherwise provided therefor which would
have a material adverse effect on Sheer, Ahearn, except as may have
been required due to income or operations of Sheer, Ahearn since the
date of the Sheer, Ahearn Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or
other encumbrance any of the assets, tangible or intangible, which are
material to the business or financial condition of Sheer, Ahearn.
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(e) Sold or transferred any of the assets material to the
consolidated business of Sheer, Ahearn, canceled any material debts or
claims or waived any material rights, except in the ordinary course of
business.
(f) Granted any general or uniform increase in the rates of
pay of employees or any material increase in salary payable or to
become payable by Sheer, Ahearn to any officer or employee, consultant
or agent (other than normal increases consistent with past practices),
or by means of any bonus or pension plan, contract or other commitment,
increased in a material respect the compensation of any officer,
employee, consultant or agent.
(g) Except for this Plan of Merger and any other agreement
executed and delivered pursuant to this Plan of Merger, entered into
any material transaction other than in the ordinary course of business
or permitted under other Sections of this Plan of Merger.
(h) Issued any stock, bonds or other securities or any
options or rights to purchase any of its securities.
(i) Become aware of any circumstance that would have a
material adverse effect on the operating results or financial condition
of Sheer, Ahearn.
3.10 Accounts Receivable. Since the date of the Sheer, Ahearn Balance
Sheet, Sheer, Ahearn has not changed any principle or practice with respect to
the recordation of accounts receivable or the calculation of reserves therefor,
or any material collection, discount or write-off policy or procedure. To the
knowledge of Sheer, Ahearn, Sheer, Ahearn is in compliance with the terms and
conditions of all third-party payor arrangements relating to its accounts
receivable, except to the extent that such noncompliance would not have a
material adverse effect on Sheer, Ahearn.
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3.11 Tax Returns. Sheer, Ahearn has filed all tax returns required to
be filed by it or requests for extensions to file such returns or reports have
been timely filed and granted and have not expired, except to the extent that
such failures to file, taken together, do not have a material adverse effect on
Sheer, Ahearn. Sheer, Ahearn has made all payments shown as due on such returns.
Sheer, Ahearn has not been notified that any tax returns of Sheer, Ahearn are
currently under audit by the Internal Revenue Service or any state or local tax
agency and has received no notice of any claimed tax liability of Sheer, Ahearn
or any Sheer, Ahearn shareholder. No agreements have been made by Sheer, Ahearn
for the extension of time or the waiver of the statute of limitations for the
assessment or payment of any federal, state or local taxes.
3.12 Employee Benefit Plans; Employment Matters. (a) Except as set
forth in Exhibit 3.12(a) to the Sheer, Ahearn Disclosure Schedule, Sheer, Ahearn
has neither established nor maintains nor is obligated to make contributions to
or under or otherwise participate in (i) any bonus or other type of incentive
compensation plan, program or arrangement (whether or not set forth in a written
document), (ii) any pension, profit-sharing, retirement or other plan, program
or arrangement, or (iii) any other employee benefit plan, fund or program,
including, but not limited to, those described in Section 3(3) of ERISA. All
such plans listed in Exhibit 3.12(a) (individually, a "Sheer, Ahearn Plan" and
collectively, the "Sheer, Ahearn Plans") have been operated and administered in
all material respects in accordance with, as applicable, ERISA, the Code, the
Age Discrimination in Employment Act of 1967, as amended, and the related rules
and regulations adopted by those federal agencies responsible for the
administration of such laws. To the knowledge of Sheer, Ahearn, no act or
failure to act by Sheer, Ahearn has resulted in a "prohibited transaction" (as
defined in ERISA) with respect to the Sheer, Ahearn Plans that is not subject to
a statutory or regulatory exception and that could have a material adverse
effect on Sheer, Ahearn. No "reportable event" (as defined in ERISA, but
excluding any event for which notice is waived under the ERISA regulations) has
occurred with respect to any of the Sheer, Ahearn Plans which is subject to
Title IV of ERISA. Sheer, Ahearn has not previously made, is not currently
making, and is not obligated in any way to make, any
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contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments Act of 1980.
(b) Except as set forth in Exhibit 3.12(b) to the Sheer, Ahearn
Disclosure Schedule, Sheer, Ahearn is not a party to any oral or written (i)
union, guild or collective bargaining agreement which agreement covers employees
in the United States (nor is it aware of any union organizing activity currently
being conducted in respect to any of its employees), (ii) agreement with any
executive officer or other key employee the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
of the nature contemplated by this Plan of Merger and which provides for the
payment of in excess of $25,000, or (iii) agreement or plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Plan of Merger or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by this
Plan of Merger.
3.14 Compliance with Laws in General. Except as set forth in Exhibit
3.13 to the Sheer, Ahearn Disclosure Schedule, Sheer, Ahearn has not received
any notices of, nor to the best of their knowledge have there been any, material
violations of any federal, state or local laws, regulations or ordinances
relating to its business and operations, including, without limitation, the
Occupational Safety and Health Act, the Americans with Disabilities Act, the
Medicare or applicable Medicaid statutes and regulations, including billing and
coding, and any Environmental Laws, and no notice of any pending inspection or
violation of any such law, regulation or ordinance has been received by Sheer,
Ahearn which, if it were determined that a violation had occurred, would have a
material adverse effect on Sheer, Ahearn.
3.15 Regulatory Approvals. Except as disclosed in the Sheer, Ahearn
Documents or in Exhibit 3.14 to the Sheer, Ahearn Disclosure Schedule, Sheer,
Ahearn or any affiliated Sheer, Ahearn entity, as applicable, holds all
licenses, certificates of need and other regulatory
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approvals required or necessary to be applied for or obtained in connection with
its business as presently conducted or as proposed to be conducted, except where
the failure to obtain such license, certificate of need or regulatory approval
would not have a material adverse effect on Sheer, Ahearn. All such licenses,
certificates of need and other regulatory approvals relating to the business,
operations and facilities of Sheer, Ahearn and each Sheer, Ahearn Subsidiary or
affiliated Sheer, Ahearn entity are in full force and effect, except where any
failure of such license, certificate of need or regulatory approval to be in
full force and effect would not have a material adverse effect on Sheer, Ahearn.
There is not now and there has never been any litigation concerning such
licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, has been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and no action (equitable, legal or
administrative), arbitration or other process is pending, or to the best
knowledge of Sheer, Ahearn, threatened, which in any way challenges the validity
of, or seeks to revoke, condition or restrict any such license, certificate of
need, or regulatory approval.
3.16 Commissions and Fees. Except as set forth on Exhibit 3.15 to the
Sheer, Ahearn Disclosure Schedule, there are no valid claims for brokerage
commissions or finder's or similar fees in connection with the transactions
contemplated by this Plan of Merger which may be now or hereafter asserted
against MedPartners resulting from any action taken by Sheer, Ahearn or its
officers, Directors or agents, or any of them.
3.17 Retirement or Re-Acquisition of MedPartners Common Stock. Sheer,
Ahearn is not a party to any agreement the effect of which would be to require
MedPartners directly or indirectly to retire or re-acquire all or part of the
shares of MedPartners Common Stock issued pursuant to Section 2.1 hereof.
3.18 Disposition of Assets of Surviving Corporation. Sheer, Ahearn is
not a party to any plan to dispose of a significant part of the assets of the
Surviving Corporation within two
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years after the Closing Date, other than dispositions in the ordinary course of
business of the Surviving Corporation and dispositions intended to eliminate
duplicate facilities or excess capacity.
3.19 Vote Required. The affirmative vote of the holders of a majority
of the outstanding Sheer, Ahearn Shares entitled to vote thereon is the only
vote of the holders of any class or series of Sheer, Ahearn capital stock
necessary to approve this Plan of Merger, the Merger and the transactions
contemplated hereby; provided, however, if the approval of the Merger by the
Sheer, Ahearn shareholders is to be accomplished by action without a meeting
pursuant to Section 607.0704 of the FBCA, the unanimous written consent of the
Sheer, Ahearn shareholders shall be required.
3.19 No Untrue Representations. No representation or warranty by Sheer,
Ahearn in this Plan of Merger, and no Exhibit or certificate issued by Sheer,
Ahearn and furnished or to be furnished to MedPartners and the Subsidiary
pursuant hereto, or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact in response to
the disclosure requested, or omits or will omit to state a material fact
necessary to make the statements or facts contained therein in response to the
disclosure requested not misleading in light of all of the circumstances then
prevailing.
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Section 4. REPRESENTATIONS AND WARRANTIES OF THE SUBSIDIARY
The Subsidiary hereby represents and warrants to Sheer, Ahearn as
follows:
4.1 Organization, Existence and Capital Stock. The Subsidiary is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. The Subsidiary's authorized capital consists
of 1,000 shares of Common Stock, par value $1.00 per share, all of which shares
are issued and registered in the name of MedPartners. The Subsidiary has not,
within the two years immediately preceding the date of this Plan of Merger,
owned, directly or indirectly, any Sheer, Ahearn Shares.
4.2 Power and Authority. The Subsidiary has the corporate power to
execute, deliver and perform this Plan of Merger and all agreements and other
documents executed and delivered, or to be executed and delivered, by it
pursuant to this Plan of Merger, and, subject to the satisfaction of the
conditions precedent set forth herein, has taken all actions required by law,
its Certificate of Incorporation, its By-laws or otherwise, to authorize the
execution and delivery of this Plan of Merger and such related documents. The
execution and delivery of this Plan of Merger does not and, subject to the
receipt of required regulatory approvals and any other required third-party
consents or approvals, the consummation of the Merger contemplated hereby will
not, violate any provisions of the Certificate of Incorporation or Bylaws of the
Subsidiary, or any agreement, instrument, order, judgment or decree to which the
Subsidiary is a party or by which it is bound, violate any restrictions of any
kind to which the Subsidiary is subject, or result in the creation of any lien,
charge or encumbrance upon any of the property or assets of the Subsidiary.
4.3 Commissions and Fees. There are no claims for brokerage
commissions, investment bankers' fees or finder's fees in connection with the
transaction contemplated by this Plan
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of Merger resulting from any action taken by the Subsidiary or any of its
officers, directors or agents.
4.4 Legal Proceedings. There are no actions, suits or proceedings
pending or threatened against the Subsidiary, at law or in equity, relating to
or affecting the Subsidiary, including the Merger. The Subsidiary does not know
or have any reasonable grounds to know of any justification for any such action,
suit or proceeding.
Section 5. REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS
MedPartners hereby represents and warrants to Sheer, Ahearn as follows:
5.1 Organization, Existence and Good Standing. MedPartners is a
corporation duly organized and validly existing and is in good standing under
the laws of the State of Delaware. MedPartners has all necessary corporate power
to own its properties and assets and to carry on its business as presently
conducted. MedPartners is not, and has not been within the two years immediately
preceding the date of this Plan of Merger, a subsidiary or division of another
corporation, nor has MedPartners within such time owned, directly or indirectly,
any Sheer, Ahearn Shares.
5.2 MedPartners Capitalization. MedPartners has an authorized
capitalization of 9,500,000 shares of Preferred Stock, par value $.001 per
share, of which no shares are issued and outstanding, and no shares are held in
treasury, 500,000 shares of Series C Junior Participating Preferred Stock, par
value $.001 per share, of which no shares are issued and outstanding and no
shares are held in treasury and 200,000,000 shares of Common Stock, par value
$.001 per share, of which 146,208,305 shares were issued and outstanding at
September 13, 1996, and no shares are held in treasury. All of the issued and
outstanding shares of MedPartners Common Stock have been duly and validly issued
and are fully paid and nonassessable. Except as described in Exhibit 5.2 to the
MedPartners Disclosure Schedule
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delivered to Sheer, Ahearn at the time of the execution and delivery of this
Plan of Merger (the "MedPartners Disclosure Schedule"), there are no options,
warrants or similar rights granted by MedPartners or any other agreements to
which MedPartners is a party providing for the issuance or sale by it of any
additional securities. There is no liability for dividends declared or
accumulated but unpaid with respect to any shares of MedPartners Common Stock.
MedPartners has not made any distributions to any holder of MedPartners Common
Stock or participated in or effected any issuance, exchange or retirement of
MedPartners Common Stock, or otherwise changed the equity interests of holders
of MedPartners Common Stock, in contemplation of effecting the Merger within the
two years immediately preceding the date of this Plan of Merger. Any shares of
MedPartners Common Stock that MedPartners has re-acquired during the two years
immediately preceding the date of this Plan of Merger have been so re-acquired
only for purposes other than Business Combinations.
5.3 MedPartners Common Stock. On the Closing Date, MedPartners will
have a sufficient number of authorized but unissued shares of its Common Stock
available for issuance to the holders of Sheer, Ahearn Shares in accordance with
the provisions of this Plan of Merger. The MedPartners Common Stock to be issued
pursuant to this Plan of Merger will, when so delivered, be (i) duly and validly
issued, fully paid and nonassessable and (ii) listed on the NYSE, upon official
notice of issuance.
5.4 Subsidiaries and Affiliated Entities.
(a) Attached as Exhibit 5.4 to the MedPartners Disclosure Schedule is a
list of all subsidiaries of MedPartners (individually, a "MedPartners
Subsidiary", and collectively, the "MedPartners Subsidiaries") and their states
of incorporation and all professional corporations or professional associations
(the "MedPartners Professional Corporations") of which MedPartners has control
and their states of incorporation.
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(b) Also disclosed in Exhibit 5.4 to the MedPartners Disclosure
Schedule is a list of all general or limited partnerships in which a general
partner is MedPartners, a MedPartners Subsidiary or another partnership
controlled by MedPartners (individually a "MedPartners Partnership" and
collectively, the "MedPartners Partnerships"), and all limited liability
companies in which MedPartners, a MedPartners Subsidiary is a member
(individually, a "MedPartners LLC"; the MedPartners Professional Corporations
and the MedPartners LLCs being collectively called the "Other MedPartners
Entities"), and their states of organization.
(c) Except as set forth in Exhibit 5.4, neither MedPartners nor any
MedPartners Subsidiary owns an equity interest in, nor does such entity control,
directly or indirectly, any other joint venture or partnership.
(d) Although the financial results of the medical groups affiliated
with MedPartners physician practice management business are consolidated for
accounting purposes on the MedPartners Balance Sheet, the terms "MedPartners
Subsidiary" and "Other MedPartners Entity" do not include any affiliated medical
groups.
5.5 Organization, Existence and Good Standing of MedPartners
Subsidiaries and Other MedPartners Entities.
(a) Each MedPartners Subsidiary and each MedPartners Professional
Corporation is a corporation duly organized, validly existing and in good
standing under the laws of its respective state of incorporation. Each
MedPartners Subsidiary and each MedPartners Professional Corporation has all
necessary corporate power to own its properties and assets and to carry on its
business as presently conducted.
(b) Each MedPartners Partnership that is a limited partnership is
validly formed, each MedPartners Partnership that is a general partnership has
been duly organized, and each MedPartners Partnership is in good standing under
the laws of its respective state of organization.
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Each MedPartners Partnership has all necessary power to own its property and
assets and to carry on its business as presently conducted.
(c) Each MedPartners LLC that is a limited company validly formed and
in good standing under the laws of its respective state of organization. Each
MedPartners LLC has all necessary power to own its property and assets and to
carry on its business as presently conducted.
5.6 Foreign Qualifications. MedPartners, each MedPartners Subsidiary,
MedPartners Professional Corporation and each MedPartners LLC is qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the nature or character of the property owned, leased or operated by it or
the nature of the business transacted by it makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
on MedPartners.
5.7 Subsidiary Common Stock. MedPartners owns, beneficially and of
record, all of the issued and outstanding shares of Common Stock, par value
$1.00 per share, of the Subsidiary (the "Subsidiary Common Stock"), which are
validly issued and outstanding, fully paid and nonassessable, free and clear of
all liens and encumbrances. MedPartners has, or will by the Effective Time have,
taken all such actions as may be required in its capacity as the sole
stockholder of the Subsidiary to approve the Merger.
5.8 Power and Authority. MedPartners has corporate power to execute,
deliver and perform this Plan of Merger and all agreements and other documents
executed and delivered, or to be executed and delivered, by it pursuant to this
Plan of Merger, and, subject to the satisfaction of the conditions precedent set
forth herein has taken all actions required by law, its Certificate of
Incorporation, its By-laws or otherwise, to authorize the execution and delivery
of this Plan of Merger and such related documents. The execution and delivery of
this Plan of Merger does not and, subject to the receipt of required regulatory
approvals and any other
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required third-party consents or approvals, the consummation of the Merger
contemplated hereby will not, violate any provisions of the Certificate of
Incorporation or By-laws of MedPartners, or any provision of, or result in the
acceleration of any obligation under, any mortgage, lien, lease, agreement,
instrument, order, arbitration award, judgment or decree to which MedPartners or
any MedPartners Subsidiary or Other MedPartners Entity is a party or by which it
is bound, or violate any restrictions of any kind to which MedPartners or any
subsidiary is subject. The execution and delivery of this Plan of Merger has
been approved by the Board of Directors of MedPartners.
5.9 MedPartners Public Information. MedPartners has heretofore
furnished Sheer, Ahearn with information regarding MedPartners including its
Prospectus dated October 16, 1996 (Registration No. 333-13471) relating to the
resale of 1,221,601 shares of MedPartners Common Stock (the "Prospectus") and
its Quarterly Report for the quarter ended September 30, 1996 ("10-Q") filed
with the Securities and Exchange Commission ("SEC") (as any such documents have
been amended since their original filing, the "MedPartners Documents"). As of
their respective filing dates, the MedPartners Documents did not contain any
untrue statements of material facts or omit to state material facts required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
filing dates, the MedPartners Documents complied in all material respects with
the applicable requirements of the Securities Act and the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and the rules and regulations
promulgated under such statutes. The financial statements contained in the
MedPartners Documents, together with the notes thereto, have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated (except as may be indicated in the notes
thereto, or, in the case of the unaudited financial statements, as permitted by
Form 10-Q), reflect all known liabilities of MedPartners, fixed or contingent,
required to be stated therein, and present fairly the financial condition of
MedPartners at said dates and the consolidated results of operations and cash
flows of MedPartners for the periods then ended. The consolidated balance
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sheet of MedPartners at December 31, 1995, included in the Information Package
is herein sometimes referred to as the "MedPartners Balance Sheet".
5.10 Legal Proceedings. There is no pending or threatened litigation,
governmental investigation, condemnation or other proceeding against or relating
to or affecting MedPartners or the transactions contemplated by this Plan of
Merger for which MedPartners is uninsured or which, if resolved adversely to
MedPartners, would have a material adverse effect on MedPartners and, to the
knowledge of MedPartners, no basis for any such action exists.
5.11 Subsequent Events. Except as set forth in Exhibit 5.11 to the
MedPartners Disclosure Schedule, MedPartners has not, since the date of the
MedPartners Balance Sheet:
(a) Incurred any material adverse change.
(b) Except for this Plan of Merger and any other agreement
executed and delivered pursuant to this Plan of Merger, entered into
any material transaction other than in the ordinary course of business
or permitted under other Sections of this Plan of Merger.
5.14 Investment Intent. MedPartners is acquiring the Sheer, Ahearn
Shares hereunder for its own account and not with a view to the distribution or
sale thereof, and MedPartners has no understanding, agreement or arrangement to
sell, distribute, partition or otherwise transfer or assign all or any part of
the Sheer, Ahearn Shares to any other person, firm or corporation.
5.13 Commissions and Fees. There are no claims for brokerage
commissions, investment bankers' fees or finder's fees in connection with the
transactions contemplated by this Plan of Merger resulting from any action taken
by MedPartners or any of its officers, directors or agents.
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5.14 Retirement or Re-Acquisition of MedPartners Common Stock.
MedPartners has not agreed directly or indirectly to retire or re-acquire all or
part of the shares of MedPartners Common Stock issued pursuant to Section 2.1
hereof.
5.15 Disposition of Assets of Surviving Corporation. MedPartners does
not intend or plan to dispose of, or to cause the Surviving Corporation to
dispose of, a significant part of the assets of the Surviving Corporation within
two years after the Effective Time, other than dispositions in the ordinary
course of business of the Surviving Corporation and dispositions intended to
eliminate duplicate facilities or excess capacity. After the Effective Time, it
is anticipated that the Surviving Corporation will become a subsidiary of Team,
and it is understood among the parties hereto that no rights or privileges of
the shareholders of Sheer, Ahearn will be altered as a result.
5.16 No Untrue Representations. No representation or warranty by
MedPartners in this Plan of Merger, and no Exhibit or certificate issued by
MedPartners and furnished or to be furnished to Sheer, Ahearn pursuant hereto,
or in connection with the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact in response to the disclosure
requested, or omits or will omit to state a material fact necessary to make the
statements or facts contained therein in response to the disclosure requested
not misleading in light of all of the circumstances then prevailing.
Section 6. ACCESS TO INFORMATION AND DOCUMENTS
6.1 Access to Information. Between the date hereof and the Closing
Date, Sheer, Ahearn will give to MedPartners and its counsel, accountants and
other representatives full access, through a Sheer, Ahearn employee designated
by Sheer, Ahearn and agreeable to MedPartners or Team, to all the properties,
documents, contracts, personnel files and other records of such party and shall
furnish MedPartners with copies of such documents and with such information with
respect to the affairs of such party as the other party may from time to time
reasonably request. Sheer, Ahearn will, subject to applicable laws, disclose and
make available
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to MedPartners and its representatives all books, contracts, accounts, personnel
records, letters of intent, papers, records, communications with regulatory
authorities and other documents relating to the business and operations of
Sheer, Ahearn. In addition, Sheer, Ahearn shall make available to MedPartners
all such banking, investment and financial information as shall be necessary to
allow for the efficient integration of Sheer, Ahearn's banking, investment and
financial arrangements with those of MedPartners at the Effective Time.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate or representative of any
party shall be deemed to be "Evaluation Material" under the terms of the
Confidentiality Agreement dated February 13, 1996 between Sheer, Ahearn and
MedPartners and/or Team Health Group, Inc. (the "Confidentiality Agreement").
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be
deemed to create any duty or responsibility on the part of either party to
investigate or evaluate the value, validity or enforceability of any contract,
lease or other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
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Section 7. COVENANTS
7.1 Preservation of Business. Sheer, Ahearn will use its reasonable
best efforts to preserve the business organization of Sheer, Ahearn intact, to
keep available to MedPartners and the Surviving Corporation the services of the
present employees and independent contractors of Sheer, Ahearn, and to preserve
for MedPartners and the Surviving Corporation the goodwill of the suppliers,
customers and others having business relations with Sheer, Ahearn.
7.2 Material Transactions. Prior to the Effective Time, Sheer, Ahearn
will not (other than as contemplated by the terms of the Plan of Merger and the
related documents, and other than with respect to transactions for which binding
commitments have been entered into prior to the date hereof and transactions
described in Exhibit 7.2 to the Sheer, Ahearn Disclosure Schedule which do not
vary materially from the terms set forth on such Exhibit 7.2), without first
obtaining the consent of MedPartners or Team:
(a) Encumber any asset or enter into any transaction or make
any contract or commitment relating to the properties, assets and
business of Sheer, Ahearn, (i) which cannot be performed within three
months or less, or (ii) which involves the expenditure of over $10,000.
(b) Enter into any employment contract which is not terminable
upon notice of 30 days or less, at will, and without penalty to Sheer,
Ahearn, except as provided herein.
(c) Issue or sell, or agree to issue or sell, any shares of
capital stock or other securities of Sheer, Ahearn.
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(d) Make any payment or distribution to the trustee under any
bonus, pension, profit-sharing or retirement plan or incur any
obligation to make any such payment or contribution which is not in
accordance with Sheer, Ahearn's usual past practice, or make any
payment or contributions or incur any obligation pursuant to or in
respect of any other plan or contract or arrangement providing for
bonuses, executive incentive compensation, pensions, deferred
compensation, retirement payments, profit-sharing or the like,
establish or enter into any such plan, contract or arrangement, or
terminate any plan. It is expressly understood by and among the
parties, after consideration of the tax and accounting provisions of
this Plan of Merger, that until the Effective Date, no bonus or other
distribution from Sheer, Ahearn to its shareholders or employees shall
be prohibited so long as such distribution does not violate the
provisions set forth in Section 9.2(o) and 9.2(p) hereof.
(e) Extend credit to anyone, except in the ordinary course
of business consistent with prior practices.
(f) Guarantee the obligation of any person, firm or
corporation, except in the ordinary course of business consistent with
prior practices.
(g) Amend its Articles of Incorporation or By-laws.
(h) Take any action of a character described in Section
3.10(a) to 3.10(h), inclusive.
7.3 Meeting of Sheer, Ahearn's Shareholders. Sheer, Ahearn will take
all steps necessary in accordance with its Articles of Incorporation and Bylaws
to call, give notice of, convene and hold a meeting of its shareholders (the
"Shareholders Meeting") as soon as practicable after the execution and delivery
of this Plan of Merger, for the purpose of approving
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this Plan of Merger and for such other purposes as may be necessary. Unless this
Plan of Merger shall have been validly terminated as provided herein, the Board
of Directors of Sheer, Ahearn (subject to the provisions of Section 8.1(d)
hereof) will (i) recommend to its shareholders the approval of this Plan of
Merger, the transactions contemplated hereby and any other matters to be
submitted to the shareholders in connection therewith, to the extent that such
approval is required by applicable law in order to consummate the Merger, and
(ii) use its reasonable, good faith efforts to obtain the approval by its
shareholders of this Plan of Merger and the transactions contemplated hereby.
Nothing contained herein shall affect the right of Sheer, Ahearn's shareholders
to take action by unanimous written consent in lieu of a meeting to the extent
permitted by applicable law and its Articles of Incorporation and By-laws.
7.4 Securities Matters. (a) MedPartners shall prepare and distribute to
the holders of Sheer, Ahearn Shares an information package (the "Information
Package") designed to provide such shareholders with such information as they
shall need about this Plan of Merger and the Merger in order to qualify the
private placement of MedPartners Shares into which the Sheer, Ahearn Shares are
to be converted pursuant to this Plan of Merger for the exemption under the
Securities Act provided by Section 4(2) promulgated thereunder. Sheer, Ahearn
shall provide MedPartners with such information and documentation as shall be
reasonably requested by MedPartners in order to prepare the Information Package
contemplated by this Section 7.4(a).
(b) The information specifically designated as being supplied by Sheer,
Ahearn for inclusion in the Information Package shall not, at the time the Proxy
Statement is first mailed to holders of Sheer, Ahearn Shares, at the time of the
Shareholders Meeting and at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, not misleading. The
information specifically designated as being supplied by Sheer, Ahearn for
inclusion in the Proxy Statement shall not, at the date the Proxy Statement (or
any amendment thereof or supplement thereto) is first mailed to holders of
Sheer, Ahearn Shares, at the time of the Shareholders Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to state
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any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to Sheer, Ahearn, or its officers or Directors, should be
discovered by Sheer, Ahearn which should be set forth in the Proxy Statement,
Sheer, Ahearn shall promptly inform MedPartners.
(c) The information specifically designated as being supplied by
MedPartners for inclusion in the Information Package shall not, at the time the
Proxy Statement is first mailed to holders of Sheer, Ahearn Shares, at the time
of the Shareholders Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, not
misleading. The information specifically designated as being supplied by
MedPartners for inclusion in the Proxy Statement to be sent to the holders of
Sheer, Ahearn Shares in connection with the Shareholders Meeting shall not, at
the date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to holders of Sheer, Ahearn Shares, at the time of the Shareholders
Meeting or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to
MedPartners or its officers or Directors, should be discovered by MedPartners
which should be set forth in the Proxy Statement, MedPartners shall promptly
inform Sheer, Ahearn.
(d) Prior to the Closing Date, MedPartners shall file a Subsequent
Listing Application with the NYSE relating to the shares of MedPartners Common
Stock to be issued in connection with the Merger, and shall cause such shares of
MedPartners Common Stock to be listed on the NYSE, upon official notice of
issuance, prior to the Closing Date.
(e) Sheer, Ahearn shall furnish all information to MedPartners with
respect to Sheer, Ahearn as MedPartners may reasonably request for inclusion in
the Proxy Statement and shall otherwise cooperate with MedPartners in the
preparation and filing of such documents.
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7.5 Exemption from State Takeover Laws. Sheer, Ahearn shall take all
reasonable steps necessary and within its power to exempt the Merger from the
requirements of any state takeover statute or other similar state law which
would prevent or impede the consummation of the transactions contemplated
hereby, by action of Sheer, Ahearn's Board of Directors.
7.6 Public Disclosures. MedPartners and Sheer, Ahearn will consult with
each other before issuing any press release or otherwise making any public
statement with respect to the transactions contemplated by this Plan of Merger,
and shall not issue any such press release or make any such public statement
prior to such consultation except as may be required by applicable law or
requirements of the NYSE. The parties shall issue a joint press release,
mutually acceptable to MedPartners and Sheer, Ahearn, promptly upon execution
and delivery of this Plan of Merger.
7.7 Resignation of Sheer, Ahearn Directors. On or prior to the Closing
Date, Sheer, Ahearn shall deliver to MedPartners evidence satisfactory to
MedPartners of the resignation of the directors and officers of Sheer, Ahearn,
such resignations to be effective on the Closing Date.
7.8 Notice of Subsequent Events. Each party hereto shall notify the
other parties of any changes, additions or events of which they have knowledge
which would cause any material change in or material addition to any Exhibit to
its Disclosure Schedule delivered by the notifying party under this Plan of
Merger, promptly after the occurrence of the same. If the effect of such change
or addition would, individually or in the aggregate with the effect of changes
or additions previously disclosed pursuant to this Section 7.8, constitute a
material adverse effect on the notifying party, the non-notifying party may, if
such change or addition has not been ameliorated within ten days after receipt
of such notice, elect to terminate this Plan of Merger. If the non-notifying
party does not give written notice of such termination within such 10-day
period, the non-notifying party shall be deemed to have consented to such change
or addition and shall not be entitled to terminate this Plan of Merger by reason
thereof.
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7.9 No Solicitations. Sheer, Ahearn shall not, directly or indirectly,
furnish information and access, in response to unsolicited requests therefor, to
any corporation, partnership, person or other entity or group, or participate in
discussions with such corporation, partnership, person or other entity or group
concerning any proposal to acquire or be acquired by such party upon a merger,
purchase of assets, purchase of or tender offer for shares of its Common Stock
or similar transaction (an "Acquisition Transaction"). Sheer, Ahearn shall
notify MedPartners of any unsolicited request for information and access in
connection with a possible Acquisition Transaction involving such party, such
notification to include the identity of such third party and the proposed terms
of such possible Acquisition Transaction.
7.10 Other Actions. Subject to the provisions of Section 7.8 hereof,
none of Sheer, Ahearn, MedPartners and the Subsidiary shall knowingly or
intentionally take any action, or omit to take any action, if such action or
omission would, or reasonably might be expected to, result in any of its
representations and warranties set forth herein being or becoming untrue in any
material respect, or in any of the conditions to the Merger set forth in this
Plan of Merger not being satisfied, or (unless such action is required by
applicable law) which would materially adversely affect the ability of Sheer,
Ahearn or MedPartners to obtain any consents or approvals required for the
consummation of the Merger without imposition of a condition or restriction
which would have a material adverse effect on the Surviving Corporation or which
would otherwise materially impair the ability of Sheer, Ahearn or MedPartners to
consummate the Merger in accordance with the terms of this Plan of Merger or
materially delay such consummation.
7.11 Sheer, Ahearn Conversion. It is understood by each of the parties
hereto that (a) Sheer, Ahearn or its shareholders shall convert Sheer, Ahearn to
a business corporation ("Sheer, Ahearn BC") organized under the FBCA immediately
prior to the Effective Time, and (b) accordingly, for all purposes of and under
this Plan of Merger, notwithstanding any other
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provision hereof, Sheer, Ahearn BC (and not Sheer, Ahearn) shall be the party
participating in the Merger with MedPartners and the Subsidiary.
7.12 Accounting Methods. Neither MedPartners nor Sheer, Ahearn shall
change, in any material respect, its methods of accounting in effect at its most
recent fiscal year end, except as required by changes in generally accepted
accounting principles as concurred by such parties' independent accountants.
7.13 Pooling and Tax-Free Reorganization Treatment. Neither MedPartners
nor Sheer, Ahearn shall intentionally take or cause any action to be taken,
whether on or before the Effective Time, which would disqualify the Merger as a
"pooling of interests" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code.
7.14 Affiliate and Pooling Agreements. MedPartners and Sheer, Ahearn
will each use their respective reasonable, good faith efforts to cause each of
their respective directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act) to
execute and deliver to MedPartners as soon as practicable an agreement in the
form attached hereto as Exhibit 7.14 relating to the disposition of shares of
Sheer, Ahearn Common Stock and shares of MedPartners Common Stock held by such
person and the shares of MedPartners Common Stock issuable pursuant to this Plan
of Merger.
7.15 Cooperation. (a) MedPartners and Sheer, Ahearn shall together, or
pursuant to an allocation of responsibility agreed to between them, (i)
cooperate with one another in determining whether any filings required to be
made or consents required to be obtained in any jurisdiction prior to the
Effective Time in connection with the consummation of the transactions
contemplated hereby and cooperate in making any such filings promptly and in
seeking to obtain timely any such consents, (ii) use their respective best
efforts to cause to be lifted any injunction prohibiting the Merger, or any part
thereof, or the other transactions contemplated hereby, and
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(iii) furnish to one another and to one another's counsel all such information
as may be required to effect the foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless
this Plan of Merger shall have been validly terminated as provided herein, each
of MedPartners and Sheer, Ahearn shall use all reasonable efforts (i) to take,
or cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party (or any subsidiaries or
affiliates of such party) with respect to the Plan of Merger and to consummate
the transactions contemplated hereby, subject to the vote of Sheer, Ahearn's
shareholders described above, and (ii) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any governmental entity and/or any other public or private third
party which is required to be obtained or made by such party or any of its
subsidiaries or affiliates in connection with this Plan of Merger and the
transactions contemplated hereby Each of MedPartners and Sheer, Ahearn will
promptly cooperate with and furnish information to the other in connection with
any such burden suffered by, or requirement imposed upon, either of them or any
of their subsidiaries or affiliates in connection with the foregoing.
7.16 Publication of Combined Results. MedPartners agrees to use its
best efforts to publish the combined results of operations of MedPartners and
Sheer, Ahearn in its Quarterly Report on Form 10-Q or Annual Report on Form
10-K, whichever is earlier, which shall contain a full calendar month of such
combined results, provided however that such period shall be tolled for such
period as the financial statements required for the preparation of such
financial statements for such publication are not reasonably available to
MedPartners. For purposes of this Section 7.16, the term "publication" shall
have the meaning provided in SEC Accounting Series Release No. 135.
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Section 8. TERMINATION, AMENDMENT AND WAIVER.
8.1 Termination. This Plan of Merger may be terminated
at any time prior to the Effective Time, whether before or after approval of
matters presented in connection with the Merger to the holders of Sheer, Ahearn
Common Stock:
(a) by mutual written consent of MedPartners, the Subsidiary
and Sheer, Ahearn;
(b) by either MedPartners or Sheer, Ahearn:
(i) if, upon a vote at a duly held meeting of shareholders or
any adjournment thereof, or otherwise, any required approval of
the holders of Sheer, Ahearn Common Stock shall not have been
obtained;
(ii) if the Merger shall not have been consummated on or
before December 31, 1996, unless the failure to consummate the
Merger is the result of a willful and material breach of this
Plan of Merger by the party seeking to terminate this Plan of
Merger; provided, however, that the passage of such period shall
be tolled for any part thereof (but not exceeding 60 days in the
aggregate) during which any party shall be subject to a nonfinal
order, decree, ruling or action restraining, enjoining or
otherwise prohibiting the consummation of the Merger or the
calling or holding of a meeting of shareholders;
(iii) if any court of competent jurisdiction or other
governmental entity shall have issued an order, decree or ruling
or taken any other action permanently enjoining, restraining or
otherwise prohibiting the
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Merger and such order, decree, ruling or other action shall
have become final and nonappealable;
(iv) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained
in this Plan of Merger which (A) would give rise to the failure
of a condition set forth in Section 9.2(a) or (b) or Section
9.3(a) or (b), as applicable, and (B) cannot be or has not been
cured within 30 days after the giving of written notice to the
breaching party of such breach (a "Material Breach") (provided
that the terminating party is not then in Material Breach of any
representation, warranty, covenant or other agreement contained
in this Plan of Merger); or
(v) if either MedPartners or Sheer, Ahearn gives notice of
termination pursuant to Section 7.8;
(c) by either MedPartners or Sheer, Ahearn in the event that
(i) all of the conditions to the obligation of such party to effect the
Merger set forth in Section 9.1 shall have been satisfied and (ii) any
condition to the obligation of such party to effect the Merger set
forth in Section 9.2 (in the case of MedPartners) or Section 9.3 (in
the case of Sheer, Ahearn) is not capable of being satisfied prior to
the end of the period referred to in Section 8.1(b)(ii);
(d) By Sheer, Ahearn, if Sheer, Ahearn's Board of Directors
shall have (i) determined, in the exercise of its fiduciary duties
under applicable law, not to recommend the Merger to the holders of
Sheer, Ahearn Shares or shall have withdrawn such recommendation or
(ii) approved, recommended or endorsed any Acquisition Transaction (as
defined in Section 7.9) other than this Plan of Merger or (iii)
resolved to do any of the foregoing;
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(e) By either MedPartners or Sheer, Ahearn, if the condition
set forth in Section 9.1(e) is not satisfied by December 31, 1996; or
(f) By MedPartners, if holders of greater than 10% of the
Sheer, Ahearn Shares shall have given proper demand for payment of the
fair value of such Sheer, Ahearn Shares as provided in Section 607.1320
of the FBCA prior to the taking of a vote on the Merger at a meeting of
the shareholders of Sheer, Ahearn.
8.2 Effect of Termination. In the event of termination of this Plan of
Merger as provided in Section 8.1, this Plan of Merger shall forthwith become
void and have no effect, without any liability or obligation on the part of any
party, other than the provisions of Sections 6.2 and 8.6, and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or other agreements
set forth in this Plan of Merger.
8.3 Amendment. This Plan of Merger may be amended by the parties at any
time before or after any required approval of matters presented in connection
with the Merger by the holders of Sheer, Ahearn Shares.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c) subject to the proviso
of Section 8.3, waive compliance with any of the agreements or conditions
contained in this Plan of Merger. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
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Plan of Merger to assert any of its rights under this Plan of Merger or
otherwise shall not constitute a waiver of such rights, except as otherwise
provided in Section 7.8.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Plan of Merger pursuant to Section 8.1, an amendment of this
Plan of Merger pursuant to Section 8.3, or an extension or waiver pursuant to
Section 8.4 shall, in order to be effective, require in the case of MedPartners,
the Subsidiary or Sheer, Ahearn, action by its Board of Directors or the duly
authorized designee of the Board of Directors.
8.6 Expenses. All costs and expenses incurred in connection with the
Plan of Merger and the transactions contemplated hereby shall be paid by the
party incurring such expense. Sheer, Ahearn shall provide MedPartners with
copies of engagement letters for each attorney, accountant, consultant,
investment banking or other person or entity retained by Sheer, Ahearn for the
purpose of consummating the Merger. If the Merger is consummated, by reason
thereof, MedPartners will indirectly bear the expenses incurred by Sheer,
Ahearn, so long as such expenses relate directly to services performed in
connection with the Merger, so long as such expenses are reasonable and
customary in transactions similar to the Merger and so long as such expenses do
not exceed $1 million. Accordingly, MedPartners shall have the right, on behalf
of Sheer, Ahearn, to review rates charged for such services provided to Sheer,
Ahearn, to contest any fees charged to Sheer, Ahearn and to negotiate the
reduction or limitation of any such fees.
Section 9. CONDITIONS TO CLOSING.
9.1 Mutual Conditions. The respective obligations of each party to
effect the Merger shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions (any of which may be waived in writing
by MedPartners, the Subsidiary and Sheer, Ahearn):
(a) None of MedPartners, Team, the Subsidiary or Sheer, Ahearn
nor any of their respective subsidiaries shall be subject to any order,
decree or
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injunction by a court of competent jurisdiction which (i) prevents or
materially delays the consummation of the Merger or (ii) would impose
any material limitation on the ability of MedPartners effectively to
exercise full rights of ownership of the Common Stock of the Surviving
Corporation or any material portion of the assets or business of
Sheer, Ahearn, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by
the government (or any governmental agency) of the United States or any
state, municipality or other political subdivision thereof that makes
the consummation of the Merger and any other transaction contemplated
hereby illegal.
(c) The holders of shares of Sheer, Ahearn Common Stock shall
have approved and adopted this Plan of Merger and any other matters
submitted to them in accordance with the provisions of Section 7.3
hereof.
(d) The shares of MedPartners Common Stock to be issued in
connection with the Merger shall have been listed on the NYSE, upon
official notice of issuance, and shall have been issued in transactions
qualified or exempt from registration under applicable securities laws
of such states and territories of the United States as may be required.
(e) The Merger shall qualify for "pooling of interests"
accounting treatment.
9.2 Conditions to Obligations of MedPartners and the Subsidiary. The
obligations of MedPartners and the Subsidiary to consummate the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction, at
or prior to the Closing Date, of the following conditions (any of which may be
waived by MedPartners and the Subsidiary):
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(a) Each of the agreements of Sheer, Ahearn to be performed at
or prior to the Closing Date pursuant to the terms hereof shall have
been duly performed in all material respects, and Sheer, Ahearn shall
have performed, in all material respects, all of the acts required to
be performed by it at or prior to the Closing Date by the terms hereof.
(b) The representations and warranties of Sheer, Ahearn set
forth in Section 3.9 shall be true and correct as of the date of this
Plan of Merger and as of the Closing Date. The representations and
warranties of Sheer, Ahearn set forth in this Plan of Merger that are
qualified as to materiality shall be true and correct, and those that
are not so qualified shall be true and correct in all material
respects, as of the date of this Plan of Merger and as of the Closing
as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so
qualified shall be true and correct in all material respects, as of
such earlier date); provided, however, that Sheer, Ahearn shall not be
deemed to be in breach of any such representations or warranties by
taking any action permitted (or approved by MedPartners) under Section
7.2 or otherwise permitted herein. MedPartners and the Subsidiary shall
have been furnished with a certificate, executed by a duly authorized
officer of Sheer, Ahearn, dated the Closing Date, certifying in such
detail as MedPartners and the Subsidiary may reasonably request as to
the fulfillment of the foregoing conditions.
(c) MedPartners and the Subsidiary shall have obtained, or
obtained the transfer of, any licenses and other regulatory approvals
necessary to allow Sheer, Ahearn to operate its business, unless the
failure to obtain such transfer or approval would not have a material
adverse effect on Sheer, Ahearn.
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(d) MedPartners shall have received an opinion from Haskell
Slaughter & Young, L.L.C., to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the
Code of which opinion may be based upon reasonable representations of
fact provided by officers of MedPartners, Sheer, Ahearn and the
Subsidiary.
(e) MedPartners shall have received an opinion from Foley &
Lardner substantially to the effect set forth in Exhibit 9.2(e) hereto.
(f) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution,
delivery and performance of this Plan of Merger shall have been
obtained or made, except for filings in connection with the Merger and
any other documents required to be filed after the Effective Time.
(g) MedPartners shall have received "Affiliate Letters" as
provided in Section 7.14 herein from each of the affiliates of Sheer,
Ahearn.
(h) MedPartners shall have received Investment Letters from
each of the shareholders of Sheer, Ahearn substantially in the from of
Exhibit 9.2(h) attached to this Plan of Merger.
(i) Each of the shareholders of Sheer, Ahearn shall have
executed and delivered an Indemnification Agreement substantially in
the form of Exhibit 9.2(i) attached to this Plan of Merger indemnifying
MedPartners from undisclosed liabilities.
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(j) Each of the shareholders of Sheer, Ahearn shall reaffirm
his investment decision on or after December 9, 1996 but not later than
December 12, 1996, in the form of Exhibit 9.2(j) attached to this Plan
of Merger.
(k) Sheer Ahearn shall have obtained the written consent of
each of the following to the transactions contemplated by the Plan of
Merger:
(1) North Bay Medical Center;
(2) University Community Hospital, Inc.;
(3) Manatee Hospitals and Health Systems, Inc.;
(4) One Call Medical, LLC;
(5) Doctor's Care, P.C.;
(6) Goodyear Medical Center;
(7) Riverview Regional Medical Center, Inc.;
(8) Northwest Regional Medical Center, Inc.;
(9) King Palm Partners;
(10) Tampa Medical Arts, Ltd.;
(11) Brownell & Henderson, a Florida general partnership;
(12) Abaco Grand Plaza, Inc.,;
(13) Second Land Sales, Inc.;
(14) PresGar Imaging, L.L.C.;
(15) Price, Hoffman, Stone & Associates, M.D.s, P.A.; Radiology
Associates of Clearwater, P.A.; Radiology Associates of
Tampa, P.A.; Radiology Associates, P.A.; and Radiology
Associates of Tarpon Springs, P.A.; and
(16) Northside Bank of Tampa.
(l) Each Sheer, Ahearn shareholder and non-shareholder
physician shall have executed, prior to the Closing Date, a new
employment agreement or
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amended employment agreement in form and substance as set forth on
Exhibit 9.2(l).
(m) Sheer, Ahearn and Team Physicians of Florida, P.A. shall
have entered into a Services Agreement in form and substance as set
forth on Exhibit 9.2(m).
(n) Each shareholder of Team Physicians of Florida, P.A. shall
have granted irrevocable proxies and options with regard to the shares
of Team Physicians of Florida, P.A. in form and substance as set forth
on Exhibit 9.2(n).
(o) Each shareholder of Sheer, Ahearn, prior to the Closing
Date, shall have executed a release with regard to any and all rights
arising under any current Sheer, Ahearn employment agreement, benefit
plan, share entitlement plan or other plan created for the benefit of
existing shareholders of Sheer, Ahearn with Sheer, Ahearn.
(p) The consummation of the Merger shall not violate any law
or restriction to which Sheer, Ahearn is subject which, if violated,
would have a material adverse effect on Sheer, Ahearn.
(q) The remaining cash and cash equivalents balance of Sheer,
Ahearn at Closing shall be not less than the amount necessary to meet
ongoing working capital obligations and in no event less than $1.2
million without the prior written consent of Team.
(r) Distributions to Sheer, Ahearn shareholders in excess of
base compensation since September 30, 1996 and prior to the Effective
Time shall not exceed $1.1 million.
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(s) The billing services agreement by and between Sheer,
Ahearn and Practice Management Partners shall have been terminated.
9.3 Conditions to Obligations of Sheer, Ahearn. The obligations of
Sheer, Ahearn to consummate the Merger and the other transactions contemplated
hereby shall be subject to the satisfaction, at or prior to the Closing Date,
of the following conditions (any of which may be waived by Sheer, Ahearn):
(a) Each of the agreements of MedPartners and the Subsidiary
to be performed at or prior to the Closing Date pursuant to the terms
hereof shall have been duly performed, in all material respects, and
MedPartners and the Subsidiary shall have performed, in all material
respects, all of the acts required to be performed by them at or prior
to the Closing Date by the terms hereof.
(b) The representation and warranty of MedPartners set forth
in Section 5.11 shall be true and correct as of the date of the Plan of
Merger and as of the Closing Date. The representations and warranties
of MedPartners set forth in this Plan of Merger that are qualified as
to materiality shall be true and correct, and those that are not so
qualified shall be true and correct in all material respects, as of the
date of this Plan of Merger and as of the Closing as though made at and
as of such time, except to the extent such representations and
warranties expressly relate to an earlier date (in which case such
representations and warranties that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be
true and correct in all material respects, as of such earlier date).
Sheer, Ahearn shall have been furnished with a certificate, executed by
duly authorized officers of MedPartners and the Subsidiary, dated the
Closing Date, certifying in such detail as Sheer, Ahearn may reasonably
request as to the fulfillment of the foregoing conditions.
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(c) Sheer, Ahearn shall have received an opinion from Foley &
Lardner to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Code which opinion may be
based upon reasonable representations of fact provided by officers of
MedPartners, Sheer, Ahearn and the Subsidiary.
(d) Sheer, Ahearn shall have received an opinion from Haskell
Slaughter & Young, L.L.C., substantially to the effect set forth in
Exhibit 9.3(d) hereto.
(e) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution,
delivery and performance of this Plan of Merger shall have been
obtained or made, except for filings in connection with the Merger and
any other documents required to be filed after the Effective Time.
(f) Each Sheer, Ahearn shareholder and non-shareholder
physician shall have executed, prior to the Closing Date, a new
employment agreement or amended employment agreement in form and
substance as set forth on Exhibit 9.2(j).
(g) Sheer, Ahearn and Team Physicians of Florida, P.A. shall
have entered into a Services Agreement in form and substance as set
forth on Exhibit 9.2(k).
Section 10. MISCELLANEOUS.
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10.1 Nonsurvival of Representations and Warranties. None of
the representations and warranties in this Plan of Merger or in any instrument
delivered pursuant to this Plan of Merger shall survive the Effective Time.
10.2 Notices. Any communications required or desired to be
given hereunder shall be deemed to have been properly given if sent by hand
delivery or by facsimile and overnight courier to the parties hereto at the
following addresses, or at such other address as either party may advise the
other in writing from time to time:
If to MedPartners:
MedPartners, Inc.
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
Facsimile: (205) 982-7709
Attention: J. Brooke Johnston, Jr., Esq.,
Senior Vice President and General Counsel
with a copy to:
Haskell, Slaughter & Young, L.L.C.
1200 AmSouth Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35201
Facsimile: (205) 324-1133
Attention: F. Hampton McFadden, Jr., Esq.
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If to Team Health Group, Inc.
H. Lynn Massingale, M.D., President
Team Health Group, Inc.
1900 Winston Road, Suite 300
Knoxville, Tennessee 37919
Facsimile: (423) 693-4064
If to Sheer, Ahearn:
Drs. Sheer, Ahearn and Associates, P.A.
9204 King Palm Drive
Tampa, Florida 33619
Facsimile: (813) 622-7589
Attention: Michael P. Flynn, M.D.
with a copy to:
Foley & Lardner
100 North Tampa Street
Suite 2700
Tampa, Florida 33602
Facsimile: (813) 221-4210
Attention : David L. Robbins, Esq.
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3 Further Assurances. Each party hereby agrees to perform
any further acts and to execute and deliver any documents which may be
reasonably necessary to carry out the provisions of this Plan of Merger.
10.4 Indemnification. MedPartners and the Subsidiary agree
that all rights to indemnification for acts or omissions occurring prior to the
Effective Time now existing in favor of the current or former directors or
officers of Sheer, Ahearn as provided in its articles of
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incorporation or by-laws shall survive the Merger and shall continue in full
force and effect in accordance with their terms. The provisions of this Section
10.4 are intended to be for the benefit of, and shall be enforceable by, each
such indemnified party and each such indemnified party's heirs and
representatives.
10.5 Governing Law. This Plan of Merger shall be interpreted,
construed and enforced in accordance with the laws of the State of Delaware,
applied without giving effect to any conflicts-of-law principles.
10.6 "Including". The word "including", when following any
general statement, term or matter, shall not be construed to limit such
statement, term or matter to the specific terms or matters as provided
immediately following the word "including" or to similar items or matters,
whether or not non-limiting language (such as "without limitation", "but not
limited to", or words of similar import) is used with reference to the word
"including" or the similar items or matters, but rather shall be deemed to refer
to all other items or matters that could reasonably fall within the broadest
possible scope of the general statement, term or matter.
10.7 "Knowledge". "To the knowledge", "to the best knowledge,
information and belief", or any similar phrase shall be deemed to refer to the
knowledge of the Chairman of the Board, Chief Executive Officer or Chief
Financial Officer of a party and to include the assurance that such knowledge is
based upon a reasonable investigation, unless otherwise expressly provided.
10.8 "Material adverse change" or "material adverse effect".
"Material adverse change" or "material adverse effect" means, when used in
connection with Sheer, Ahearn or MedPartners, any change, effect, event or
occurrence that has, or is reasonably likely to have, individually or in the
aggregate, a material adverse impact on the business or financial position of
such party and its subsidiaries taken as a whole; provided, however, that
"material adverse change" and "material adverse effect" shall be deemed to
exclude the impact of (i) changes in
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generally accepted accounting principles, (ii) changes in applicable law, and
(iii) any changes resulting from any restructuring or other similar charges or
write-offs taken by Sheer, Ahearn with the consent of MedPartners; provided,
however, that no such charges or write-offs will be taken if such would
adversely affect pooling-of-interests accounting treatment for the Merger.
Moreover, it shall not be deemed a "material adverse change" or "material
adverse effect" so long as future financial performance shall be consistent with
written representations between the parties in connection with the Merger.
10.9 "Hazardous Materials". The term "Hazardous Materials"
means any material which has been determined by any applicable governmental
authority to be harmful to the health or safety of human or animal life or
vegetation, regardless of whether such material is found on or below the surface
of the ground, in any surface or underground water, airborne in ambient air or
in the air inside any structure built or located upon or below the surface of
the ground or in building materials or in improvements of any structures, or in
any personal property located or used in any such structure, including, but not
limited to, all hazardous substances, imminently hazardous substances, hazardous
wastes, toxic substances, infectious wastes, pollutants and contaminants from
time to time defined, listed, identified, designated or classified as such under
any Environmental Laws (as defined in Section 10.10) regardless of the quantity
of any such material.
10.10 Environmental Laws. The term "Environmental Laws" means
any federal, state or local statute, regulation, rule or ordinance, and any
judicial or administrative interpretation thereof, regulating the use,
generation, handling, storage, transportation, discharge, emission, spillage or
other release of Hazardous Materials or relating to the protection of the
environment.
10.11 Captions. The captions or headings in this Plan of
Merger are made for convenience and general reference only and shall not be
construed to describe, define or limit the scope or intent of the provisions of
this Plan of Merger.
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10.12 Integration of Exhibits. All Exhibits attached to this
Plan of Merger are integral parts of this Plan of Merger as if fully set forth
herein, and all statements appearing therein shall be deemed disclosed for all
purposes and not only in connection with the specific representation in which
they are explicitly referenced.
10.13 Entire Agreement. This instrument, including all
Exhibits attached hereto and the Confidentiality Agreement contain the entire
agreement of the parties and supersede any and all prior or contemporaneous
agreements between the parties, written or oral, with respect to the
transactions contemplated hereby. Such agreement may not be changed or
terminated orally, but may only be changed by an agreement in writing signed by
the party or parties against whom enforcement of any waiver, change,
modification, extension, discharge or termination is sought.
10.14 Counterparts. This Plan of Merger may be executed in
several counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.15 Binding Effect. This Plan of Merger shall be binding on,
and shall inure to the benefit of, the parties hereto, and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Plan of Merger. No party may assign any right or
obligation hereunder without the prior written consent of the other parties.
10.16 No Rule of Construction. The parties acknowledge that
this Plan of Merger was initially prepared by MedPartners, and that all parties
have read and negotiated the language used in this Plan of Merger. The parties
agree that, because all parties participated in negotiating and drafting this
Plan of Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
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IN WITNESS WHEREOF, MedPartners, the Subsidiary and Sheer, Ahearn have
caused this Plan and Agreement of Merger to be executed by their respective duly
authorized officers, all as of the day and year first above written.
MEDPARTNERS, INC.
By
-------------------------------------
SA MERGER CORPORATION
By
-------------------------------------
DRS. SHEER, AHEARN AND ASSOCIATES, P.A.
By
-------------------------------------
-----------------------------
53
<PAGE> 1
EXHIBIT (3)-1
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
MEDPARTNERS, INC.
MEDPARTNERS, INC., a corporation organized and existing under and by
virtue of the Delaware General Corporation Law ("DGCL"), does hereby certify
that:
The present name of the corporation is MedPartners, Inc.
("Corporation");
The date of filing of the original Certificate of Incorporation of the
Corporation with the Delaware Secretary of State was August 14, 1995, under the
name MedPartners/Mullikin, Inc.;
The date of filing of the Restated Certificate of Incorporation of the
Corporation with the Delaware Secretary of State was November 29, 1995;
The date of filing of the Certificate of Correction of Restated
Certificate of Incorporation of the Corporation with the Delaware Secretary of
State was May 13, 1996;
The date of filing of the Second Amended and Restated Certificate of
Incorporation of the Corporation with the Delaware Secretary of State was May
13, 1996;
The date of filing of a Certificate of Amendment to Second Amended and
Restated Certificate of Incorporation of the Corporation with the Delaware
Secretary of State was September 5, 1996; and
The date of filing of a Certificate of Amendment to Second Amended and
Restated Certificate of Incorporation of the Corporation with the Delaware
Secretary of State was December 13, 1996.
The provisions of the Second Amended and Restated Certificate of
Incorporation, as previously amended, are hereby restated and integrated into
the single instrument which is hereinafter set forth, and which is entitled
Third Restated Certificate of Incorporation of MedPartners, Inc., without any
further amendment and without any discrepancy between the provisions of the
Second Amended and Restated Certificate of Incorporation, as previously
amended, and the provisions of the said single instrument hereinafter set
forth.
The Board of Directors of the Corporation duly adopted this Third
Restated Certificate of Incorporation pursuant to the provisions of Section 245
of the DGCL in the form set forth as follows:
ARTICLE I
The name of the Corporation is MedPartners, Inc.
<PAGE> 2
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is The Prentice-Hall Corporation System, Inc. at 1013 Centre Road, in
the City of Wilmington, County of New Castle. The Registered Agent in charge
thereof is The Prentice-Hall Corporation System, Inc.
ARTICLE III
The purposes of the Corporation are to engage in any lawful act or
activity for which corporations may be organized under the DGCL, including but
not limited to the following:
SECTION 3.1 To engage in any lawful act or activity for which
corporations may be organized under the DGCL;
SECTION 3.2 To manufacture, purchase or otherwise acquire, invest
in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of,
trade, deal in and deal with goods, wares and merchandise and personal property
of every class and description;
SECTION 3.3 To acquire, and pay for in cash, stock or bonds of
this Corporation or otherwise, the goodwill, rights, assets and property, and
to undertake or assume the whole or any part of the obligations or liabilities
of any person, firm, association or corporation;
SECTION 3.4 To acquire, hold, use, sell, assign, lease, grant
licenses in respect of, mortgage or otherwise dispose of letters patent of the
United States or any foreign country, patent rights, licenses and privileges,
inventions, improvements and processes, copyrights, trademarks and trade names,
relating to or useful in connection with any business of this Corporation;
SECTION 3.5 To acquire by purchase, subscription or otherwise,
and to receive, hold, own, guarantee, sell, assign, exchange, transfer,
mortgage, pledge or otherwise dispose of or deal in and with any of the shares
of the capital stock, or any voting trust certificates in respect of the shares
of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust
receipts, and other securities, obligations, choses in action and evidences of
indebtedness or interest issued or created by any corporations, joint stock
companies, syndicates, associations, firms, trusts or persons, public or
private, or by the government of the United States of America, or by any
foreign government, or by any state, territory, province, municipality or other
political subdivision or by any governmental agency, and as owner thereto to
possess and exercise all the rights, powers and privileges of ownership,
including the right to execute consents and vote thereon, and to do any and all
acts and things necessary or advisable for the preservation, protection,
improvement and enhancement in value thereof;
SECTION 3.6 To borrow or raise money for any of the purposes of
the Corporation and, from time to time without limit as to amount, to draw,
make, accept, endorse, execute and issue promissory notes, drafts, bills of
exchange, warrants, bonds, debentures and other negotiable or non-negotiable
instruments and evidences of indebtedness, and to secure the payment of any
thereof and
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<PAGE> 3
of the interest thereon by mortgage upon or pledge, conveyance or assignment in
trust of the whole or any part of the property of the Corporation, whether at
the time owned or thereafter acquired, and to sell, pledge or otherwise dispose
of such bonds or other obligations of the Corporation for its corporate
purposes;
SECTION 3.7 To purchase, receive, take by grant, gift, devise,
bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ,
use and otherwise deal in and with real or personal property, or any interest
therein, wherever situated, and to sell, convey, lease, exchange, transfer or
otherwise dispose of, or mortgage or pledge, all or any of the Corporation's
property and assets, or any interest therein, wherever situated; and
SECTION 3.8 In general, to possess and exercise all the powers
and privileges granted by the DGCL or by any other law of Delaware or by this
Certificate of Incorporation together with any powers incidental thereto, so
far as such powers and privileges are necessary or convenient to the conduct,
promotion or attainment of the business or purposes of the Corporation.
SECTION 3.9 The business and purposes specified in the foregoing
clauses shall, except where otherwise expressed, be in nowise limited or
restricted by reference to, or inference from, the terms of any other clause in
this Certificate of Incorporation, but the business and purposes specified in
each of the foregoing clauses of this Article shall be regarded as an
independent business and purpose.
ARTICLE IV
SECTION 4.1 AUTHORIZATION OF CAPITAL. The total number of shares
of all classes of capital stock which the Corporation shall have authority to
issue is Four Hundred Ten Million (410,000,000) shares, comprised of (a) Four
Hundred Million (400,000,000) shares of Common Stock, with a par value of $.001
per share; (b) Five Hundred Thousand (500,000) shares of Series C Junior
Participating Preferred Stock (the "Series C Preferred Stock"), with a par
value of $.001 per share; and (c) Nine Million Five Hundred Thousand
(9,500,000) shares of such other Preferred Stock, with a par value of $.001 per
share, as the Board of Directors may decide to issue pursuant to Section 4.3,
which constitutes a total authorized capital of all classes of capital stock of
Four Hundred Ten Thousand Dollars ($410,000.00).
A description of the respective classes of stock and a statement of
the designations, preferences, voting powers, relative, participating, optional
or other special rights and privileges, and the qualifications, limitations and
restrictions of the Series C Preferred Stock, such other Preferred Stock as the
Board of Directors may by resolution or resolutions decide to issue, and the
Common Stock are as follows:
SECTION 4.2 SERIES C PREFERRED STOCK.
(a) Voting Rights. The holders of shares of Series C
Preferred Stock shall have the following voting rights:
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(1) Subject to the provisions for adjustment
hereinafter set forth, each share of Series C Preferred Stock shall entitle the
holder thereof to one hundred (100) votes on all matters submitted to a vote of
the stockholders of the Corporation. In the event the Corporation shall at any
time after the Rights Declaration Date (as defined in subsection 4.2(b)) (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series C Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(2) Except as otherwise provided herein or by
law, the holders of shares of Series C Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation.
(3) (A) If at any time dividends on any
Series C Preferred Stock shall be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on all
shares of Series C Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, all holders of
Preferred Stock (including holders of the Series C Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends thereon,
voting as a class irrespective of series, shall have the right to elect two (2)
Directors.
(B) During any default period, such
voting right of the holders of Series C Preferred Stock may be exercised
initially at a special meeting called pursuant to subsection 4.2(a)(3)(C) or at
any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of ten percent (10%) in number of shares of Series C Preferred Stock
outstanding shall be present in person or by proxy. The absence of a quorum of
the holders of Common Stock shall not affect the exercise by the holders of
Series C Preferred Stock of such voting right. At any meeting at which the
holders of Series C Preferred Stock shall exercise such voting right initially
during an existing default period, they shall have the right, voting as a
class, to elect Directors to fill such vacancies, if any, in the Board of
Directors as may then exist up to two (2) Directors or, if such right is
exercised at an annual meeting, to elect two (2) Directors. If the number
which may be so elected at any special meeting does not amount to the required
number, the holders of the Series C Preferred Stock shall have the right to
make such increase in the number of Directors as shall be necessary to permit
the election by them of the required number. After the holders of the Series C
Preferred Stock shall have exercised their right to elect Directors in any
default period and during the continuance of such period, the number of
Directors shall not be increased or decreased except by vote of the holders of
Series C Preferred Stock as herein provided or pursuant to the rights of any
equity securities ranking senior to or pari passu with the Series C Preferred
Stock.
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(C) Unless the holders of Series C
Preferred Stock shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of Directors may order, or
any stockholder or stockholders owning in the aggregate not less than ten
percent (10%) of the total number of shares of Series C Preferred Stock
outstanding, irrespective of series, may request, the calling of a special
meeting of the holders of Series C Preferred Stock, which meeting shall
thereupon be called by the President, a Vice President or the Secretary of the
Corporation. Notice of such meeting and of any special meeting at which
holders of Series C Preferred Stock are entitled to vote pursuant to this
subsection 4.2(a)(3)(C) shall be given to each holder of record of Series C
Preferred Stock by mailing a copy of such notice to him at his last address as
the same appears on the books of the Corporation. Such meeting shall be called
for a time not earlier than twenty (20) days and not later than sixty (60) days
after such order or request or, in default of the calling of such meeting
within sixty (60) days after such order or request, such meeting may be called
on similar notice by any stockholder or stockholders owning in the aggregate
not less than ten percent (10%) of the total number of shares of Preferred
Stock outstanding. Notwithstanding the provisions of this subsection
4.2(a)(3)(C), no such special meeting shall be called during the period within
sixty (60) days immediately preceding the date fixed for the next annual
meeting of the stockholders.
(D) In any default period, the holders
of Common Stock, and other classes of stock of the Corporation if applicable,
shall continue to be entitled to elect the whole number of Directors until the
holders of Series C Preferred Stock shall have exercised their right to elect
two (2) Directors voting as a class, after the exercise of which right (x) the
Directors so elected by the holders of Series C Preferred Stock shall continue
in office until their successors shall have been elected by such holders or
until the expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in subsection 4.2(a)(3)(B) hereof) be filled
by vote of a majority of the remaining Directors theretofore elected by the
holders of the class of stock which elected the Director whose office shall
have become vacant. References in this Section 4.2(a)(3)(D) to Directors
elected by the holders of a particular class of stock shall include Directors
elected by such Directors to fill vacancies as provided in clause (y) of the
foregoing sentence.
(E) Immediately upon the expiration of a
default period, (x) the right of the holders of Series C Preferred Stock as a
class to elect Directors shall cease, (y) the term of any Directors elected by
the holders of Series C Preferred Stock as a class shall terminate, and (z) the
number of Directors shall be such number as may be provided for in this
Certificate of Incorporation or the Bylaws of the Corporation, irrespective of
any increase made pursuant to the provisions of subsection 4.2(a)(3)(B) hereof
(such number being subject, however, to change thereafter in any manner
provided by law or in the Certificate of Incorporation or Bylaws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
Directors.
(4) Except as set forth herein, holders of Series
C Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
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(b) Dividends and Distribution.
(1) The holders of shares of Series C Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purposes, quarterly dividends
payable in cash on the last day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series C Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a)
$.001 or (b) subject to the provision for adjustment hereinafter set forth, one
hundred (100) times the aggregate per share amount of all cash dividends, and
one hundred (100) times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock, since
the immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series C Preferred Stock. In the event the
Corporation shall, at any time after November 10, 1994 (the "Rights Declaration
Date"), (i) declare any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount to which holders of shares of Series C Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(2) The Corporation shall declare a dividend or
distribution on the Series C Preferred Stock as provided in subsection
4.2(b)(1) hereof immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $.001 per share on the Series C Preferred Stock shall nevertheless
be payable on such subsequent Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series C Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
C Preferred Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is
a date after the record date for the determination of holders of shares of
Series C Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series C Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors
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may fix a record date for the determination of holders of shares of Series C
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than thirty (30) days
prior to the date fixed for the payment thereof.
(c) Restrictions.
(1) Whenever quarterly dividends or other
dividends or distributions payable on the Series C Preferred Stock as provided
in subsection 4.2(b) hereof are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on shares of
Series C Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(A) declare or pay dividends on, make
any other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series C Preferred Stock;
(B) declare or pay dividends on or make
any other distributions on any shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series C
Preferred Stock, except dividends paid ratably on the Series C Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(C) redeem or purchase or otherwise
acquire for consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series C
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series C Preferred Stock; or
(D) purchase or otherwise acquire for
consideration any shares of Series C Preferred Stock, or any shares of stock
ranking on a parity with the Series C Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(2) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under subsection 4.2(c)(1) hereof, purchase or otherwise acquire such
shares at such time and in such manner.
(d) Reacquired Shares. Any shares of Series C Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall, upon their cancellation, become
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authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock to be created by resolution or resolutions
of the Board of Directors, subject to the conditions and restrictions on
issuance set forth herein.
(e) Liquidation, Dissolution or Winding Up.
(1) Upon any liquidation (voluntary or
otherwise), dissolution or winding up of the Corporation, no distribution shall
be made to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series C
Preferred Stock unless, prior thereto, the holders of shares of Series C
Preferred Stock shall have received an amount equal to one hundred (100) times
the Exercise Price, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment
(the "Series C Liquidation Preference"). The term "Exercise Price" means the
price established by the Board of Directors for the purchase of one unit of
Series C Preferred Stock equal to one-one-hundredth of one share of Series C
Preferred Stock. If no shares of convertible Preferred Stock are outstanding
at the time of liquidation, then, following the payment of the full amount of
the Series C Liquidation Preference, no additional distributions shall be made
to the holders of shares of Series C Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Common Adjustment") equal to the quotient obtained by dividing (i) the Series
C Liquidation Preference by (ii) one hundred (100) (as approximately adjusted
as set forth in subparagraph (3) below to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock) (such
number in clause (ii), the "Adjustment Number"). Following the payment of the
full amount of the Series C Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Series C Preferred Stock and Common Stock,
respectively, holders of Series C Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to one
(1) with respect to such Series C Preferred Stock and Common Stock, on a per
share basis, respectively.
(2) In the event, however, that there are not
sufficient assets available to permit payment in full of the Series C
Liquidation Preference and the liquidation preferences of all other series of
Preferred Stock, if any, which rank on a parity with the Series C Preferred
Stock, then such remaining assets shall be distributed ratable to the holders
of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
(3) In the event the Corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each such case, the Adjustment Number in effect immediately prior to
such event shall be adjusted by multiplying such Adjustment Number by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
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(f) Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then, in any such case, the
shares of Series C Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to one hundred (100) times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then, in each such case, the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series C Preferred Stock shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(g) No Redemption. The shares of Series C Preferred
Stock shall not be redeemable.
(h) Amendment. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series C
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Series C
Preferred Stock, voting separately as a class.
(i) Fractional Shares. Series C Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, to receive
dividends, to participate in distributions and to have the benefit of all other
rights of holders of Series C Preferred Stock.
SECTION 4.3 OTHER PREFERRED STOCK. The Board of Directors of the
Corporation is authorized, subject to the limitations prescribed by law and the
provisions of this Section 4.3, to adopt one or more resolutions to provide for
the issuance from time to time in one or more series of any number of shares of
Preferred Stock, up to a maximum of nine million five hundred thousand
(9,500,000) shares, and to establish the number of shares to be included in
each such series, and to fix the designation, relative rights, preferences,
qualifications and limitations of the shares of each such series. The
authority of the Board of Directors with respect to each such series shall
include, but not be limited to, a determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series,
whether dividends shall be cumulative and, if so, from which date or dates, and
whether they should be payable in preference to, or in another relation to, the
dividends payable on any other class or classes or series of stock;
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(c) Whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(d) Whether that series shall have conversion or exchange
privileges and, if so, the terms and conditions of such conversion or exchange,
including provision for adjustments for the conversion or exchange rate in such
events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be
redeemable and, if so, the terms and conditions of such redemption, including
the manner of selecting shares for redemption if less than all shares are to be
redeemed, the date or dates upon or after which they shall be redeemable, and
the amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(f) Whether that series shall be entitled to the benefit
of a sinking fund to be applied to the purchase or redemption of shares of that
series and, if so, the terms and amounts of such sinking funds;
(g) The rights of the shares of that series to the
benefit of conditions and restrictions upon the creation of indebtedness of the
Corporation or any subsidiary, upon the issuance of any additional stock
(including additional shares of such series or of any other series) and upon
the payment of dividends or the making of other distributions on, and the
purchase, redemption or other acquisition by the Corporation or any subsidiary
of, any outstanding stock of the Corporation;
(h) The right of the shares of that series in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and whether such rights shall be in preference to, or in other
relation to, the comparable rights of any other class or classes or series of
stock; and
(i) Any other relative, participating, optional or other
special rights, qualifications, limitations or restrictions of that series.
SECTION 4.4 COMMON STOCK.
(a) Voting Rights. Except as otherwise required by law
or this Certificate of Incorporation, each holder of Common Stock shall have
one vote in respect of each share of stock held by him of record on the books
of the Corporation for the election of Directors and on all matters submitted
to a vote of stockholders of the Corporation.
(b) Dividends. Except as otherwise provided by the
resolution or resolutions of the Board of Directors providing for the issuance
of any series of Preferred Stock pursuant to Section 4.3, the holders of shares
of Common Stock shall be entitled to receive, when and if declared by the Board
of Directors, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of capital
stock.
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(c) Dissolution, Liquidation or Winding Up. Except as
otherwise provided by the resolution or resolutions of the Board of Directors
providing for the issuance of any series of Preferred Stock pursuant to Section
4.3, in the event of any dissolution, liquidation or winding up of the affairs
of the Corporation, after distribution in full of the preferential amounts, if
any, to be distributed to the holders of the Series C Preferred Stock, the
rights of the holders of Common Stock to receive any remaining assets of the
Corporation shall be as provided in subsection 4.2(e).
ARTICLE V
SECTION 5.1 GENERAL PROVISIONS. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors.
The exact number of Directors shall be fixed from time to time by, or in the
manner provided in, the Bylaws of the Corporation, and may be increased or
decreased as therein provided. Directors of the Corporation need not be
elected by ballot unless required by the Bylaws.
SECTION 5.2 CLASSIFICATION OF BOARD OF DIRECTORS. The Directors
shall be divided into three (3) classes. Each such class shall consist, as
nearly as may be possible, of one-third of the total number of Directors, and
any remaining Directors shall be included within such groups as the Board of
Directors shall designate. The first class of Directors will be elected for a
term which expires in 1996. The second class will be elected for a term which
expires in 1997. The third class will be elected to a term which expires in
1998. At each annual meeting of stockholders, beginning in 1996, successors to
the class of Directors whose term expires at the annual meeting shall be
elected for a three-year term. If the number of Directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of Directors in each class as nearly equal as possible, but in no
case shall a decrease in the number of Directors shorten the term of any
incumbent Director. A Director may be removed from office for cause only and,
subject to such removal, death, resignation, retirement or disqualification,
shall hold office until the annual meeting for the year in which his term
expires and until his successor shall be elected and qualify. No alteration,
amendment or repeal of this Article V or the Bylaws of the Corporation shall be
effective to shorten the term of any Director holding office at the time of
such alteration, amendment or repeal, to permit any such Director to be removed
without cause, or to increase the number of Directors in any class or in the
aggregate from that existing at the time of such alteration, amendment or
repeal until the expiration of the terms of office of all Directors then
holding office, unless (i) in the case of this Article V, such alteration,
amendment or repeal has been approved by the holders of all shares of stock
entitled to vote thereon, or (ii) in the case of the Bylaws, such alteration,
amendment or repeal has been approved by either the holders of all shares
entitled to vote thereon or by a vote of a majority of the entire Board of
Directors.
SECTION 5.3 DIRECTORS APPOINTED BY A SPECIFIC CLASS OF
STOCKHOLDERS. To the extent that any holders of any class or series of stock
other than Common Stock issued by the Corporation shall have the separate
right, voting as a class or series, to elect Directors, the Directors elected
by such class or series shall be deemed to constitute an additional class of
Directors and shall have a term of office for one year or such other period as
may be designated by the provisions of such class
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or series providing such separate voting right to the holders of such class or
series of stock, and any such class of Directors shall be in addition to the
classes designated above.
SECTION 5.4 NOMINATIONS. Advance notice of nominations for the
election of Directors shall be given in the manner and to the extent provided
in the Bylaws of the Corporation.
SECTION 5.5 VACANCIES. Vacancies and newly created directorships
resulting from any increase in the authorized number of Directors may be filled
by a majority of the Board of Directors, and any vacancies on the Board of
Directors resulting from death, resignation, removal or other cause shall only
be filled by the affirmative vote of a majority of the remaining Directors then
in office, even though less than a quorum of the Board of Directors, or by a
sole remaining Director. Any Director elected in accordance with the preceding
sentence of this Section 5.5 shall hold office for the remainder of the full
term of the Directors whose vacancy is so filled and until such Director's
successor shall have been elected and qualified.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
In furtherance and not in limitation of the powers conferred upon it
by law, the Board of Directors is expressly authorized:
SECTION 7.1 To adopt, repeal, alter or amend the Bylaws of the
Corporation by a vote of a majority of the entire Board of Directors.
SECTION 7.2 To authorize and cause to be executed mortgages and
liens upon the real and personal property of the Corporation.
SECTION 7.3 To set apart, out of any of the funds of the
Corporation available for dividends, a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which it was created.
SECTION 7.4 By a majority of the whole Board of Directors, to
designate one or more committees, each committee to consist of one or more of
the Directors of the Corporation. The Board of Directors may designate one or
more Directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. The Bylaws may
provide that, in the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, or in the Bylaws of the
Corporation, shall
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have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in
reference to amending the Certificate of Incorporation, adopting an agreement
of merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the Bylaws of the Corporation; and,
unless the resolution or Bylaws expressly so provide, no such committee shall
have the power or authority to declare a dividend or to authorize the issuance
of stock.
SECTION 7.5 When and as authorized by the stockholders in
accordance with statute, to sell, lease or exchange all or substantially all of
the property and assets of the Corporation, including its goodwill and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property,
including shares of stock in and/or other securities of any other corporation
or corporations, as the Board of Directors shall deem expedient and for the
best interests of the Corporation.
ARTICLE VIII
SECTION 8.1 Except as provided in Section 8.2 of this Article
VIII, any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of the
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders. Advance notice of items of business to be
considered at any meeting of the stockholders shall be given in the manner and
to the extent provided in the Bylaws of the Corporation.
SECTION 8.2 Notwithstanding the foregoing, this Article VIII
shall not apply to the Corporation if it does not have a class of voting stock
that is either (i) listed on a national securities exchange, (ii) authorized
for quotation on an inter dealer quotation system of the registered national
securities association, or (iii) held of record by more than two thousand
(2,000) stockholders.
ARTICLE IX
SECTION 9.1 LIMITATION OF LIABILITY OF DIRECTORS. A Director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a Director,
except for liability (i) for any breach of the Director's duty of loyalty to
the Corporation 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 Section 174 of the DGCL, or (iv) for any transaction from which the
Director derived an improper personal benefit.
If the DGCL is amended after the date hereof to
authorized action by corporations organized pursuant to the DGCL to further
eliminate or limit the personal liability of
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directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL, as amended.
SECTION 9.2 INDEMNIFICATION OF DIRECTORS.
(a) Each person who was or is made a party to, or is
threatened to be made a party to, or is involved in, any threatened, pending or
completed action, suit or proceeding, whether formal or informal, whether of a
civil, criminal, administrative or investigative nature (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a Director of the Corporation,
whether the basis of such proceeding is an alleged action or inaction in an
official capacity or in any other capacity while serving as a Director, shall
be indemnified and held harmless by the Corporation to the fullest extent
permissible under Delaware law, as the same exists or may hereafter exist in
the future (but, in the case of any future change, only to the extent that such
change permits the Corporation to provide broader indemnification rights than
the law permitted prior to such change), against all costs, charges, expenses,
liabilities and losses (including, without limitation, attorneys' fees,
judgments, fines, Employee Retirement Income Security Act of 1974 ("ERISA")
excise taxes, or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and
such indemnification shall continue as to a person who has ceased to be a
Director and shall inure to the benefit of his or her heirs, executors and
administrators.
(b) The Corporation shall pay expenses actually incurred
in connection with any proceeding in advance of its final disposition;
provided, however, that if Delaware law then requires, the payment of such
expenses incurred in advance of the final disposition of a proceeding shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf
of such Director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such Director or officer is not entitled to be
indemnified.
(c) If a claim under subsection 9.2(a) hereof is not paid
in full by the Corporation within thirty (30) days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination that indemnification of the claimant
is permissible in the circumstances because the claimant has met the applicable
standard of conduct, if any, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met the standard of conduct, shall be a
defense to the action or create a presumption that the claimant has not met the
standard of conduct.
SECTION 9.3 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS.
The Corporation may provide indemnification to employees and agents of the
Corporation to the fullest extent permissible under Delaware law.
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<PAGE> 15
SECTION 9.4 EXPENSES AS A WITNESS. To the extent that any
Director, officer, employee or agent of the Corporation is, by reason of such
position, or position with another entity at the request of the Corporation, a
witness in any action, suit or proceeding, he or she shall be indemnified
against all costs and expenses actually and reasonably incurred by him or her
on his or her behalf in connection therewith.
SECTION 9.5 INSURANCE. The Corporation may maintain insurance,
at its expense, to protect itself and any Director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under Delaware law.
SECTION 9.6 INDEMNITY AGREEMENTS. The Corporation may enter into
agreements with any Director, officer, employee or agent of the Corporation
providing for indemnification to the fullest extent permissible under Delaware
law.
SECTION 9.7 SEPARABILITY. Each and every paragraph, sentence,
term and provision of this Article IX is separate and distinct, so that if any
paragraph, sentence, term or provision hereof shall be held to be invalid or
unenforceable for any reason, such invalidity or unenforceability shall not
affect the validity or enforceability of any other paragraph, sentence, term or
provision hereof. To the extent required, any paragraph, sentence, term or
provision of this Article IX may be modified by a court of competent
jurisdiction to preserve its validity and to provide the claimant with, subject
to the limitations set forth in this Article IX and any agreement between the
Corporation and claimant, the broadest possible indemnification permitted under
applicable law.
SECTION 9.8 CONTRACT RIGHT. Each of the rights conferred on
Directors of the Corporation by Sections 9.1, 9.2 and 9.4 of this Article IX,
and on officers, employees or agents of the Corporation by Section 9.4 of this
Article, shall be a contract right, and any repeal or amendment of the
provisions of this Article shall not adversely affect any right hereunder of
any person existing at the time of such repeal or amendment with respect to any
act or omission occurring prior to the time of such repeal or amendment, and,
further, shall not apply to any proceeding, irrespective of when the proceeding
is initiated, arising from the service of such person prior to such repeal or
amendment.
SECTION 9.9 NONEXCLUSIVITY. The rights conferred in this Article
shall not be exclusive of any other rights that any person may have or
hereafter acquire under any statute, Bylaw, agreement, vote of stockholders or
disinterested Directors or otherwise.
ARTICLE X
The Corporation reserves the right to amend, alter or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are subject to this reservation.
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<PAGE> 16
IN WITNESS WHEREOF, MedPartners, Inc. has caused this Certificate to
be signed by Harold O. Knight, Jr., its Executive Vice President and Chief
Financial Officer, and attested to by Tracy P. Thrasher, its Executive Vice
President and Corporate Secretary, this 24th day of March, 1997.
MEDPARTNERS, INC.
By:
-------------------------------------
Harold O. Knight, Jr.
Executive Vice President and
Chief Financial Officer
[SEAL] Attest:
-------------------------------------
Tracy P. Thrasher
Executive Vice President and
Corporate Secretary
16
<PAGE> 1
EXHIBIT (4)-2
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
AMENDMENT NO. 1 to Rights Agreement, dated as of November 29, 1995,
among MEDPARTNERS, INC., a Delaware corporation (the "Company"),
MEDPARTNERS/MULLIKIN, INC., a Delaware corporation ("MedPartners/Mullikin") and
CHEMICAL BANK, a national banking association (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, the Company and the Rights Agent are parties to that certain
Rights Agreement, dated as of March 1, 1995 (the "Original Rights Agreement");
WHEREAS, pursuant to the Plan and Agreement of Merger, dated as of
August 14, 1995, among the Company, Mullikin Medical Enterprises, L.P.,
MedPartners/Mullikin and MPI Merger Corporation, MedPartners/Mullikin has become
the successor issuer to the Company under the applicable regulations of the
Securities and Exchange Commission ("SEC"), promulgated under the Securities
Exchange Act of 1934 (the "Act");
WHEREAS, the Company has assigned and transferred the Original Rights
Agreement to MedPartners/Mullikin, and MedPartners/Mullikin, as such successor
issuer, has agreed to assume all of the rights, duties and obligations of the
Company under the Original Rights Agreement, as amended by this Amendment No. 1
to Rights Agreement (the Original Rights Agreement and this Amendment No. 1 are
hereinafter sometimes referred to as the "Agreement").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
1. Substitution of MedPartners/Mullikin as Successor Issuer. The
Company by its execution and delivery of this Amendment No. 1 to Rights
Agreement as the wholly-owned subsidiary of MedPartners/Mullikin, hereby assigns
and transfers to MedPartners/Mullikin as its successor issuer under the
applicable regulations promulgated by the SEC under the Act, all of its rights,
duties and obligations under the Agreement and MedPartners/Mullikin hereby
assumes all of the rights, duties and obligations of the Company under the
<PAGE> 2
Agreement. Upon the effectiveness of this Amendment No. 1, MedPartners/Mullikin
shall be the "Company" as defined in the Agreement.
2. Exhibits. Exhibits A, B and C attached to the Original Rights
Agreement are hereby deleted from the Agreement and the new documents attached
hereto as Exhibits A, B and C, respectively, are hereby substituted in their
place and by such attachment become a part of the Agreement.
3. Rights Agent. The Rights Agent hereby acknowledges the
assignment and assumption contained in Section 1 hereof and reconfirms its
position as Rights Agent under the Agreement.
4. Full Force and Effect. The remaining provisions of the
Original Rights Agreement, except as specifically amended by this Amendment No.
1 to Rights Agreement, shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the day and year first above written.
MEDPARTNERS, INC.
By
-----------------------------------
Larry R. House
Chairman, President and
Chief Executive Officer
ATTESTATION:
-----------------------------------
Tracy P. Thrasher
Secretary
MEDPARTNERS/MULLIKIN, INC.
By
-----------------------------------
Larry R. House
Chairman, President and
Chief Executive Officer
ATTESTATION:
-----------------------------------
Tracy P. Thrasher
Secretary
CHEMICAL BANK
By
-----------------------------------
Name:
----------------------------
Title:
---------------------------
ATTESTATION:
- -------------------------------------
2
<PAGE> 3
EXHIBIT A
RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDPARTNERS/MULLIKIN, INC.
MEDPARTNERS/MULLIKIN, INC., a corporation organized and existing under
and by virtue of the Delaware General Corporation Law of the State of Delaware
("DGCL"), does hereby certify:
That the present name of the Corporation is MedPartners/Mullikin, Inc.
(the "Corporation");
That the date of filing of the original Certificate of Incorporation of
the Corporation with the Secretary of State was August 14, 1995;
That the Board of Directors of the Corporation, by unanimous written
consent, dated November 28, 1995, has adopted a resolution proposing and
declaring advisable this Restated Certificate of Incorporation in accordance
with the provisions of Section 245 of the DGCL;
That this Restated Certificate of Incorporation was duly adopted by the
sole Stockholder of the Corporation by written consent, dated November 28, 1995;
That the text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read as herein set forth in full:
ARTICLE I
The name of the Corporation is MedPartners/Mullikin, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is The Prentice-Hall Corporation System, Inc. at 1013 Centre Road, in
the City of Wilmington, County of New Castle. The Registered Agent in charge
thereof is The Prentice-Hall Corporation System, Inc.
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<PAGE> 4
ARTICLE III
The purposes of the Corporation are to engage in any lawful act or
activity for which corporations may be organized under the DGCL, including but
not limited to the following:
Section 3.1 To engage in any lawful act or activity for which
corporations may be organized under the DGCL;
Section 3.2 To manufacture, purchase or otherwise acquire, invest
in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of,
trade, deal in and deal with goods, wares and merchandise and personal property
of every class and description;
Section 3.3 To acquire, and pay for in cash, stock or bonds of
this Corporation or otherwise, the goodwill, rights, assets and property, and to
undertake or assume the whole or any part of the obligations or liabilities of
any person, firm, association or corporation;
Section 3.4 To acquire, hold, use, sell, assign, lease, grant
licenses in respect of, mortgage or otherwise dispose of letters patent of the
United States or any foreign country, patent rights, licenses and privileges,
inventions, improvements and processes, copyrights, trademarks and trade names,
relating to or useful in connection with any business of this Corporation;
Section 3.5 To acquire by purchase, subscription or otherwise,
and to receive, hold, own, guarantee, sell, assign, exchange, transfer,
mortgage, pledge or otherwise dispose of or deal in and with any of the shares
of the capital stock, or any voting trust certificates in respect of the shares
of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust
receipts, and other securities, obligations, choses in action and evidences of
indebtedness or interest issued or created by any corporations, joint stock
companies, syndicates, associations, firms, trusts or persons, public or
private, or by the government of the United States of America, or by any foreign
government, or by any state, territory, province, municipality or other
political subdivision or by any governmental agency, and as owner thereto to
possess and exercise all the rights, powers and privileges of ownership,
including the right to execute consents and vote thereon, and to do any and all
acts and things necessary or advisable for the preservation, protection,
improvement and enhancement in value thereof;
Section 3.6 To borrow or raise money for any of the purposes of
the Corporation and, from time to time without limit as to amount, to draw,
make, accept, endorse, execute and issue promissory notes, drafts, bills of
exchange, warrants, bonds, debentures and other negotiable or non-negotiable
instruments and evidences of indebtedness, and to secure the payment of any
thereof and of the interest thereon by mortgage upon or pledge, conveyance or
assignment in trust of the whole or any part of the property of the Corporation,
whether
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<PAGE> 5
at the time owned or thereafter acquired, and to sell, pledge or otherwise
dispose of such bonds or other obligations of the Corporation for its corporate
purposes;
Section 3.7 To purchase, receive, take by grant, gift, devise,
bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ,
use and otherwise deal in and with real or personal property, or any interest
therein, wherever situated, and to sell, convey, lease, exchange, transfer or
otherwise dispose of, or mortgage or pledge, all or any of the Corporation's
property and assets, or any interest therein, wherever situated;
Section 3.8 In general, to possess and exercise all the powers
and privileges granted by the DGCL or by any other law of Delaware or by this
Certificate of Incorporation together with any powers incidental thereto, so far
as such powers and privileges are necessary or convenient to the conduct,
promotion or attainment of the business or purposes of the Corporation.
Section 3.9 The business and purposes specified in the foregoing
clauses shall, except where otherwise expressed, be in nowise limited or
restricted by reference to, or inference from, the terms of any other clause in
this Certificate of Incorporation, but the business and purposes specified in
each of the foregoing clauses of this Article shall be regarded as an
independent business and purpose.
ARTICLE IV
Section 4.1 AUTHORIZATION OF CAPITAL. The total number of shares
of all classes of capital stock which the Corporation shall have authority to
issue is eighty-five million (85,000,000) shares, comprised of (a) seventy-five
million (75,000,000) shares of Common Stock, with a par value of $.001 per share
(the "Common Stock"); (b) five hundred thousand (500,000) shares of Series C
Junior Participating Preferred Stock (the "Series C Preferred Stock"), with a
par value of $.001 per share; and (c) nine million five hundred thousand
(9,500,000) shares of such other Preferred Stock, with a par value of $.001 per
share, as the Board of Directors may decide to issue pursuant to Section 4.3,
which constitutes a total authorized capital of all classes of capital stock of
eighty-five thousand dollars ($85,000.00).
A description of the respective classes of stock and a statement of the
designations, preferences, voting powers, relative, participating, optional or
other special rights and privileges, and the qualifications, limitations and
restrictions of the Series C Preferred Stock, such other Preferred Stock as the
Board of Directors may by resolution or resolutions decide to issue, and the
Common Stock are as follows:
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Section 4.2 SERIES C PREFERRED STOCK.
(a) Voting Rights. The holders of shares of Series C Preferred
Stock shall have the following voting rights:
(1) Subject to the provision for adjustment hereinafter
set forth, each share of Series C Preferred Stock shall entitle the holder
thereof to one hundred (100) votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
after the Rights Declaration Date (as defined in subsection 4.2(b)) (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the number of votes per share
to which holders of shares of Series C Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(2) Except as otherwise provided herein or by law, the
holders of shares of Series C Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(3) (A) If at any time dividends on any Series C
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series C
Preferred Stock then outstanding shall have been declared and paid or set apart
for payment. During each default period, all holders of Preferred Stock
(including holders of the Series C Preferred Stock) with dividends in arrears in
an amount equal to six (6) quarterly dividends thereon, voting as a class,
irrespective of series, shall have the right to elect two (2) Directors.
(B) During any default period, such voting right
of the holders of Series C Preferred Stock may be exercised initially at a
special meeting called pursuant to subsection 4.2(a)(3)(C) or at any annual
meeting of stockholders, and thereafter at annual meetings of stockholders,
provided that such voting right shall not be exercised unless the holders of ten
percent (10%) in number of shares of Series C Preferred Stock outstanding shall
be present in person or by proxy. The absence of a quorum of the holders of
Common Stock shall not affect the exercise by the holders of Series C Preferred
Stock of such voting right. At any meeting at which the holders of Series C
Preferred Stock shall exercise such voting right initially during an existing
default period, they shall have the right, voting as a class, to elect directors
to fill such vacancies, if any, in the Board of Directors as may then exist up
to two (2) Directors or, if such right is exercised at an annual meeting, to
elect two (2) Directors. If the number which may be so elected at any special
meeting does not amount to the required number, the holders of the Series C
Preferred Stock shall have the right to make such increase in the number of
directors as shall be necessary to permit the election by them of the required
number. After the holders of the Series C Preferred Stock shall have exercised
their right to elect Directors in any default period and during the continuance
of such period, the number of Directors shall not be increased or decreased
except
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<PAGE> 7
by vote of the holders of Series C Preferred Stock as herein provided or
pursuant to the rights of any equity securities ranking senior to or pari passu
with the Series C Preferred Stock.
(C) Unless the holders of Series C Preferred
Stock shall, during an existing default period, have previously exercised their
right to elect Directors, the Board of Directors may order, or any stockholder
or stockholders owning in the aggregate not less than ten percent (10%) of the
total number of shares of Series C Preferred Stock outstanding, irrespective of
series, may request, the calling of special meeting of the holders of Series C
Preferred Stock, which meeting shall thereupon be called by the President, a
Vice-President or the Secretary of the Corporation. Notice of such meeting and
of any annual meeting at which holders of Series C Preferred Stock are entitled
to vote pursuant to this subsection 4.2(a)(3)(C) shall be given to each holder
of record of Series C Preferred Stock by mailing a copy of such notice to him at
his last address as the same appears on the books of the Corporation. Such
meeting shall be called for a time not earlier than twenty (20) days and not
later than sixty (60) days after such order or request or in default of the
calling of such meeting within sixty (60) days after such order or request, such
meeting may be called on similar notice by any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding. Notwithstanding the provisions of this
subsection 4.2(a)(3)(C), no such special meeting shall be called during the
period within sixty (60) days immediately preceding the date fixed for the next
annual meeting of the Corporation stockholders.
(D) In any default period, the holders of Common
Stock, and other classes of stock of the Corporation if applicable, shall
continue to be entitled to elect the whole number of Directors until the holders
of Series C Preferred Stock shall have exercised their right to elect two (2)
Directors voting as a class, after the exercise of which right (x) the Directors
so elected by the holders of Series C Preferred Stock shall continue in office
until their successors shall have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of Directors
may (except as provided in subsection 4.2(a)(3)(B) hereof) be filled by vote of
a majority of the remaining Directors theretofore elected by the holders of the
class of stock which elected the Director whose office shall have become vacant.
References in this Section 4.2(a)(3)(D) to Directors elected by the holders of a
particular class of stock shall include Directors elected by such Directors to
fill vacancies as provided in clause (y) of the foregoing sentence.
(E) Immediately upon the expiration of a default
period, (x) the right of the holders of Series C Preferred Stock as a class to
elect Directors shall cease, (y) the term of any Directors elected by the
holders of Series C Preferred Stock as a class shall terminate, and (z) the
number of Directors shall be such number as may be provided for in this
Certificate of Incorporation or the By-Laws of the Corporation irrespective of
any increase made pursuant to the provisions of subsection 4.2(a)(3)(B) hereof
(such number being subject, however, to change thereafter in any manner provided
by law or in the Certificate of Incorporation or By-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.
(4) Except as set forth herein, holders of
Series C Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
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(b) Dividends and Distributions.
(1) The holders of shares of Series C Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the last day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series C Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $.001 or (b)
subject to the provision for adjustment hereinafter set forth, one hundred (100)
times the aggregate per share amount of all cash dividends, and one hundred
(100) times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series C Preferred Stock. In the event the Corporation
shall at any time after November 10, 1994 (the "Rights Declaration Date"), (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount to
which holders of shares of Series C Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(2) The Corporation shall declare a dividend or
distribution on the Series C Preferred Stock as provided in subsection 4.2(b)(1)
hereof immediately after it declares a dividend or distribution of the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.001 per share on the
Series C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series C Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series C
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series C Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative From such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
C Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series C Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than thirty
(30) days prior to the date fixed for the payment thereof.
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<PAGE> 9
(c) Restrictions.
(1) Whenever quarterly dividends or other dividends or
distributions payable on the Series C Preferred Stock as provided in subsection
4.2(b) hereof are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series C
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not
(A) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Preferred Stock;
(B) declare or pay dividends on or make any
other distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series C
Preferred Stock, except dividends paid ratably on the Series C Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
(C) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series C Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Preferred Stock; or
(D) purchase or otherwise acquire for
consideration any shares of Series C Preferred Stock, or any shares of stock
ranking on a parity with the Series C Preferred Stock, except in accordance with
a purchase offer made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(2) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subsection
4.2(c)(1) hereof, purchase or otherwise acquire such shares at such time and in
such manner.
(d) Reacquired Shares. Any shares of Series C Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of preferred stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
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(e) Liquidation, Dissolution or Winding Up.
(1) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Stock unless,
prior thereto, the holders of shares of Series C Preferred Stock shall have
received an amount equal to one hundred (100) times the Exercise Price, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the "Series C Liquidation
Preference"). The term "Exercise Price" means the price established by the Board
of Directors for purchase of one unit of Series C Preferred Stock equal to
one-one-hundredth of one share of Series C Preferred Stock. If no shares of
convertible Preferred Stock are outstanding at the time of liquidation, then
following the payment of the full amount of the Series C Liquidation Preference,
no additional distributions shall be made to the holders of shares of Series C
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series C Liquidation Preference by (ii)
one hundred (100) (as appropriately adjusted as set forth in subparagraph (3)
below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause (ii),
the "Adjustment Number"). If any shares of convertible Preferred Stock are
outstanding at the time of liquidation, then the liquidation provisions of
subsection 4.2(c) hereof shall apply. Following the payment of the full amount
of the Series C Liquidation Preference and the Common Adjustment in respect of
all outstanding shares of Series C Preferred Stock and Common Stock,
respectively, holders of Series C Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Series C Preferred Stock and Common Stock, on a per share
basis, respectively.
(2) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series C Liquidation
Preference and the liquidation preferences of all other series of Preferred
Stock, if any, which rank on a parity with the Series C Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(3) In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(f) Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series C Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to one hundred (100) times the aggregate amount of
stock, securities,
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<PAGE> 11
cash and/or any other property (payable in kind), as the case may be, into which
or for which each share of Common Stock is changed or exchanged. In the event
the Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Series C
Preferred Stock shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(g) No Redemption. The shares of Series C Preferred Stock shall
not be redeemable.
(h) Amendment. The Certificate of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series C Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series C Preferred stock, voting
separately as a class.
(i) Fractional Shares. Series C Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series C Preferred Stock.
Section 4.3 OTHER PREFERRED STOCK. The Board of Directors of the
Corporation is authorized, subject to the consent required by subsection
4.2(d)(1) hereof, the limitations prescribed by law, and the provisions of this
Section 4.3, to adopt one or more resolutions to provide for the issuance from
time to time in one or more series of any number of shares of Preferred Stock up
to a maximum of nine million five hundred thousand (9,500,000) shares, and to
establish the number of shares to be included in each such series, and to fix
the designation, relative rights, preferences, qualifications and limitations of
the shares of each such series. The authority of the Board of Directors with
respect to each such series shall include, but not be limited to, a
determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and if so, from which date or dates, and whether
they should be payable in preference to, or in another relation to, the
dividends payable on any other class or classes or series of stock;
(c) Whether that series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion or exchange
privileges, and, if so, the terms and conditions of such conversion or exchange,
including provision for adjustments for the conversion or exchange rate in such
events as the Board of Directors shall determine;
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(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the manner of
selecting shares for redemption if less than all shares are to be redeemed, the
date or dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall be entitled to the benefit of a
sinking fund to be applied to the purchase or redemption of shares of that
series, and, if so, the terms and amounts of such sinking funds;
(g) The right of the shares of that series to the benefit of
conditions and restrictions upon the creation of indebtedness of the Corporation
or any subsidiary, upon the issuance of any additional stock (including
additional shares of such series or of any other series) and upon the payment of
dividends or the making of other distributions on, and the purchase, redemption
or other acquisition by the Corporation or any subsidiary of any outstanding
stock of the Corporation;
(h) The right of the shares of that series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and whether such rights shall be in preference to, or in other
relation to, the comparable rights of any other class or classes or series of
stock; and
(i) Any other relative, participating, optional or other special
rights, qualifications, limitations or restrictions of that series.
Section 4.4 COMMON STOCK.
(a) Voting Rights. Except as otherwise required by law or this
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held by him of record on the books of the
Corporation for the election of Directors and on all matters submitted to a vote
of stockholders of the Corporation.
(b) Dividends. Except as otherwise provided by the resolution or
resolutions of the Board of Directors providing for the issuance of any series
of Preferred Stock pursuant to Section 4.3, the holders of shares of Common
Stock shall be entitled to receive, when and if declared by the Board of
Directors, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of capital
stock.
(c) Dissolution, Liquidation or Winding Up. Except as otherwise
provided by the resolution or resolutions of the Board of Directors providing
for the issuance of any series of Preferred Stock pursuant to Section 4.4, in
the event of any dissolution, liquidation or winding up of the affairs of the
Corporation, after distribution in full of the preferential amounts, if any, to
be distributed to the holders of the Series C Preferred Stock, the rights of the
holders of Common Stock to receive any remaining assets of the Corporation shall
be as provided in subsections 4.2(c) and 4.2(e).
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ARTICLE V
Section 5.1 GENERAL PROVISIONS. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
exact number of Directors shall be fixed from time to time by, or in the manner
provided in, the By-laws of the Corporation and may be increased or decreased as
therein provided. Directors of the Corporation need not be elected by ballot
unless required by the By-laws.
Section 5.2 CLASSIFICATION OF BOARD OF DIRECTORS. The Directors
shall be divided into three classes. Each such class shall consist, as nearly as
may be possible, of one-third of the total number of Directors, and any
remaining Directors shall be included within such groups as the Board of
Directors shall designate. The first class of Directors will be elected for a
term which expires in 1996. The second class will be elected for a term which
expires in 1997. The third class will be elected to a term which expires in
1998. At each annual meeting of stockholders, beginning in 1996, successors to
the class of Directors whose term expires at the annual meeting shall be elected
for a three-year term. If the number of Directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
Directors in each class as nearly equal as possible, but in no case shall a
decrease in the number of Directors shorten the term of any incumbent Director.
A director may be removed from office for cause only and, subject to such
removal, death, resignation, retirement or disqualification, shall hold office
until the annual meeting for the year in which his term expires and until his
successor shall be elected and qualify. No alteration, amendment or repeal of
this Article V or the By-laws of the Corporation shall be effective to shorten
the term of any Director holding office at the time of such alteration,
amendment or repeal, to permit any such Director to be removed without cause, or
to increase the number of Directors in any class or in the aggregate from that
existing at the time of such alteration, amendment or repeal until the
expiration of the terms of office of all Directors then holding office, unless
(i) in the case of this Article V, such alteration, amendment or repeal has been
approved by the holders of all shares of stock entitled to vote thereon, or (ii)
in the case of the By-laws, such alteration, amendment or repeal has been
approved by either the holders of all shares entitled to vote thereon or by a
vote of a majority of the entire Board of Directors.
Section 5.3 DIRECTORS APPOINTED BY A SPECIFIC CLASS OF
STOCKHOLDERS. To the extent that any holders of any class or series of stock
other than Common Stock issued by the Corporation shall have the separate right,
voting as a class or series, to elect Directors, the Directors elected by such
class or series shall be deemed to constitute an additional class of Directors
and shall have a term of office for one year or such other period as may be
designated by the provisions of such class or series providing such separate
voting right to the holders of such class or series of stock, and any such class
of Directors shall be in addition to the classes designated above.
Section 5.4 NOMINATIONS. Advance notice of nominations for the
election of Directors shall be given in the manner and to the extent provided in
the By-laws of the Corporation.
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Section 5.5 VACANCIES. Vacancies and newly created directorships
resulting from any increase in the authorized number of Directors may be filled
by a majority of the Board of Directors and any vacancies on the Board of
Directors resulting from death, resignation, removal or other cause shall only
be filled by the affirmative vote of a majority of the remaining Directors then
in office, even though less than a quorum of the Board of Directors, or by a
sole remaining director. Any Director elected in accordance with the preceding
sentence of this Section 5.5 shall hold office for the remainder of the full
term of the Directors whose vacancy is so filled and until such Director's
successor shall have been elected and qualified.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
In furtherance and not in limitation of the powers conferred upon it by
law, the Board of Directors is expressly authorized:
Section 7.1 To adopt, repeal, alter or amend the By-laws of the
Corporation by a vote of a majority of the entire Board of Directors.
Section 7.2 To authorize and cause to be executed mortgages and
liens upon the real and personal property of the Corporation.
Section 7.3 To set apart out of any of the funds of the
Corporation available for dividends a reserve or reserves for any proper purpose
and to abolish any such reserve in the manner in which it was created.
Section 7.4 By a majority of the whole Board of Directors, to
designate one or more committees, each committee to consist of one or more of
the Directors of the Corporation. The Board of Directors may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. The
By-laws may provide that in the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
or in the Bylaws of the Corporation, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to
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<PAGE> 15
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-laws of the Corporation; and, unless the resolution or By-laws expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
Section 7.5 When and as authorized by the stockholders in
accordance with statute, to sell, lease or exchange all or substantially all of
the property and assets of the Corporation, including its goodwill and its
corporate franchises, upon such terms and conditions and for such consideration,
which may consist in whole or in part of money or property including shares of
stock in, and/or other securities of, any other corporation or corporations, as
the Board of Directors shall deem expedient and for the best interests of the
Corporation.
ARTICLE VIII
Section 8.1 Except as provided in Section 8.2 of this Article
VIII, any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of the
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders. Advance notice of items of business to be
considered at any meeting of the stockholders shall be given in the manner and
to the extent provided in the By-laws of the Corporation.
Section 8.2 Notwithstanding the foregoing, this Article VIII
shall not apply to the Corporation if it does not have a class of voting stock
that is either (i) listed on a national securities exchange, (ii) authorized for
quotation on an inter dealer quotation system of the registered national
securities association, or (iii) held of record by more than two thousand
(2,000) stockholders.
ARTICLE IX
Section 9.1 LIMITATION OF LIABILITY OF DIRECTORS. A Director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a Director,
except for liability (i) for any breach of the Director's duty of loyalty to the
Corporation 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
Section 174 of the DGCL, or (iv) for any transaction from which the Director
derived an improper personal benefit.
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If the DGCL is amended after the date hereof to authorize action by
corporations organized pursuant to the DGCL to further eliminate or limit the
personal liability of directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as amended.
Section 9.2 INDEMNIFICATION OF DIRECTORS.
(a) Each person who was or is made a party or is threatened to be
made a party or is involved in any threatened, pending or completed action, suit
or proceeding, whether formal or informal, whether of a civil, criminal,
administrative or investigative nature (hereinafter a "proceeding"), by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a Director of the Corporation, whether the basis of
such proceeding is an alleged action or inaction in an official capacity or in
any other capacity while serving as a Director, shall be indemnified and held
harmless by the Corporation to the fullest extent permissible under Delaware
law, as the same exists or may hereafter exist in the future (but, in the case
of any future change, only to the extent that such change permits the
Corporation to provide broader indemnification rights than the law permitted
prior to such charge), against all costs, charges, expenses, liabilities and
losses (including, without limitation, attorneys' fees, judgments, fines,
Employee Retirement Income Security Act of 1974 ("ERISA") excise taxes, or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a Director and shall inure to the
benefit of his or her heirs, executors and administrators.
(b) The Corporation shall pay expenses actually incurred in
connection with any proceeding in advance of its final disposition; provided,
however, that if Delaware law then requires, the payment of such expenses
incurred in advance of the final disposition of a proceeding shall be made only
upon delivery to the Corporation of an undertaking, by or on behalf of such
Director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such Director or officer is not entitled to be indemnified.
(c) If a claim under subsection 9.2(a) hereof is not paid in full
by the Corporation within thirty (30) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination that indemnification of the claimant
is permissible in the circumstances because the claimant has met the applicable
standard of conduct, if any, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met the standard of conduct, shall be a
defense to the action or create a presumption that the claimant has not met the
standard of conduct.
Section 9.3 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS.
The Corporation may provide indemnification to employees and agents of the
Corporation to the fullest extent permissible under Delaware law.
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<PAGE> 17
Section 9.4 EXPENSES AS A WITNESS. To the extent that any
Director, officer, employee or agent of the Corporation is by reason of such
position, or position with another entity at the request of the Corporation, a
witness in any action, suit or proceeding, he or she shall be indemnified
against all costs and expenses actually and reasonably incurred by him or her on
his or her behalf in connection therewith.
Section 9.5 INSURANCE. The Corporation may maintain insurance,
at its expense, to protect itself and any Director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Delaware law.
Section 9.6 INDEMNITY AGREEMENTS. The Corporation may enter into
agreements with any Director, officer, employee or agent of the Corporation
providing for indemnification to the fullest extent permissible under Delaware
law.
Section 9.7 SEPARABILITY. Each and every paragraph, sentence,
term and provision of this Article IX is separate and distinct, so that if any
paragraph, sentence, term or provision hereof shall be held to be invalid or
unenforceable for any reason, such invalidity or unenforceability shall not
affect the validity or unenforceability of any other paragraph, sentence, term
or provision hereof. To the extent required, any paragraph, sentence, term or
provision of this Article IX may be modified by a court of competent
jurisdiction to preserve its validity and to provide the claimant with, subject
to the limitations set forth in this Article IX and any agreement between the
Corporation and claimant, the broadest possible indemnification permitted under
applicable law.
Section 9.8 CONTRACT RIGHT. Each of the rights conferred on
Directors of the Corporation by Sections 9.1, 9.2 and 9.4 of this Article IX and
on officers, employees or agents of the Corporation by Section 9.4 of this
Article shall be a contract right and any repeal or amendment of the provisions
of this Article shall not adversely affect any right hereunder of any person
existing at the time of such repeal or amendment with respect to any act or
omission occurring prior to the time of such repeal or amendment, and, further,
shall not apply to any proceeding, irrespective of when the proceeding is
initiated, arising from the service of such person prior to such repeal or
amendment.
Section 9.9 NONEXCLUSIVITY. The rights conferred in this Article
shall not be exclusive of any other rights that any person may have or hereafter
acquire under any statute, By-law, agreement, vote of stockholders or
disinterested Directors or otherwise.
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<PAGE> 18
ARTICLE X
The Corporation reserves the right to amend, alter or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are subject to this reservation.
IN WITNESS WHEREOF, said MedPartners/Mullikin, Inc. has caused this
Certificate to be signed by Harold O. Knight, Jr., its Executive Vice President,
and attested by Tracy P. Thrasher, its Secretary, this 29th day of November,
1995.
MEDPARTNERS/MULLIKIN, INC.
[S E A L] By
-------------------------------------
Harold O. Knight, Jr.
Executive Vice President
ATTEST:
- -------------------------------------
Tracy P. Thrasher
Its Secretary
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EXHIBIT B
FORM OF RIGHTS CERTIFICATE
CERTIFICATE NO. R-________
NOT EXERCISABLE AFTER _______________, ________ OR EARLIER IF REDEEMED BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT
$0.001 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.](1)
RIGHTS CERTIFICATE
MEDPARTNERS/MULLIKIN, INC.
This certifies that ______________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of ______________, ______, as amended (the
"Rights Agreement"), between MedPartners/Mullikin, Inc., a Delaware corporation
(the "Company"), and Chemical Bank, a national banking association (the "Rights
Agent"), to purchase from the Company at any time prior to 5:00 P.M. (New York
City time) on _______________, ____ at the office or offices of the Rights Agent
designated for such purpose, or its successors as Rights Agent, one
one-hundredth of a fully paid, non-assessable share of Series C Junior
Participating Preferred Stock (the "Preferred Stock") of the Company, at a
purchase price of $_____ per one one-hundredth of a share (the "Purchase
Price"), upon presentation and surrender of this Rights Certificate with the
Form of Election to Purchase and related Certificate duly executed. The number
of Rights evidenced by this Rights Certificate (and the number of shares which
may be purchased upon exercise thereof) set forth above, and the Purchase Price
per share set forth above, are the number and Purchase Price as of based on the
Preferred Stock as constituted at such date. The Company reserves the right to
require prior to the occurrence of a Triggering Event (as such term is defined
in the Rights Agreement) that a number of Rights be exercised so that only whole
shares of Preferred Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
- ---------------------
(1) The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
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<PAGE> 20
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-hundredths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a redemption
price of $0.001 per Right at any time prior to the earlier of the close of
business on (i) the tenth day following the Stock Acquisition Date (as such time
period may be extended pursuant to the Rights Agreement), and (ii) the Final
Expiration Date. In addition, the Rights may be exchanged, in whole or in part,
for shares of the Common Stock, or shares of preferred stock of the Company
having essentially the same value or economic rights as such shares. Immediately
upon the action of the Board of Directors of the Company authorizing any such
exchange, and without any further action or any notice, the Rights (other than
Rights which are not subject to such exchange) will terminate and the Rights
will only enable holders to receive the shares issuable upon such exchange.
Under certain circumstances set forth in the Rights Agreement, the decision to
redeem the Rights shall require the concurrence of a majority of the Continuing
Directors.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-hundredth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts), but
in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
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<PAGE> 21
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of _________________________, __________.
MEDPARTNERS/MULLIKIN, INC.
By
------------------------------------
Title
---------------------------------
ATTEST:
- -------------------------------------
Secretary
[ S E A L ]
COUNTERSIGNED:
CHEMICAL BANK
By
-----------------------------------
Authorized Signature
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<PAGE> 22
[FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE]
(FORM OF ASSIGNMENT)
(To be executed by the registered holder if such holder desires to transfer the
Rights Certificate.)
FOR VALUE RECEIVED, ______________________________ hereby sells,
assigns and transfers unto ______________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ______________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: ______________________________, 19_____
-------------------------------------
Signature
Signature Guaranteed:
- ---------------------------------
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<PAGE> 23
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) This Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.
Dated: ______________________________, 19_____
--------------------------------
Signature
Signature Guaranteed:
- -------------------------------
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-5
<PAGE> 24
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented by the Rights
Certificate.)
To: MedPartners/Mullikin, Inc.:
The undersigned hereby irrevocably elects to exercise __________ Rights
represented by this Rights Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of
and delivered to:
Please insert social security or other identifying number:
--------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance of such Rights shall be
registered in the name of and delivered to:
Please insert social security or other identifying number:
--------------------------------------------------
(Please print name and address)
Dated: ______________________________, 19_____
-----------------------------------
Signature
Signature Guaranteed:
- --------------------------------
B-6
<PAGE> 25
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: ______________________________, 19_____
------------------------------------
Signature
Signature Guaranteed:
- ------------------------------------
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.
B-7
<PAGE> 26
EXHIBIT C
DETAILED SUMMARY OF RIGHTS TO PURCHASE
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
On November 8, 1994, the Board of Directors of MedPartners, Inc. (the
"Company") adopted a Stockholder Rights Plan, providing that one Right shall be
attached to each share of Common Stock of the Company. Each Right entitles the
registered holder to purchase from the Company a unit (a "Unit") consisting of
one one-hundredth of a share of Series C Junior Participating Preferred Stock,
without par value (the "Preferred Stock"), at a Purchase Price of $___________
per Unit (the "Purchase Price"), subject to adjustment. As of November 29, 1995,
the Rights Agreement was amended to substitute MedPartners/Mullikin, Inc., the
successor issuer to MedPartners, Inc. as the "Company". The description and
terms of the Rights are set forth in the Rights Agreement (the "Rights
Agreement"), dated as of March 1, 1995, as amended, between the Company and
Chemical Bank, a national banking association, as Rights Agent (the "Rights
Agent").
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificate will be
distributed. The Rights will separate from the Common Stock and a 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 shares of Common Stock (the "Stock Acquisition
Date") or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 10% or
more of such outstanding shares of Common Stock. Until the Distribution Date,
(i) the Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on _______________, ______ unless earlier
redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only shares of Common Stock prior to the Distribution
Date will be issued with Rights.
In the event that (A) an Acquiring Person becomes the beneficial owner
of 10% or more of the then outstanding shares of Common Stock (unless such
acquisition is made pursuant to a tender or exchange offer for all outstanding
shares of the Company, at a price determined by a majority of the independent
Directors of the Company who are not representatives, nominees, Affiliates or
Associates of an Acquiring Person to be fair and otherwise in the best interest
of the Company and its stockholders), (B) an Acquiring Person engages in certain
self-dealing transactions involving the Company, such as (i) merging or
consolidating into or with the Company where the Company survives and the Common
Stock remains outstanding, (ii) transferring assets to the Company
C-1
<PAGE> 27
in exchange for Company securities, or acquiring securities from the Company
other than on the same basis as to all other stockholders, (iii) transferring
assets to or from the Company on terms less favorable than arm's length, (iv)
transferring to or from the Company assets having a fair market value in excess
of $5,000,000, (v) receiving unusual compensation or (vi) receiving any other
financial benefit not provided to all other stockholders, or (C) 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 amount of Common Sock beneficially owned by the Acquiring Person,
each holder of a Right will thereafter have the right to receive, upon exercise,
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. The exercise price is the Purchase Price times the number of shares of
Common Stock associated with each Right (initially, one). Notwithstanding any of
the foregoing, following the occurrence of any of the events set forth in this
paragraph (the "Flip-In Events"), all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person will be null and void. However, Rights are not exercisable
following the occurrence of any of the Flip-In 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 following the Stock Acquisition Date, (i) the Company
is acquired in a merger or consolidation in which the Company is not the
surviving corporation (other than a merger that follows a tender offer
determined to be fair to the stockholders of the Company, as described in the
preceding paragraph) 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 have
previously been voided as set forth above) shall thereafter have the right to
receive, upon exercise of the Right, Common Stock of the acquiring company
having a value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of Units of Preferred Stock
or other securities or property issuable upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) if holders of the Preferred Stock are granted certain rights or
warrants to subscribe for Preferred Stock or convertible securities at less than
the current market price of the Preferred Stock, or (iii) upon the distribution
to holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment in
cash will be made based on the market price of the Preferred Stock on the last
trading date prior to the date of exercise.
At any time until 10 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. Under certain circumstances, the decision to redeem shall require the
concurrence of a majority of the Continuing Directors (as defined below).
Immediately upon the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
The term "Continuing Director" means any member of the Board of
Directors of the Company who was a member of the Board prior to the adoption of
the Rights Plan and any person who is subsequently elected to
C-2
<PAGE> 28
the Board if such person is recommended or approved by a majority of the
Continuing Directors, but shall not include an Acquiring Person, or an affiliate
or associate of an Acquiring Person, or any representative of the foregoing
entities.
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 Common Stock (or other consideration) of the 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 Agreement may be amended by the
Board of Directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board (in certain circumstances, with the concurrence of the Continuing
Directors) in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interest of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-B. A
copy of the Rights Agreement is available free of charge from the Company. This
Summary Description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
C-3
<PAGE> 1
EXHIBIT (10)-17
MEDPARTNERS
1997 LONG TERM INCENTIVE COMPENSATION PLAN
<PAGE> 2
CONTENTS
<TABLE>
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Article 1. Establishment, Objectives and Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1 Establishment of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Objectives of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Duration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Article 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 "Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 "Award" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 "Award Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 "Beneficial Owner" or "Beneficial Ownership" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 "Board" or "Board of Directors" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 "Change in Control" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.8 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.9 "Committee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.10 "Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.11 "Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.12 "Disability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.13 "Effective Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.14 "Eligible Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.15 "Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.16 "Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.17 "Fair Market Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.18 "Immediate Family Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.19 "Incentive Stock Option" or "ISO" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.20 "Insider" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.21 "Non-employee Director". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.22 "Nonqualified Stock Option" or "NQSO" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.23 "Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.24 "Option Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.25 "Participant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.26 "Period of Restriction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.27 "Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.28 "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.29 "Restricted Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.30 "Retirement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.31 "Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.32 "Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
Article 3. Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 The Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Authority of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Decisions Binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Grants to Non-Insiders by Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.5 Costs of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 4. Shares Subject to the Plan and Maximum Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Number of Shares Available for Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Lapsed Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Adjustments in Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 5. Eligibility and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2 Actual Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Article 6. Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1 Grant of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2 Award Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4 Duration of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.6 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.7 Restrictions on Share Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.8 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.9 Nontransferability of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) Nonqualified Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Article 7. Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Grant of Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 Restricted Stock Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.4 Other Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.5 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.6 Dividends and Other Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.7 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Article 8. Beneficiary Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Article 9. Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Article 10. Rights of Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
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Article 11. Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.1 Treatment of Outstanding Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.2 Termination, Amendment, and Modifications of Change-in-Control Provisions . . . . . . . . . . . . . 16
Article 12. Amendment, Modification, and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.1 Amendment, Modification, and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . . . . . . . . . 17
12.3 Awards Previously Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Article 13. Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.1 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Article 14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Article 15. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Article 16. Legal Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.1 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.2 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.3 Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.4 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 5
ARTICLE 1. ESTABLISHMENT, OBJECTIVES AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. MedPartners, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), hereby establishes an
incentive compensation plan to be known as the "MedPartners 1997 Long Term
Incentive Compensation Plan" (hereinafter referred to as the "Plan"), as set
forth in this document. The Plan permits the grant of Incentive Stock Options,
Nonqualified Stock Options and Restricted Stock.
Subject to approval by the Company's stockholders, the Plan shall
become effective as of February 25, 1997 (the "Effective Date") and shall
remain in effect as provided in Section 1.3 hereof.
1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to
optimize the profitability and growth of the Company through the use of
incentives which are consistent with the Company's objectives and which link
the interests of Participants to those of the Company's stockholders; to
provide Participants with an incentive for excellence in individual
performance; and to promote teamwork among Participants.
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants who
make significant contributions to the Company's success and to allow
Participants to share in the success of the Company.
1.3 DURATION OF THE PLAN. The Plan shall commence on the
Effective Date, as described in Section 1.1 hereof, and shall remain in effect,
subject to the right of the Board of Directors or the Committee to amend or
terminate the Plan at any time pursuant to Article 12 hereof, until all Shares
subject to it shall have been purchased or acquired according to the Plan's
provisions. However, in no event may an Incentive Stock Option be granted
under the Plan on or after February 25, 2007.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
2.1 "AFFILIATE" means a "parent corporation" or "subsidiary
corporation" as defined in Section 424 of the Code.
2.2 "AWARD" means, individually or collectively, a grant under
this Plan of Incentive Stock Options, Nonqualified Stock Options or Restricted
Stock.
2.3 "AWARD AGREEMENT" means an agreement entered into by the
Company and each Participant setting forth the terms and provisions applicable
to Awards granted under this Plan.
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2.4 "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the
meaning ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
2.5 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors
of the Company.
2.6 "CAUSE" shall be determined by the Committee, exercising good
faith and reasonable judgment, and shall mean the occurrence of any one or more
of the following:
(i) The willful and continued failure by the Participant
to substantially perform his duties (other than any such failure
resulting from the Participant's Disability) after a written demand
for substantial performance is delivered by the Committee to the
Participant that specifically identifies the manner in which the
Committee believes that the Participant has not substantially
performed his duties, and the Participant has failed to remedy the
situation within 30 calendar days of receiving such notice; or
(ii) The Participant's conviction for committing an act of
fraud, embezzlement, theft or another act constituting a felony; or
(iii) The willful engaging by the Participant in gross
misconduct materially and demonstrably injurious to the Company, as
determined by the Committee. However, no act or failure to act on the
Participant's part shall be considered "willful" unless done, or
omitted to be done, by the Participant not in good faith and without
reasonable belief that his action or omission was in the best interest
of the Company.
2.7 "CHANGE IN CONTROL" of the Company shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:
(i) The acquisition by any Person of Beneficial Ownership
of 20% or more of either (A) the then outstanding shares of Common
Stock of the Company, or (B) the combined voting power of the
outstanding voting securities of the Company entitled to vote
generally in the selection of Directors; provided, however, that for
purposes of this subsection, the following transactions shall not
constitute a Change of Control: (1) any acquisition directly from the
Company through a public offering of shares of Common Stock of the
Company, (2) any acquisition by the Company, (3) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained
by the Company or any corporation controlled by the Company, or (4)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B) and (C) of subsection (iii);
(ii) The cessation, for any reason, of the individuals who
constitute the Company's Board of Directors as of the date hereof
("Incumbent Board") to
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constitute at least a majority of the Company's Board of Directors;
provided, however, that any individual becoming a Director following
the date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority
of the Directors then comprising the Incumbent Board shall be
considered as though such individual was a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs because of an actual or threatened
election contest with respect to the election or removal of Directors
or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Company's Board of Directors;
(iii) The consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company ("Business Combination") unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the Beneficial Owners,
respectively, of the outstanding shares of Common Stock of the Company
and the outstanding voting securities of the Company immediately
before such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding
shares of Common Stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of Directors, as the case may be, of the Company resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership immediately before such Business
Combination of the outstanding shares of Common Stock and the
outstanding voting securities of the Company, as the case may be; (B)
no party (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed before
the Business Combination; and (C) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of the Company's Board of Directors
at the time of the execution of the initial agreement, or of the
action of the Company's Board of Directors, providing for such
Business Combination; or
(iv) The approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.
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2.8 "CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
2.9 "COMMITTEE" means the Compensation Committee of the Board, as
specified in Article 3 herein, or such other Committee appointed by the Board
to administer the Plan with respect to grants of Awards.
2.10 "COMPANY" means MedPartners, Inc., and also means any
corporation of which a majority of the voting capital stock is owned directly
or indirectly by MedPartners, Inc. or by any of its Subsidiaries, and any other
corporation designated by the Committee as being a Company hereunder (but only
during the period of such ownership or designation).
2.11 "DIRECTOR" means any individual who is a member of the Board
of Directors of the Company.
2.12 "DISABILITY", as applied to a Participant, means that the
Participant (i) has established to the satisfaction of the Committee that the
Participant is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to last for a continuous period of not less than 12 months (all within
the meaning of Section 22(e)(3) of the Code), and (ii) has satisfied any
requirement imposed by the Committee in regard to evidence of such disability.
2.13 "EFFECTIVE DATE" shall have the meaning ascribed to such term
in Section 1.1 hereof.
2.14 "ELIGIBLE PERSON" shall mean all Employees, Directors or
consultants of the Company or any Affiliate; provided, however, that no Award
may be granted to anyone who is not an "employee" as that term is defined in
General Instruction A.(1)(a) of Form S-8, as such definition may be amended
from time to time, without first receiving advice and guidance from the
Company's outside counsel as to the effect of such grant.
2.15 "EMPLOYEE" means any key officer or employee of the Company.
2.16 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
2.17 "FAIR MARKET VALUE" shall be determined on the basis of the
closing sale price on the principal securities exchange on which the Shares are
traded or, if there is no such sale on the relevant date, then on the last
previous day on which a sale was reported.
2.18 "IMMEDIATE FAMILY MEMBERS" means the spouse, children and
grandchildren of a Participant.
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2.19 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase
Shares granted under Article 6 herein and which is designated as an Incentive
Stock Option and which is intended to meet the requirements of Code Section
422.
2.20 "INSIDER" shall mean an individual who is, on the relevant
date, a Director, a 10% Beneficial Owner of any class of the Company's equity
securities that is registered pursuant to Section 12 of the Exchange Act or an
officer of the Company, as defined under Section 16 of the Exchange Act and as
determined by the Board of Directors from time to time.
2.21 "NON-EMPLOYEE DIRECTOR" means an individual who is a member of
the Board of Directors of the Company but who is not an Employee of the
Company.
2.22 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to
purchase Shares granted under Article 6 herein and which is not intended to
meet the requirements of Code Section 422.
2.23 "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option, as described in Article 6 herein.
2.24 "OPTION PRICE" means the price at which a Share may be
purchased by a Participant pursuant to an Option.
2.25 "PARTICIPANT" means an Eligible Person who has outstanding an
Award granted under the Plan.
2.26 "PERIOD OF RESTRICTION" means the period during which the
transfer of Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance objectives, or upon the
occurrence of other events as determined by the Committee, at its discretion),
and the Shares of Restricted Stock are subject to a substantial risk of
forfeiture, as provided in Article 7 herein.
2.27 "PERSON" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.
2.28 "PLAN" means the MedPartners 1997 Long Term Incentive
Compensation Plan.
2.29 "RESTRICTED STOCK" means an Award granted to a Participant
pursuant to Article 8 herein.
2.30 "RETIREMENT" as applied to a Participant, means the
Participant's termination of employment in a manner which qualifies the
Participant to receive immediately payable retirement benefits under the
applicable retirement plan maintained by the Company (the "Retirement Plan"),
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under the successor or replacement of such Retirement Plan if it is then no
longer in effect, or under any other retirement plan maintained or adopted by
the Company which is determined by the Committee to be the functional
equivalent of such Retirement Plan; or, with respect to a Participant who may
not or has not participated in a retirement plan maintained by the Company or
an Affiliate, "Retirement" shall have the meaning determined by the Committee
from time to time.
2.31 "SHARES" means Common Stock of MedPartners, Inc., par value
$.001 per share.
2.32 "SUBSIDIARY" means any corporation, partnership, joint venture
or other entity in which the Company has a majority voting interest.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the
Committee, or by any other committee appointed by the Board, which Committee
shall consist solely of two or more "Non-Employee Directors" within the meaning
of Rule 16b-3 under the Exchange Act, or any successor provision. The members
of the Committee shall be appointed from time to time by, and shall serve at
the discretion of, the Board of Directors.
3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law or by
the Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, including Section 3.4, the Committee shall have full power
to select Employees who shall participate in the Plan; determine the sizes and
types of Awards; determine the terms and conditions of Awards in a manner
consistent with the Plan; construe and interpret the Plan and any agreement or
instrument entered into under the Plan as they apply to Employees; establish,
amend, or waive rules and regulations for the Plan's administration as they
apply to Employees; alter, amend, suspend or terminate the Plan in whole or in
part; and (subject to the provisions of Article 12 herein) amend the terms and
conditions of any outstanding Award to the extent such terms and conditions are
within the discretion of the Committee as provided in the Plan. Further, the
Committee shall make all other determinations which may be necessary or
advisable for the administration of the Plan, as the Plan applies to Employees.
As permitted by law, the Committee may delegate its authority as identified
herein.
3.3 DECISIONS BINDING. All determinations and decisions made by
the Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its stockholders, Employees, Participants and their
estates and beneficiaries.
3.4 GRANTS TO NON-INSIDERS BY CHIEF EXECUTIVE OFFICER. To the
extent permissible under governing rules and regulations, and, in particular,
Section 141(C) of the General Corporation Law of Delaware, the Chief Executive
Officer of the Company shall have the authority to make
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and administer grants of Awards under this Plan to non-Insiders upon such terms
and conditions as the Chief Executive Officer shall determine; provided,
however, that the total number of Awards granted by the Chief Executive Officer
each year shall be subject to approval by the Committee.
3.5 COSTS OF PLAN. The costs and expenses incurred in the
operation and administration of the Plan shall be borne by the Company.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment
as provided in Section 4.3 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be five million.
The number of Shares reserved for issuance under the Plan shall
automatically increase on the first day of each calendar year during the term
of this Plan, beginning with the 1998 calendar year, by an amount equal to 1%
of the Shares outstanding on December 31 of the immediately preceding year.
However, such additional Shares shall not be available for grants of Incentive
Stock Options, unless and until the increase in the number of Shares provided
for herein is subsequently approved by the stockholders of the Company in
accordance with Section 422 of the Code.
Notwithstanding the foregoing, the maximum number of Shares of
Restricted Stock granted pursuant to Article 7 herein shall be an amount equal
to one-fifth of the total number of Shares reserved for issuance under the
Plan.
4.2 LAPSED AWARDS. If any Award granted under this Plan is
canceled, terminates, expires or lapses for any reason, any Shares subject to
such Award again shall be available for the grant of an Award under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change
in corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether
or not such reorganization comes within the definition of such term in Code
Section 368) or any partial or complete liquidation of the Company, such
adjustment shall be made in the number and class of Shares which may be
delivered under Section 4.1, in the number and class of and/or price of Shares
subject to outstanding Awards granted under the Plan, and in the Award limits
set forth in Section 4.1, as may be determined to be appropriate and equitable
by the Committee, in its sole discretion, to prevent dilution or enlargement of
rights; provided, however, that the number of Shares subject to any Award shall
always be a whole number.
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ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. All Eligible Persons are eligible to
participate in this Plan.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan,
the Committee may, from time to time, select from all Eligible Persons, those
to whom Awards shall be granted and shall determine the nature and amount of
each Award.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the
Plan, Options may be granted to Participants in such number, and upon such
terms, and at any time and from time to time as shall be determined by the
Committee.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an
Award Agreement that shall specify the Option Price, the duration of the
Option, the number of Shares to which the Option pertains, and such other
provisions as the Committee shall determine. The Award Agreement also shall
specify whether the Option is intended to be an ISO within the meaning of Code
Section 422, or an NQSO whose grant is intended not to fall under the
provisions of Code Section 422.
6.3 OPTION PRICE. The Option Price for each grant of an Option
under this Plan shall be at least equal to 100% of the Fair Market Value of a
Share on the date the Option is granted.
6.4 DURATION OF OPTIONS. Each Option granted to an Employee shall
expire at such time as the Committee shall determine at the time of grant;
provided, however, that no Incentive Stock Option shall be exercisable later
than the tenth anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under this Article 6
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which need not be
the same for each grant or for each Participant.
6.6 PAYMENT. Options granted under this Article 6 shall be
exercised by the delivery of a written notice of exercise to the Company,
setting forth the number of Shares with respect to which the Option is to be
exercised, accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) if permitted in
the governing Award Agreement, by tendering previously acquired Shares having
an aggregate Fair Market Value at the time of exercise equal to the total
Option Price (provided that the Shares which are tendered must have been held
by the Participant for at least six months prior to their tender to satisfy the
Option Price), or (c) if permitted in the governing Award Agreement, by a
combination of (a) and (b).
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The Committee also may allow cashless exercise subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may
impose such restrictions on any Shares acquired pursuant to the exercise of an
Option granted under this Article 6 as it may deem advisable, including,
without limitation, restrictions under applicable federal securities laws,
under the requirements of any stock exchange or market upon which such Shares
are then listed and/or traded, and under any blue sky or state securities laws
applicable to such Shares.
6.8 TERMINATION OF EMPLOYMENT. Each Option, to the extent it has
not been previously exercised, shall terminate upon the earliest to occur of:
(i) the expiration of the Option period set forth in the Option Award
Agreement; (ii) for ISOs, the expiration of three months following the
Participant's Retirement (following the Participant's Retirement, NQSOs shall
terminate upon the expiration of the Option period set forth in the Option
Award Agreement); (iii) the expiration of 12 months following the Participant's
death or Disability; (iv) immediately upon termination for Cause; or (v) the
expiration of 90 days following the Participant's termination of employment for
any reason other than Cause, Change in Control, death, Disability, or
Retirement. Upon a termination of employment related to a Change in Control,
options shall be treated in the manner set forth in Article 11.
6.9 NONTRANSFERABILITY OF OPTIONS.
(a) INCENTIVE STOCK OPTIONS. No ISO granted under the Plan may be
sold, transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
ISOs granted to a Participant under the Plan shall be exercisable during his or
her lifetime only by such Participant.
(b) NONQUALIFIED STOCK OPTIONS. The Committee may, in its
discretion, authorize all or a portion of NQSOs granted to a Participant to be
on terms which permit transfer by such Participant to (i) Immediate Family
Members, (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, provided that (x) there may be no consideration for any
such transfer, (y) the Award Agreement pursuant to which such Options are
granted must be approved by the Committee, and must expressly provide for
transferability in a manner consistent with this Section, and (z) subsequent
transfers of transferred Options shall be prohibited except those by will or
the laws of descent and distribution. Following transfer, any such Options
shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that
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for purposes of this Plan, the term "Participant" shall be deemed to refer to
the transferee. The events of termination of employment shall continue to be
applied with respect to the original Participant, following which the Options
shall be exercisable by the transferee only to the extent, and for the periods
specified at Section 6.9. Notwithstanding the foregoing, should the Committee
provide that Options granted be transferable, the Company by such action incurs
no obligation to notify or otherwise provide notice to a transferee of early
termination of the Option. In the event of a transfer, as set forth above, the
original Participant is and will remain subject to and responsible for any
applicable withholding taxes upon the exercise of such Options.
ARTICLE 7. RESTRICTED STOCK
7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and
provisions of the Plan, the Committee, at any time and from time to time, may
grant Shares of Restricted Stock to Participants in such amounts as the
Committee shall determine. Without limiting the generality of the foregoing,
Restricted Shares may be granted in connection with payouts under other
compensation programs of the Company.
7.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall
be evidenced by a Restricted Stock Award Agreement that shall specify the
Period(s) of Restriction, the number of Shares of Restricted Stock granted, and
such other provisions as the Committee shall determine.
7.3 TRANSFERABILITY. Except as provided in this Article 7, the
Shares of Restricted Stock granted herein may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction established by the Committee and specified in
the Restricted Stock Award Agreement, or upon earlier satisfaction of any other
conditions, as specified by the Committee in its sole discretion and set forth
in the Restricted Stock Award Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be available
during his or her lifetime only to such Participant.
7.4 OTHER RESTRICTIONS. Subject to Article 8 herein, the
Committee shall impose such other conditions and/or restrictions on any Shares
of Restricted Stock granted pursuant to the Plan as it may deem advisable
including, without limitation, a requirement that Participants pay a stipulated
purchase price for each Share of Restricted Stock, restrictions based upon the
achievement of specific performance objectives (Company-wide, business unit,
and/or individual), time-based restrictions on vesting following the attainment
of the performance objectives, and/or restrictions under applicable federal or
state securities laws.
At the discretion of the Committee, the Company may retain the
certificates representing Shares of Restricted Stock in the Company's
possession until such time as all conditions and/or restrictions applicable to
such Shares have been satisfied.
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Except as otherwise provided in this Article 7, Shares of Restricted
Stock covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the Participant after the last day of the applicable
Period of Restriction.
7.5 VOTING RIGHTS. During the Period of Restriction, Participants
holding Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares.
7.6 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of
Restriction, Participants holding Shares of Restricted Stock granted hereunder
may be credited with regular cash dividends paid with respect to the underlying
Shares while they are so held. Such dividends may be paid currently, accrued
as contingent cash obligations, or converted into additional shares of
Restricted Stock, upon such terms as the Committee establishes.
The Committee may apply any restrictions to the dividends that the
Committee deems appropriate.
In the event that any dividend constitutes a "derivative security" or
an "equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the remaining vesting
period of the Shares of Restricted Stock with respect to which the dividend is
paid.
7.7 TERMINATION OF EMPLOYMENT. Upon a Participant's death,
Disability, or Retirement, all Restricted Shares shall vest immediately. Each
Restricted Stock Award Agreement shall set forth the extent to which the
Participant shall have the right to retain unvested Restricted Shares following
termination of the Participant's employment with the Company in all other
circumstances. Such provisions shall be determined in the sole discretion of
the Committee, shall be included in the Award Agreement entered into with each
Participant, need not be uniform among all Shares of Restricted Stock issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination of employment.
ARTICLE 8. BENEFICIARY DESIGNATION
A Participant under the Plan may make written designation of a
beneficiary on forms prescribed by and filed with the Corporate Secretary.
Such beneficiary, or if no such designation of any beneficiary has been made,
the legal representative of such Participant or such other person entitled
thereto as determined by a court of competent jurisdiction, may exercise, in
accordance with and subject to the provisions of Article 6, any unterminated
and unexpired Option granted to such Participant to the same extent that the
Participant himself could have exercised such Option were he alive or able;
provided, however, that no Option granted under the Plan shall be exercisable
for more Shares than the Participant could have purchased thereunder on the
date his employment by, or other relationship with, the Company and its
Subsidiaries was terminated.
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ARTICLE 9. DEFERRALS
The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option, the lapse or waiver of restrictions with respect to Restricted Stock,
or the satisfaction of any requirements or objectives with respect to
performance measures, if any. If any such deferral election is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
ARTICLE 10. RIGHTS OF EMPLOYEES
10.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit
in any way the right of the Company to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in the
employ of the Company.
10.2 PARTICIPATION. No Employee shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.
ARTICLE 11. CHANGE IN CONTROL
11.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a
Change in Control, unless otherwise specifically prohibited under applicable
laws, or by the rules and regulations of any governing governmental agencies or
national securities exchanges:
(a) Any and all Options granted hereunder shall become
immediately exercisable, and shall remain exercisable throughout their
entire term; and
(b) Any restriction periods and restrictions imposed on
Shares of Restricted Stock shall lapse; provided, however, that the
degree of vesting associated with Restricted Stock which has been
conditioned upon the achievement of performance conditions pursuant to
Section 7.4 herein shall be determined in the manner set forth in
Section 7.7 herein.
11.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL
PROVISIONS. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 11 may not be terminated,
amended, or modified on or after the date of a Change in Control to affect
adversely any Award theretofore granted under the Plan without the prior
written consent of the Participant with respect to said Participant's
outstanding Awards.
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ARTICLE 12. AMENDMENT, MODIFICATION, AND TERMINATION
12.1 AMENDMENT, MODIFICATION, AND TERMINATION. Subject to Section
12.2 herein, the Board or the Committee may at any time and from time to time,
alter, amend, suspend or terminate the Plan in whole or in part.
Neither the Company nor the Board or Committee on its behalf may
cancel outstanding Awards and issue substitute Awards in replacement thereof or
reduce the exercise price of any outstanding Options.
12.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual
or nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan.
12.3 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.
ARTICLE 13. WITHHOLDING
13.1 TAX WITHHOLDING. The Company shall have the power and the
right to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy federal, state, and local taxes, domestic or
foreign, required by law or regulation to be withheld with respect to any
taxable event arising as a result of this Plan.
13.2 SHARE WITHHOLDING. With respect to withholding required upon
the exercise of Options, upon the lapse of restrictions on Restricted Stock, or
upon any other taxable event arising as a result of Awards granted hereunder,
Participants may elect to satisfy the withholding requirement, in whole or in
part, by having the Company withhold Shares having a Fair Market Value on the
date the tax is to be determined equal to the minimum statutory total tax which
could be withheld on the transaction. All such elections shall be made in
writing, signed by the Participant, and shall be subject to any restrictions or
limitations that the Committee, in its sole discretion, deems appropriate.
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ARTICLE 14. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against
him or her, provided he or she shall give the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
ARTICLE 15. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase, of
all or substantially all of the business and/or assets of the Company, or a
merger, consolidation or otherwise.
ARTICLE 16. LEGAL CONSTRUCTION
16.1 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular; and, the singular shall include the plural.
16.2 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
16.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
16.4 SECURITIES LAW COMPLIANCE. With respect to Insiders,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Committee fails to so
18
<PAGE> 19
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
16.5 GOVERNING LAW. To the extent not preempted by federal law,
the Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the state of Delaware.
19
<PAGE> 1
EXHIBIT (11)
MEDPARTNERS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Earnings:
Income from Continuing operations......................... $ 54,144 $ 20,901 $ (89,831)
Operating income (loss) from discontinued operations...... 25,902 (168,342) (71,221)
Gain on sale of discontinued operations................... -- 31,814 2,523
-------- --------- ---------
Net income (loss)................................. $ 80,046 $(115,627) $(158,529)
======== ========= =========
PRIMARY
Weighted average common shares outstanding.................. 119,342 135,007 151,282
Weighted average redeemable preferred stock................. 7,001 1,131 --
Net common shares issuable on exercise of certain stock
options(1)................................................ 5,440 4,226 4,082
-------- --------- ---------
Average common and common equivalent shares
outstanding..................................... 131,783 140,364 155,364
======== ========= =========
Per share amounts:
Income from continuing operations......................... $ 0.41 $ 0.15 $ (0.58)
Operating income (loss) from discontinued operations...... 0.20 (1.20) (0.46)
Gain on sale of discontinued operations................... -- 0.23 0.02
-------- --------- ---------
Net income (loss)................................. $ 0.61 $ (0.82) $ (1.02)
======== ========= =========
FULLY DILUTED
Weighted average common shares outstanding.................. 119,342 135,007 151,282
Weighted average redeemable preferred stock................. 7,001 1,131 --
Net common shares issuable on exercise of certain stock
options(1)................................................ 5,440 4,226 4,027
-------- --------- ---------
Average common and common equivalent shares outstanding..... 131,783 140,364 155,309
======== ========= =========
Per share amounts:
Income from continuing operations......................... $ 0.41 $ 0.15 $ (0.58)
Operating income (loss) from discontinued operations...... 0.20 (1.20) (0.46)
Gain on sale of discontinued operations................... -- 0.23 0.02
-------- --------- ---------
Net income (loss)................................. $ 0.61 $ (0.82) $ (1.02)
======== ========= =========
</TABLE>
- ---------------
(1) Net common shares issuable on exercise of certain stock options is
calculated based on the treasury stock method using the average market price
for the primary calculation and the ending market price, if higher than
average, for the fully diluted calculation.
<PAGE> 1
EXHIBIT (21)
CORPORATE SUBSIDIARIES
MedGP, Inc.
MedPartners Acquisition Corporation
MedPartners Aviation, Inc.
Bay Area Practice Management Group, Inc.
CHS Management, Inc.
Caremark International Inc.
Caremark Corporation
The Caremark Foundation
Caremark Inc.
Caremark Physician Services of Texas Inc.
MCS Holdings Corporation
Prescription Health Services, Inc.
Strategic Healthcare Management, Inc.
Caremark Indemnity Ltd.
Caremark International Holdings Inc.
Caremark Holdings N.V.
Caremark N.V.
Caremark Deutschland GmbH
Caremark S.A.
Caremark Distribution S.A.
Caremark Ltd.
Caremark Centres for Physical Rehabilitation Inc.
Caremark Pharmacy Services Inc.
Caremark Ltd.
Caremark Limited
Caremark Limited
Caremark Services Limited
CPSL Limited
Caremark Pty. Ltd.
MedPartners Physician Services Inc.
Caremark Nephrology Services Inc.
Caremark Resources Corporation
Friendly Hills Healthcare Network Inc.
North Suburban Clinic Ltd.
Medical Card System, Inc.
MCS Life Insurance Company
Greeley Clinic, Inc.
LFMG, Inc.
Pacific Medical Group, Inc.
Pacific Physician Services, Inc.
PPS East, Inc.
PPS North Carolina Medical Management, Inc.
PPS Nevada Investment Corporation
PPS Riverside Division Acquisition and Management
Corp. I
PPS Valley Management, Inc.
Pacific Indemnity, Ltd.
Pacific Physician Services Arizona, Inc.
Pacific Physician Services Nevada, Inc.
Physicians' Hospital Management Corporation
Reliant Healthcare Systems, Inc.
Team Health Group, Inc.
Clinic Management Services, Inc.
Daniel & Yeager, Inc.
Drs. Sheer, Ahearn & Associates, Inc.
The Emergency Associates for Medicine, Inc.
Emergency Coverage Corporation
Emergency Physician Associates, Inc.
Emergency Professional Services, Inc.
Hospital Based Physician Services, Inc.
Med: Assure Systems, Inc.
Northwest Emergency Physicians, Inc.
Southeastern Emergency Physicians, Inc.
Southeastern Emergency Physicians of Memphis, Inc.
Emergicare Management Incorporated
Team Radiology, Inc.
Pioneer Provider Network, Inc.
St. Johns Clinic, Inc.
The Tigard Clinic, Inc.
NON-CORPORATE SUBSIDIARIES
MedOhio, L.P.
MedTen, L.P.
MedTex, L.P.
MedPartners Physician Services of Illinois L.L.C.
Cerritos Investment Group
Cerritos Investment Group II
Family Medical Center
5000 Airport Plaza, L.P.
KS-PSI of Texas L.P.
MPI/Memorial IPA, LLC
PPS Medical Management and Consulting, L.L.C.
Sierra Meadows Associates, Ltd.
<PAGE> 1
EXHIBIT (23)
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of MedPartners, Inc. and in the related Prospectus of our report dated February
3, 1997, with respect to the consolidated financial statements of MedPartners,
Inc. included in this Annual Report (Form 10-K) for the year ended December 31,
1996 as follows:
Form S-8 No. 033-86806 pertaining to the 1993 Stock Option Plan;
Form S-8 No. 333-11875 pertaining to MedPartners Incentive Compensation
Plan;
Form S-8 No. 333-11127 pertaining to the 1995 Stock Option Plan;
Form S-8 No. 333-05703 pertaining to MedPartners' Employee Savings Plan;
Form S-8 No. 333-14159 pertaining to Caremark's Employee Savings Plan;
Form S-8 No. 333-14163 pertaining to Caremark's Non-Employee/Director Stock
Option Plan and Caremark's Stock Purchase Plan;
Form S-8 No. 333-16863 pertaining to MedPartner's Employee Stock Purchase
Plan;
Form S-3 No. 333-17337 pertaining to the Affiliated Stock Purchase Plan;
and
Form S-3 No. 333-17339 pertaining to the resale of common stock by certain
selling stockholders.
ERNST & YOUNG LLP
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 123,779
<SECURITIES> 0
<RECEIVABLES> 563,519
<ALLOWANCES> 120,350
<INVENTORY> 150,156
<CURRENT-ASSETS> 947,118
<PP&E> 505,060
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,265,969
<CURRENT-LIABILITIES> 776,805
<BONDS> 450,000
0
0
<COMMON> 165
<OTHER-SE> 739,332
<TOTAL-LIABILITY-AND-EQUITY> 2,265,969
<SALES> 0
<TOTAL-REVENUES> 4,813,499
<CGS> 0
<TOTAL-COSTS> 4,577,571
<OTHER-EXPENSES> 331,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,930
<INCOME-PRETAX> (95,128)
<INCOME-TAX> (5,297)
<INCOME-CONTINUING> (89,831)
<DISCONTINUED> (68,698)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158,529)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
