<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 0-27276
MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-1151076
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(Address of Principal Executive Offices)
(205)733-8996
(Registrant's Telephone Number, Including Area Code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 6, 1998
- ----------------------- -------------------------------
<S> <C>
COMMON STOCK, PAR VALUE 199,026,769*
$.001 PER SHARE
</TABLE>
* Includes 8,675,899 shares held in trust to be utilized in employee benefit
plans.
1
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FORWARD LOOKING STATEMENTS
Statements in this document that are not historical facts are hereby
identified as "forward looking statements" for purposes 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. (the "Company") cautions readers that such "forward looking
statements", including without limitation, those relating to the Company's
future business prospects, announced asset sales, revenue, 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 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 the
factors set forth in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Factors That May Affect Future Results and
Financial Condition."
The "forward looking statements" contained in this report are made
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Moreover, the Company, through its senior
management, may from time to time make "forward looking statements" about
matters described herein or other matters concerning the Company.
The Company disclaims any intent or obligation to update "forward
looking statements" to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
2
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MEDPARTNERS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 (Unaudited)................................. 4
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 1997 and 1998....................................... 5
Condensed Consolidated Statements of Operations (Unaudited) -
Nine Months Ended September 30, 1997 and 1998........................................ 6
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1997 and 1998........................................ 7
Notes to Condensed Consolidated Financial Statements (Unaudited). 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................ 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
</TABLE>
3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MEDPARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 215,801 $ 142,026
Accounts receivable, less allowances for bad debts of $204,249 and $192,104 763,551 739,392
Inventories ............................................................... 164,049 140,166
Income tax receivable ..................................................... 10,446 6,764
Deferred tax assets, net .................................................. 72,203 68,632
Prepaid expenses and other current assets ................................. 86,991 78,366
----------- -----------
Total current assets ............................................... 1,313,041 1,175,346
Property and equipment, net ................................................. 530,033 548,011
Intangible assets, net ...................................................... 731,586 818,946
Deferred tax assets, net .................................................... 175,619 198,113
Other assets ................................................................ 140,250 135,388
----------- -----------
Total assets ....................................................... $ 2,890,529 $ 2,875,804
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 340,106 $ 269,088
Accrued medical claims payable ............................................ 208,937 216,513
Other accrued expenses and liabilities .................................... 670,615 450,563
Current portion of long-term debt ......................................... 17,636 7,736
----------- -----------
Total current liabilities .......................................... 1,237,294 943,900
Long-term debt, net of current portion ...................................... 1,470,622 1,743,490
Other long-term liabilities ................................................. 91,759 127,998
Stockholders' equity:
Common stock, $.001 par value; 400,000 shares
authorized; issued -- 197,766 in 1997
and 198,697 in 1998 ..................................................... 198 199
Additional paid-in capital ................................................ 937,233 944,791
Notes receivable from stockholders ........................................ (1,367) (1,170)
Other comprehensive income ................................................ (5,035) (5,035)
Shares held in trust, 9,317 in 1997 and 8,931 in 1998 ..................... (150,200) (146,724)
Accumulated deficit ....................................................... (689,975) (731,645)
----------- -----------
Total stockholders' equity ......................................... 90,854 60,416
----------- -----------
Total liabilities and stockholders' equity ......................... $ 2,890,529 $ 2,875,804
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MEDPARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
-----------------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue ................................................................. $ 1,614,062 $ 1,739,189
Operating expenses:
Clinic expenses ........................................................... 889,165 998,842
Non-clinic goods and services ............................................. 548,140 602,390
General and administrative expenses ....................................... 45,423 63,297
Depreciation and amortization ............................................. 29,414 35,084
Net interest expense ...................................................... 13,969 25,673
Gain on sale of operations ................................................ -- (1,437)
----------- -----------
Income from continuing operations before income taxes ....................... 87,951 15,340
Income tax expense .......................................................... 33,509 7,617
----------- -----------
Income from continuing operations ........................................... 54,442 7,723
Loss from discontinued operations ........................................... (5,273) --
----------- -----------
Net income .................................................................. $ 49,169 $ 7,723
=========== ===========
Basic earnings per common share:
Income from continuing operations ......................................... $ 0.29 $ 0.04
Loss from discontinued operations ......................................... (0.03) --
----------- -----------
Net income ................................................................ $ 0.26 $ 0.04
=========== ===========
Diluted earnings per common share:
Income from continuing operations ......................................... $ 0.29 $ 0.04
Loss from discontinued operations ......................................... (0.03) --
----------- -----------
Net income ................................................................ $ 0.26 $ 0.04
=========== ===========
Weighted average common shares outstanding .................................. 186,691 189,585
Dilutive effect of employee stock options ................................... 3,691 74
----------- -----------
Weighted average shares outstanding, assuming dilution ...................... 190,382 189,659
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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MEDPARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue ................................................................. $ 4,642,595 $ 5,234,972
Operating expenses:
Clinic expenses ........................................................... 2,480,939 3,066,490
Non-clinic goods and services ............................................. 1,669,678 1,778,473
General and administrative expenses ....................................... 130,984 210,400
Depreciation and amortization ............................................. 83,871 94,370
Net interest expense ...................................................... 36,299 80,388
Merger expense ............................................................ 59,434 --
Terminated merger expenses ................................................ -- 8,445
Restructuring expense ..................................................... -- 75,175
Gain on sale of operations ................................................ -- (19,028)
----------- -----------
Income (loss) from continuing operations before income taxes ................ 181,390 (59,741)
Income tax expense (benefit) ................................................ 80,503 (18,071)
----------- -----------
Income (loss) from continuing operations .................................... 100,887 (41,670)
Loss from discontinued operations ........................................... (80,707) --
----------- -----------
Net income (loss) ........................................................... $ 20,180 $ (41,670)
=========== ===========
Basic earnings (loss) per common share:
Income (loss) from continuing operations .................................. $ 0.54 $ (0.22)
Loss from discontinued operations ......................................... (0.43) --
----------- -----------
Net income (loss) ......................................................... $ 0.11 $ (0.22)
=========== ===========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations .................................. $ 0.53 $ (0.22)
Loss from discontinued operations ......................................... (0.42) --
----------- -----------
Net income (loss) ......................................................... 0.11 $ (0.22)
=========== ===========
Weighted average common shares outstanding .................................. 185,300 189,083
Dilutive effect of employee stock options ................................... 3,340 --
----------- -----------
Weighted average shares outstanding, assuming dilution ...................... 188,640 189,083
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
MEDPARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Income (loss) from continuing operations ................................... $ 100,887 $ (41,670)
Adjustments for non-cash items:
Depreciation and amortization ............................................. 83,871 94,370
Provision for deferred taxes............................................... 25,836 (37,764)
Merger expense ............................................................ 59,434 --
Restructuring expense ..................................................... -- 75,175
Terminated merger expenses ................................................ -- 8,445
Net gain on sales of operations ........................................... -- (19,028)
Other ..................................................................... 613 (850)
Changes in operating assets and liabilities,
net of effects of acquisitions ........................................... (116,559) (128,973)
----------- -----------
Net cash and cash equivalents provided by
(used in) continuing operations ........................................ 154,082 (50,295)
Investing activities:
Net cash used to fund acquisitions ......................................... (327,486) (140,079)
Cash paid for merger and terminated merger charges ......................... (116,998) (9,920)
Purchase of property and equipment ......................................... (67,077) (114,064)
Additions to intangibles, net of acquisitions .............................. (13,630) (3,656)
Net proceeds from sales of operations ...................................... -- 69,102
Proceeds from sales of property and equipment .............................. -- 8,523
Other ...................................................................... 2,813 (933)
----------- -----------
Net cash and cash equivalents used in investing activities .............. (522,378) (191,027)
Financing activities:
Capital contributions ..................................................... 46,894 3,048
Net borrowings under line of credit ....................................... 60,000 292,251
Proceeds from senior subordinated notes offering .......................... 420,000 --
Proceeds from other debt .................................................. 53,946 188
Repayment of debt ......................................................... (34,594) (20,242)
Financing costs ........................................................... (2,395) (15,299)
Other ..................................................................... 249 (576)
----------- -----------
Net cash and cash equivalents provided by financing activities .......... 544,100 259,370
Cash paid for restructuring expenses ........................................ -- (81,707)
Cash used in discontinued operations ........................................ (67,977) (10,116)
----------- -----------
Net increase (decrease) in cash and cash equivalents ........................ 107,827 (73,775)
Cash and cash equivalents at beginning of period ............................ 127,397 215,801
Beginning cash and cash equivalents of immaterial
pooling of interests entities .............................................. 501 --
----------- -----------
Cash and cash equivalents at end of period .................................. $ 235,725 $ 142,026
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
MEDPARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring items) necessary for a fair presentation of results for the interim
periods presented. The results of operations for any interim period are not
necessarily indicative of results for the full year. The condensed consolidated
balance sheet of the Company at December 31, 1997 has been derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. These financial statements and footnote
disclosures should be read in conjunction with the December 31, 1997 audited
consolidated financials statements and the notes thereto.
The Company has historically amortized the goodwill related to its
practice management agreements over the terms of the agreements, generally 20 to
40 years. Effective July 1, 1998, the Company adopted a maximum of 25 years as
the useful life for amortization of its intangible assets, including those
acquired in prior years. Had this policy been in place in 1997, amortization
expense would have increased by approximately $1.7 million for the quarter ended
September 30, 1997 and $5.1 million for the nine months ended September 30,
1997. The effect on diluted earnings per share, using the Company's historical
effective tax rate, would have been $0.01 and $0.02 for the three and nine month
periods ended September 30, 1997 respectively. On the same basis, amortization
expense would have increased by $4.2 million for the first six months of 1998,
resulting in a decrease in earnings per share of $0.01.
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.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's consolidated net
income or consolidated stockholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities, which prior to
adoption had been reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
During the first nine months of 1998 and 1997, total other
comprehensive income was immaterial to the condensed consolidated financial
statements.
In June 1997, the FASB issued "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for the Company's financial statements for the year ending
December 31, 1998. The adoption of SFAS 131 will have no impact on the Company's
results of operations or financial position.
The Emerging Issues Task Force ("EITF") issued guidance during 1997,
EITF 97-2, on the consolidation of physician practice revenues. Under EITF 97-2,
Physician Practice Management Companies will be required to consolidate
financial information of a physician practice where the company acquires a
"controlling financial interest" in the practice through the execution of a
contractual management agreement even though the company does not own a
controlling equity interest in the physician practice. EITF 97-2 outlines six
requirements for establishing a controlling financial interest. The guidance
contained in EITF 97-2 is effective for the Company's financial statements for
the year ending December 31, 1998. The Company does not believe that the
implementation of this guidance will have a material impact on its financial
condition or results of operations.
NOTE 3. ACQUISITIONS
During the nine months ended September 30, 1998, the Company acquired
four companies in the Contract Services Division and two physician groups in
the Physician Practice Management Division. The acquisitions have been accounted
for by the purchase method of accounting and, accordingly, the purchase price
has been allocated to net assets acquired based on estimated fair values at
8
<PAGE> 9
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
the dates of acquisition. Cash paid during the nine months ended September 30,
1998 totaled $27.0 million related to these acquisitions. Additionally $113.1
million in cash was paid during the nine months ended September 30, 1998 related
to payments for previously completed acquisitions, including a $51.9 million
payment related to the 1997 acquisition of the Health Centers Division of Blue
Cross Blue Shield of Massachusetts.
NOTE 4. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is calculated by dividing income
available to common stockholders by the weighted average number of common shares
outstanding. For the computation of diluted earnings (loss) per common share, no
incremental shares related to options are included for the nine months
ended September 30, 1998, since including the shares would be antidilutive.
NOTE 5. SALES OF OPERATIONS
During the first quarter of 1998, the Company sold its international
operations in Germany, the Netherlands, Canada, Puerto Rico and Japan. The
pharmacy benefits management ("PBM") operations in the Netherlands were sold
during the second quarter of 1998. The remaining international operation, the
home infusion unit in the United Kingdom, was sold during the third quarter of
1998. In addition, the Company also sold certain of its physician practice
management ("PPM") operations in Utah, New Mexico, Arizona and California. The
net pretax gain on sales of operations were $19.0 million for the nine months
ended September 30, 1998.
NOTE 6. TERMINATED MERGER AND RESTRUCTURING
On October 1, 1997, the Company announced that it entered into an
agreement to acquire America Service Group Inc. ("ASG") in a stock transaction
valued at approximately $59 million. On February 26, 1998, it was announced that
the merger agreement had been terminated by mutual consent of both parties and
that a release and settlement agreement had been executed. Due to the exchange
of confidential information, the settlement agreement contains non-competition
and non-solicitation provisions and provides that certain expenses and costs be
paid by the Company. Accordingly, the pre-tax loss for the nine months ended
September 30, 1998 includes costs totaling $8.4 million, primarily relating to
the terminated merger with ASG.
In addition, during the first nine-months of 1998 the Company recorded
a pre-tax restructuring charge of $75.2 million that primarily relates to
severance costs, costs associated with the closing of certain clinic operations
and real estate obligations for space no longer in use or scheduled to become
vacant as a result of continuing consolidation activities.
NOTE 7. CREDIT FACILITY
On June 9, 1998, the Company entered into an amendment and restatement
of its $1.0 billion credit facility. The credit facility consists of the
following:
i. a one-year non-amortizing term loan in an aggregate principal
amount of up to $300 million (the Company has an option to extend
the term loan an additional two years as an amortizing term loan);
ii. a three-year non-amortizing term loan in an aggregate principal
amount of up to $300 million; and
iii. a three-year revolving credit facility in an aggregate principal
amount of up to $400 million.
As of September 30, 1998, $816.8 million was outstanding under the
credit facility. In addition, the Company had $53.9 million in letters of credit
outstanding under its credit facility as of September 30, 1998. The credit
facility contains affirmative and negative covenants which include requirements
that the Company maintain certain financial ratios (including minimum fixed
charge coverage ratio and maximum indebtedness to cash flow), maintain during
1998 a specified minimum level of EBITDA and establishes certain restrictions on
investments, mergers and sales of assets. Additionally, the Company is required
to obtain bank consent for any
9
<PAGE> 10
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
acquisitions with an aggregate purchase price in excess of $15 million. The
credit facility is unsecured but provides a negative pledge on substantially all
domestic assets of the Company. The credit facility is also guaranteed by
substantially all of the Company's domestic subsidiaries.
NOTE 8. CONTINGENCIES
On January 7, 1998, MedPartners issued a press release announcing the
termination of its proposed merger with PhyCor, Inc. On that date, MedPartners
also issued another press release announcing certain fourth quarter 1997 charges
and negative earnings estimates. On January 8, 1998, there was a decline in the
market prices for MedPartners' publicly traded securities. Since then, certain
persons claiming to be stockholders of MedPartners have filed complaints in
either state or federal court against MedPartners and certain officers and
directors of MedPartners. Originally, there were two state court actions and 14
federal court actions, all filed in Birmingham, Alabama. In each of these
lawsuits, the plaintiffs purport to represent a class and generally allege
violations of the Securities Exchange Act of 1934, fraud and various state law
claims in connection with the public disclosure by MedPartners of the
termination of the PhyCor merger and the fourth quarter 1997 charges and
earnings estimates. All of the federal court actions have been consolidated into
one case and one state court action has been dismissed but is being appealed by
the plaintiff's counsel. The remaining state court action was filed against
MedPartners and certain of its officers and directors, purportedly on behalf of
all persons who purchased MedPartners' Threshold Appreciation Price
Securities(TM) in the offering occurring on or about September 16, 1997.
Collectively, these complaints seek class certification, damages and interest,
as well as costs and expenses. MedPartners' management believes that it and
MedPartners have acted properly throughout and intends to defend each of these
cases vigorously. All of these cases are in the most preliminary stages, and
their ultimate resolution cannot be known at this time. Therefore, there can be
no assurance that the ultimate resolution of these matters will not have a
material adverse effect on the operating results and financial condition of
MedPartners.
NOTE 9. SUBSEQUENT EVENTS
On November 11, 1998 the Company announced that its Caremark division, which
includes its PBM and the therapeutic services businesses, will become its core
operating unit. The Company will divest its PPM operations, either by sale,
spinout to stockholders, or some combination thereof, in a process which
management believes will be completed within the next twelve months. The Company
is in negotiations with its bank group in order to restructure its credit
facility to reflect its new strategic direction. The Company currently
anticipates applying discontinued operations accounting treatment for the PPM
operations.
10
<PAGE> 11
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
GENERAL
MedPartners is a diversified healthcare management company which
currently operates three separate business divisions: Pharmaceutical Services,
Physician Practice Management Services and Contract Medical Services. The
Pharmaceutical Services Division provides pharmacy benefits management and
therapeutic pharmaceutical services, with revenues of $1.9 billion for the nine
months ended September 30, 1998. The Physician Practice Management Services
Division develops, consolidates and manages physician-based healthcare delivery
systems, with $2.6 billion in revenues for the nine months ended September 30,
1998. The Contract Medical Services Division provides hospital-based physician
management services and provides medical services to correctional and certain
other governmental institutions, with revenues of $0.6 billion for the nine
months ended September 30, 1998.
On June 23, 1998, the Company announced its intent to sell its Team
Health operations, which is a significant portion of its Contract Medical
Services Division. On September 25, 1998, the Company announced its intent to
sell its Government Services Unit, the remainder of its Contract Medical
Services Division. Proceeds from the sale of these operations would be used to
reduce the outstanding debt of the Company. The Contract Medical Services
Division represented $0.6 billion of the Company's consolidated net revenue
and $47.8 million of the Company's operating income for the nine months ended
September 30, 1998.
On November 11, 1998, the Company announced its intent to divest its
PPM operations either by sale, spinout to stockholders, or some combination
thereof. Proceeds from the sale of these operations would be used to reduce the
outstanding debt of the Company. The PPM represented $2.6 billion of the
Company's consolidated net revenue and had an operating loss of $48.7 million
for the nine months ended September 30, 1998.
The Company currently anticipates applying discontinued operations
accounting for the PPM operations. Additionally, should the Company determine
that the Team Health and Government Services units will be sold, discontinued
operations treatment may be applied to the Contract Services Division. Net
revenue and operating income for the divisions are set forth in the table below,
and net revenue and results of operations for those divisions to which
discontinued operations accounting is applied would be removed from the
Company's revenue and operating income from continuing operations. In addition,
the Company anticipates that discontinued operations will include allocations of
corporate overhead and interest expense.
The Company's Pharmaceutical Services division includes the
prescription benefit management ("PBM") and therapeutic services businesses. The
PBM manages prescription programs for corporations, insurance companies, unions,
government employee groups and managed care organizations. The PBM through its
network of 53,000 retail pharmacies and its mail-order distribution centers
filled over 32 million prescriptions in the first nine months of 1998. The
therapeutic services business provides drug therapies and services for patients
with chronic high cost, low incidence conditions such as hemophilia, growth
disorders, immune deficiencies, cystic fibrosis and multiple sclerosis.
The Company's PPM division manages physician group practices under a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets or by affiliation on a
contractual basis. Most of the Company's PPM revenue is derived from contracts
covering 2.0 million lives with health maintenance organizations and other
third-party payors that compensate the Company on a prepaid basis for
professional, and in some cases, all medical services required by enrollees. The
remainder of the PPM revenues are derived from long-term practice management
agreements with affiliated physicians that provide for both the management of
their practices by the Company and the clinical independence of the physicians.
The Contract Medical Services Division organizes and manages physicians
and other healthcare professionals engaged in the delivery of emergency,
radiology and primary care services. The Company provides these services to
hospitals, clinics, managed care organizations, correctional facilities,
Department of Defense facilities and government-affiliated physician groups. At
September 30, 1998, the Contract Medical Services Division had 450 contracts in
place.
RESULTS OF OPERATIONS
Net revenue was $1.739 billion and $5.235 billion for the three and
nine months ended September 30, 1998, respectively, and $1.614 billion and
$4.643 billion for the same periods of 1997. The increases in net revenue
primarily resulted from various increases in PPM, PBM and Contract Medical
Services as discussed below. Net income (loss) for the third quarter of 1998 was
$7.7 million, compared to $49.2 million for the same period of 1997, and $(41.7)
million for the nine months ended September 30, 1998, compared to $20.2 million
for the same period of 1997.
The Company recorded pre-tax restructuring charges of $75.2 million for
the nine months ended September 30, 1998. Such charges relate to severance
costs, costs associated with the closing of certain clinic operations and real
estate obligations for space no longer in use or scheduled to become vacant.
11
<PAGE> 12
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations (Continued)
Net interest expense increased $11.7 million and $44.1 million for the
three and nine months ended September 30, 1998, respectively, over the same
periods in the previous year. The increase was the result of increased
borrowings and interest rates under the credit facility and the issuance of the
$420 million senior subordinated notes in September, 1997.
The following table sets forth the earnings summary by division for the
periods indicated. (Operating income (loss) represents earnings (loss) before
interest and income taxes and excludes merger expenses, terminated merger
expense, restructuring expense and gain on sales of operations):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------------------------------------------------------------------------------------
Total Total % Change Total Total % Change
-------- ------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Physician Practice
Management Services
Net revenue $777,865 $ 852,493 9.6% $ 2,181,175 $ 2,633,741 20.7%
Operating income (loss) 45,349 (10,621) (123.4)% 130,220 (48,693) (137.4)%
Margin 5.83% (1.25)% 5.97% (1.85)%
Pharmaceutical Services
Net revenue $578,040 $ 660,608 14.3% $ 1,769,624 $ 1,920,291 8.5%
Operating income (loss) 38,084 43,291 13.7% 106,593 116,321 9.1%
Margin 6.59% 6.55% 6.02% 6.11%
Contract Medical Services
Net revenue $220,840 $ 217,198 (1.6)% $ 601,163 $ 635,040 5.6%
Operating income (loss) 23,502 16,978 (27.8)% 57,008 47,820 (16.1)%
Margin 10.64% 7.82% 9.48% 7.53%
International
Net revenue $ 37,317 $ 8,890 (76.2)% $ 90,633 $ 45,900 (49.4)%
Operating income (loss) 996 209 (79.0)% 2,051 701 (65.8)%
Margin 2.67% 2.35% 2.26% 1.53%
</TABLE>
Pharmaceutical Services
Pharmaceutical Services revenues grew approximately 14.3% and 8.5% for
the three months and nine months ended September 30, 1998, respectively. Key
factors contributing to this growth include new contracts, drug cost inflation,
and increased revenue in the multiple sclerosis line. The majority of
Pharmaceutical Services revenue is earned on a fee-for-service basis through
contracts covering one to three-year periods. The remainder of revenues are
earned based on a percentage of savings achieved or on a per-enrollee or
per-member basis.
Margins for Pharmaceutical Services remained relatively constant at
6.6% from the third quarter of 1997 to the third quarter of 1998 and at 6.1% and
6.0% for the first nine months of 1998 and 1997, respectively. Management
believes that revenue growth in the multiple sclerosis line will negatively
impact margins in future periods, as this product line provides lower margins
than existing products.
Physician Practice Management Services
The Company's PPM revenues increased over the three and nine months
ended September 30, 1997 by 9.6% and 20.7% respectively, primarily due to growth
in prepaid enrollment and acquisitions during the last three quarters of 1997
(primarily Talbert Medical Management Holdings Corporation, Aetna U.S.
Healthcare's physician practice management business and the Health Centers
Division of Blue Cross and Blue Shield of Massachusetts). 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 Division for the periods
indicated:
12
<PAGE> 13
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations (Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------------
1997 1998 1997 1998
-------- -------- ---------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Prepaid healthcare........ $532,615 $566,563 $1,460,704 $1,779,259
Fee-for-service .......... 231,587 281,877 697,157 835,817
Other .................... 13,663 4,053 23,314 18,665
-------- -------- ---------- ----------
Net Revenue .............. $777,865 $852,493 $2,181,175 $2,633,741
======== ======== ========== ==========
</TABLE>
Prepaid revenues increased 21.8% from the first nine months of 1997 to
the first nine months of 1998, and 6.4% from the third quarter of 1997 to the
third quarter of 1998. Approximately 39% of the increase in prepaid revenues
relates to acquisitions made during the last four months of 1997. The remaining
increase primarily relates to additional institutional risk assumed.
The operating loss for the third quarter of 1998 was $10.6 million,
compared to operating income of $45.3 million for the same period of 1997. For
the first nine months of 1998, the operating loss was $48.7 million compared to
operating income of $130.2 million for the same period of 1997. The third
quarter 1998 operating loss for the PPM division is a substantial improvement
from the operating losses of $25.0 and $13.1 million for the first and second
quarter of 1998, respectively. The most significant component of the third
quarter 1998 operating loss is attributable to the negative performance in the
PPM's Southern California operations. The Company has replaced management in its
Southern California operations and is undertaking consolidation and
restructuring activities which has improved financial results.
Contract Medical Services
Contract Medical Services net revenue decreased $3.6 million or 1.6%
over the third quarter of 1997 and increased $33.9 million or 5.6% over the
first nine months of 1997. The increase in revenue for Contract Services for the
nine months ended September 30, 1998 is due to four new acquisitions in the Team
Health operations and the increase in the number of contracts and inmates in the
correctional care operations.
Contract Medical Services operating income decreased by 16.1% from the
nine-months ended September 30, 1997, to September 30, 1998 and 27.8% from the
three months ended September 30, 1997, to September 30, 1998, primarily due to
the absorption by the division of certain overhead costs from InPhyNet corporate
operations previously absorbed by the corporate division and changes in
estimates of net accounts receivable balances.
Sales of Operations
During the first quarter of 1998, the Company sold its international
operations in Germany, the Netherlands, Canada, Puerto Rico and Japan. The PBM
operations in the Netherlands were sold during the second quarter of 1998. The
remaining international operation, the home infusion unit in the U.K., was sold
during the third quarter of 1998. In addition the Company also sold certain of
its PPM operations in Utah, New Mexico, Arizona and California. The net pretax
gains on sales of operations were $19.0 million for the nine months ended
September 30, 1998.
Other
The year 2000 presents a problem for computer software and hardware
that were not designed to handle dates beyond the year 1999. The year 2000
("Y2K") problem is pervasive and complex because virtually every computer
operation will be affected in some way by the rollover of the last two digits of
the year to "00." As a consequence, any such software and hardware will need to
be modified some time prior to December 31, 1999 in order to remain functional.
Computer systems and hardware that do not properly handle this rollover could
generate erroneous data or fail to function.
13
<PAGE> 14
The Company has initiated a company-wide program to address the year
2000 issue with respect to the information systems (software and hardware) and
equipment and systems (including medical equipment manufactured by third
parties) utilized in the Company's operations. The program includes: (1) an
inventory of the information systems, hardware, and equipment (the "Systems,
Hardware and Equipment") utilized in operations; (2) an assessment of the Y2K
issues associated with the Systems, Hardware and Equipment; (3) the remediation
of such Systems, Hardware and Equipment to achieve year 2000 readiness ("Y2K
Readiness" or "Y2K Ready"); (4) the testing of such Systems, Hardware and
Equipment to confirm Y2K Readiness; and (5) the development of contingency plans
to address the year 2000 and the principal risks facing the Company in its
efforts to achieve Y2K Readiness. The Company's Y2K program also includes its
"Trading Partners Initiative," which is designed to provide the Company with
insights into the Y2K Readiness of certain of the Company's customers, suppliers
and vendors. In addition, the Company has sent letters to certain manufacturers
of the hardware and equipment utilized in operations requesting that such
manufacturers address the Y2K Readiness of such hardware and equipment.
In terms of the status of the Company's Y2K program, management
believes that the Company's inventory of information systems is approximately
95% complete, that its assessment of Y2K issues associated with such information
systems is approximately 75% complete and that its remediation efforts with
respect to such information systems is approximately 40% complete. With respect
to the status of the Company's Y2K efforts with respect to equipment and systems
that include embedded logic or software which presents Y2K issues, management
believes that the inventory of such equipment and systems is approximately 20%
complete; however, the Company has not yet commenced the assessment or
remediation efforts with respect to the Y2K issues associated with such
equipment and software. It is currently contemplated that the Company will
commence testing efforts with respect to the Systems, Hardware and Equipment
following the completion of the inventory and assessment stages of its Y2K
program. The Company has not, to date, received substantial responses to its
requests of customers, suppliers and vendors with respect to their Y2K
Readiness. As a result, management is currently unable to form an opinion as to
the present level of risk associated with the state of Y2K Readiness of the
Company's customers, vendors and suppliers, other than a belief that the Y2K
issues generally associated with the healthcare industry are very significant
and complex and include issues associated with the delivery of healthcare
services and products as well as the billing and collection of amounts due for
such services and products. The Company is unaware of any survey speaking to Y2K
Readiness in the healthcare industry at-large and is thus unable to assess the
magnitude of this risk.
Management of the Company believes that the Company's Y2K program will
be substantially completed by mid-1999. The Company estimates that the total
cost of the Y2K program will be approximately $32.5 million, of which
approximately $14.7 million has been spent through September 30, 1998. Of such
aggregate Y2K expenditures made to date, management currently estimates that
approximately $12.2 million consisted of capital expenditures for new or
replacement Systems, Hardware and Equipment and approximately $2.5 million
consisted of expenses of the Y2K program. The source of the funding utilized to
make such historical expenditures has been borrowings under the Company's credit
facility and cash flow from operations. Management of the Company believes that
a significant amount of the funds spent to date and budgeted in the future for
achieving Y2K Readiness would otherwise have been spent and budgeted in
connection with the Company's ongoing information technology consolidation
efforts to reduce the number of information systems and hardware platforms
utilized in its operations and acquired through the Company's various
acquisition transactions over the years.
The Company believes that the most reasonably likely worse case
scenario with respect to Y2K issues is the possibility that equipment and
systems that include embedded logic or software will fail to be Y2K Ready and
that such failure will cause such equipment to fail to operate or operate
improperly. The failure of such equipment (including without limitation, the
medical equipment used by the Company) may expose individual patients to
potential injury and may expose the Company to claims and liabilities,
including without limitation medical malpractice claims. At this time the
Company cannot estimate the likelihood or magnitude of any such equipment or
systems failures. The Company has not established a contingency plan for the
failure of such equipment or systems but plans to establish such a plan during
1999 in conjunction with the implementation of the Y2K program.
The foregoing discussion involves the estimates and judgments of the
senior management of the Company. There can be no assurances that the Company
will be Y2K Ready or that the Company will not incur liability or suffer a
material adverse effect as a result of the Company's failure to be Y2K Ready.
In addition, there can be no assurances that the estimated expenses to make the
Company Y2K Ready will not be materially higher than estimated or that the
Company will not incur additional expenses associated with its efforts to get
Y2K Ready or its failure to do so.
14
<PAGE> 15
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations (Continued)
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The healthcare industry in general is in a state of significant flux. This,
together with the circumstance that the Company has a relatively short operating
history makes the Company particularly susceptible to various factors that may
affect future results. The future operating results and financial condition of
the Company are dependent on, among other things, the Company's ability to
market its services profitably, successfully increase market share, manage
expense growth relative to revenue growth and successfully sell the Contract
Services Division and divest the PPM Division, manage the operations of the
Company during such sale and divestiture process and to address the liquidity
and capital needs of the business over the short and long term. The future
operating results and financial condition of the Company may be affected by a
number of additional factors, including: (1) adverse developments with respect
to the sale of the contract medical services division or the planned divestiture
of the PPM Division (including the timing, terms or feasibility of such sale and
divestiture); (2) adverse developments with respect to the operation of the
Company's business units during such sale and divestiture process; (3) failure
to meet operating objectives or to execute the operating plan; (4) pharmacy
licensing, healthcare reform and government regulation and (5) adverse
developments with respect to the healthcare industry in general and overall
market conditions. 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.
There are various legal matters which, if adversely determined, could
have a material adverse effect on the Company's operating results and financial
condition. See Note 8 to the unaudited consolidated financial statements and
Item 3 of the Company's Annual Report filed on Form 10-K for the fiscal year
ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had working capital of $231.4
million, including cash and cash equivalents of $142.0 million. For the first
nine months of 1998, cash used by operations was $50.3 million compared to cash
flows from operations of $154.1 million for the same period of 1997.
For the nine months ended September 30, 1998 and 1997, the Company
invested cash of $140.1 million and $327.5 million, respectively, in
acquisitions of the assets of physician practices and PPM entities, and $114.1
million and $67.1 million, respectively, in property and equipment. During the
nine months ended September 30, 1998 and 1997, the Company paid $9.9 and $117.0
million, respectively, in cash for terminated merger costs and merger costs.
During the nine months ended September 30, 1998, the Company paid $81.7 million
for restructuring expenses and $15.3 million for financing costs. These
expenditures were primarily funded in 1998 by $292.3 million in increased
borrowings under the Company's credit facility, and, in 1997, the $420 million
senior subordinated note offering and $46.9 million derived from capital
contributions. The Company expects that future capital requirements will relate
primarily to the replacement of property and equipment, payments related to
restructuring expenses, severance and other exit costs relating to discontinued
operations and expansions of PBM operations.
On June 9, 1998, the Company entered into an amendment and restatement
of its $1.0 billion credit facility. The credit facility consists of the
following:
i. a one-year non-amortizing term loan in an aggregate principal amount
of up to $300 million (the Company has an option to extend the term
loan an additional two years as an amortizing term loan) ($284.1
million outstanding at September 30, 1998);
ii. a three-year non-amortizing term loan in an aggregate principal
amount of up to $300 million ($284.1 million outstanding at
September 30, 1998); and
iii. a three-year revolving credit facility in an aggregate principal
amount of up to $400 million.
As of September 30, 1998, there was $248.5 million in outstanding borrowings and
$53.9 million in letters of credit under the revolving credit facility,
resulting in $98 million in available borrowing capacity. Proceeds of the
announced asset sales will be used to reduce indebtedness under the credit
facility. Based on its projections of
15
<PAGE> 16
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations (Continued)
short-term cash requirements, the Company is pursuing the following measures to
increase its short and long term capital resources: (1) negotiating additional
financing, which would be secured by accounts receivable of the PBM division;
(2) proposing amendments to its bank facility to allow portions of asset sale
proceeds to be applied to the revolving credit facility, thereby increasing
available borrowing capacity; and (3) negotiating with various parties to reduce
letter of credit requirements to increase available borrowing capacity. The
additional financing and proposed amendments to the credit facility noted above
will require the consent of a simple majority of the bank group under the
Company's credit facility. Management of the Company currently believes, based
upon preliminary discussions, that the bank group will consent to such
additional financing and/or proposed amendments. However, there can be no
assurance that such consents will ultimately be received. To the extent the
Company does not receive such consents, the Company intends to address its
liquidity and capital needs through alternative sources of funds, a further
reduction in capital expenditures and operating costs or a combination of one or
more of the foregoing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates
related to its long-term debt. The impact on earnings and value of its long-term
debt is subject to change as a result of movements in market rates and prices.
As of September 30, 1998, the Company had $870.6 million in long-term debt
subject to variable interest rates. The remaining $872.9 million in long-term
debt is subject to fixed rates of interest. A hypothetical increase in interest
rates of 1% would result in potential losses in future pre-tax earnings of
approximately $8.7 million per year. The impact of such a change on the carrying
value of the long-term debt would not be significant. These amounts are
determined based on the impact of the hypothetical interest rates on the
Company's long-term debt balances and do not consider the effects, if any, of
the potential changes in the overall level of economic activity that could
exist in such an environment.
16
<PAGE> 17
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Description
3.1 MedPartners, Inc. Third Restated Certificate of Incorporation,
filed as Exhibit (3)-1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, is
hereby incorporated herein by reference.
3.2 The Third Amended and Restated Bylaws of the Company
4.1 MedPartners, Inc. Stockholders' Rights Plan, filed as
Exhibit (4)-1 to the Company's Registration Statement on
Form S-4 (Registration No. 333-00774), is hereby incorporated
by reference.
4.2 Amendment No. 1 to the Stockholders' Rights Plan of
MedPartners, Inc., filed as Exhibit (4)-2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is hereby incorporated herein by
reference.
4.3 Amendment No. 2 to the Stockholders' 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 Employment Agreement by and between Registrant and
E. Mac Crawford dated as of March 18, 1998, filed as
Exhibit (10)-4 to the Company's Quarterly Report for the
quarter ending March 31, 1998 on Form 10-Q, is hereby
incorporated by reference.
10.2 First Amendment to Employment Agreement by and between
the Company and E. Mac Crawford.
10.3 Nonqualified Stock Option Agreement by and between the Company
and E. Mac Crawford.
27.1 Financial Data Schedule (For SEC use only)
99.1 MedPartners, Inc. 1998 New Employee Stock Option Plan.
99.2 MedPartners, Inc. 1998 Employee Stock Option Plan, filed as
Exhibit 4.5 to the Company's Registration Statement on
Form S-8 (Registration No. 333-64371) filed with the
Commission on September 25, 1998, is incorporated herein by
reference.
99.3 Form of Option Surrender and Relinquishment Agreement, filed
as Exhibit 4.6 to the Company's Registration Statement on
Form S-8 (Registration No. 333-64371) filed with the
Commission on September 25, 1998, is incorporated herein by
reference.
99.4 Form of Stock Option Award Certificate pursuant to the
MedPartners, Inc. 1998 Employee Stock Option Plan and the
Option Surrender Program, filed as Exhibit 4.7 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-64371) filed with the Commission on September 25,
1998, is incorporated herein by reference.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the quarter ended
September 30, 1998.
17
<PAGE> 18
Pursuant to the requirements 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/ James H. Dickerson, Jr.
----------------------------------------------------
James H. Dickerson, Jr.,
Executive Vice President and Chief Financial Officer
By:/s/ Howard A. McLure
----------------------------------------------------
Howard A. McLure, Senior
Vice President and Chief Accounting Officer
Date: November 16, 1998
<PAGE> 1
EXHIBIT 3.2
THIRD AMENDED AND RESTATED BYLAWS
OF
MEDPARTNERS, INC.
ARTICLE I
OFFICES
The registered office shall be in the City of Wilmington, County of New
Castle, State of Delaware. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Stockholder Meetings. All meetings of the stockholders for the
election of Directors shall be held in the City of Birmingham, State of Alabama,
at such place as may be fixed from time to time by the Board of Directors, or at
such other place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. Annual meetings of the stockholders shall be
held during the month in which the Corporation's fiscal year ends or at such
time designated by the stockholders, if not a legal holiday, and if a legal
holiday, then on the next secular day following, or at such other date as shall
be designated from time to time by the Board of Directors and stated in the
notice of the meeting, at which they shall elect by a plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting.
Section 3. Notice of Annual Meeting. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
fifty days before the date of the meeting.
Section 4. Voting List. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or Secretary at the request in writing of a majority of the
Board
<PAGE> 2
of Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Notice of Special Meeting. Written notice of a special meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called, shall be given not less than ten nor more than
fifty days before the date of the meeting, to each stockholder entitled to vote
at such meeting.
Section 7. Transaction of Business. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
Section 8. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, then the presiding officer of
said meeting or the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
until a quorum shall be present or represented, and the Corporation may transact
at any adjourned meeting any business which might have been transacted at the
original meeting. Notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken, unless (a) any adjournment or series of adjournments caused the original
meeting to be adjourned for more than thirty days after the date originally
fixed therefor, or (b) a new record date is fixed for the adjourned meeting. If
notice of an adjourned meeting is given, such notice shall be given to each
stockholder of record entitled to vote at the adjourned meeting in the manner
prescribed in Section 3 or Section 6 of this Article II, as the case may be, for
the giving of notice of annual meetings and special meetings, respectively, of
stockholders.
Section 9. Voting of Shares. Unless otherwise provided in the Certificate
of Incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 10. Written Consent. Unless otherwise provided in the Certificate
of Incorporation, any action required to be taken at any annual or special
meeting of stockholders of the Corporation, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if there is a consent in
writing, setting forth the action so taken, bearing the signature and date of
signature of the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 11. Proposals at Annual Meetings. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, otherwise properly
brought before the meeting by or at the direction of the Board of Directors or
otherwise properly brought before the meeting by a stockholder. In addition to
any other applicable requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
2
<PAGE> 3
principal executive offices of the Corporation, not less than sixty days nor
more than ninety days prior to the meeting; provided, however, that in the event
that less than seventy days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting, (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of record by
the stockholder, (iv) a description of all arrangements or understandings
between the stockholder and any other person or persons (including their names)
in connection with the proposal of such business by the stockholder and any
material interest of the stockholder in such business, and (v) a representation
that the stockholder intends to appear in person or by proxy at the annual
meeting to bring such business before the meeting.
Notwithstanding anything in the Bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Article II, Section 11, provided, however, that nothing in this
Article II, Section 11 shall be deemed to preclude discussion by any stockholder
of any business properly brought before the annual meeting in accordance with
said procedure.
The Chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Article II, Section 11, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 12. Nominations of Persons for Election to the Board of Directors.
In addition to any other applicable requirements, only persons who are nominated
in accordance with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board of Directors or by any stockholder of the Corporation entitled to vote for
the election of Directors at the meeting who complies with the notice procedures
set forth in this Article II, Section 12. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty days nor more
than ninety days prior to the meeting; provided, however, that in the event that
less than seventy days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholders to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a Director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by the person and (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Section 14 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice, (i) the name and
record address of the stockholder, (ii) the class or series and number of shares
of capital stock of the Corporation which are owned beneficially or of record by
the stockholder, (iii) a description of all arrangements or understandings
between the stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nominations(s) are to be
made by the stockholder, (iv) a representation that such stockholder intends to
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appear in person or by proxy at the meeting to nominate the persons named in
such notice and (v) any other information relating to the stockholder that would
be required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for the election of Directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee being named as a nominee and to serve as a Director if
elected. The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a Director of the Corporation.
No person shall be eligible for election as a Director of the Corporation unless
nominated in accordance with the procedures set forth herein. The provisions of
this Article II, Section 12 shall not apply to Directors governed by Section 14
of Article III.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE III
DIRECTORS
Section 1. General Powers. The business of the Corporation shall be
managed by or under the direction of its Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by law or by the Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.
Section 2. Number and Term of Office; Removal. The number of Directors of
the Corporation shall be fixed from time to time by these Bylaws but in no event
shall be less than three. Until these Bylaws are further amended, the number of
Directors shall be thirteen. 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 group or groups as the Board of Directors shall designate. The first class
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 for a
term which expires in 1998. At each annual meeting of stockholders, successors
to the class of Directors whose term expires at that 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 of stockholders for the year in which
his term expires and until his successor shall be elected and qualify. No
alteration, amendment or repeal of these Bylaws 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
such alteration, amendment or repeal has been approved by either the holders of
all shares of stock entitled to vote thereon or by a vote of a majority of the
entire Board of Directors. The provisions of this Section 2 shall not apply to
Directors governed by Section 14 of this Article III.
Section 3. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of Directors may be filled by a
majority of the Directors then in office, though less than a quorum, or by a
sole remaining Director, in accordance with the provisions of the Certificate of
Incorporation, and the Directors so chosen shall hold office until the next
annual election and until their
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successors are duty elected and shall qualify, unless sooner displaced. If there
are no Directors in office, then an election of Directors may be held in the
manner provided by law. If, at the time of filling any vacancy or any newly
created directorship, the Directors then in office shall constitute less than a
majority of the whole board (as constituted immediately prior to any such
increase), the Court of Chancery of the State of Delaware may, upon application
of any stockholder or stockholders holding at least ten percent of the total
number of the shares at the time outstanding having the right to vote for such
Directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the Directors chosen by the Directors
then in office.
Section 4. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. Initial Meeting. The first meeting of each newly elected Board
of Directors shall be held at such time and place as shall be fixed by the vote
of the stockholders at the annual meeting of stockholders and no notice of such
meeting shall be necessary to the newly elected Directors in order legally to
constitute the meeting, provided a quorum shall be present. In the event of the
failure of the stockholders to fix the time or place of such first meeting of
the newly elected Board of Directors, or in the event such meeting is not held
at the time and place so fixed by the stockholders, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shall be
specified in a written waiver signed by all of the Directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time to
time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by the President on two days' notice to each Director, either
personally or by mail telegram or facsimile transmission; special meetings shall
be called by the President or Secretary in like manner and on like notice on the
written request of two Directors unless the Board of Directors consists of only
one Director, in which case special meetings shall be called by the President or
Secretary in like manner and on like notice on the written request of the sole
Director.
Section 8. Quorum and Meetings. At all meetings of the Board of Directors,
a majority of the Directors shall constitute a quorum for the transaction of
business, and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation. The Chairman of the Board, or his designee, shall preside at all
meetings of the Board of Directors and, whether or not a quorum is present, may
adjourn the meeting from time to time without notice other than by announcement
at the meeting.
Section 9. Unanimous Consent. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
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Section 11. Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board of Directors, 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. Any such committee, to the extent provided in the
resolution of the Board of Directors, 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 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
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
of Directors as provided in Section 151(a) of the General Corporation Law of the
State of Delaware, fix any of the preferences or rights of such shares relating
to dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation), 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; and, unless the resolution or the
Certificate of Incorporation expressly so provides, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock or to adopt a certificate of ownership and merger. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
Section 12. Minutes. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
Section 13. Compensation. Unless otherwise restricted by the Certificate
of Incorporation or these Bylaws, the Board of Directors shall have the
authority to fix the compensation of Directors. The Directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as Director. No such payment shall preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 14. Directors Elected by Special Class or Series. To the extent
that any holders of any class or series of stock other than the 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 referred to in Section 2 of this Article III. Any
Directors so elected shall be subject to removal in such manner as may be
provided by law or by the Certificate of Incorporation. The provisions of
Section 12 of Article II and Sections 2 and 3 of this Article III do not apply
to Directors governed by this Article III, Section 14.
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ARTICLE IV
NOTICES
Section 1. Giving Notice. Whenever, under the provisions of the statutes
or of the Certificate of Incorporation or of these Bylaws, notice is required to
be given to any Director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed to
such Director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to Directors may also be given by telegram or by facsimile transmission.
Section 2. Waiver of Notice. Whenever any notice is required to be given
by law or of the Certificate of Incorporation or of these Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE V
OFFICERS
Section 1. Principal Officers. The principal officers of the Corporation
shall be elected by the Board of Directors and shall include a Chairman of the
Board, a President, a Secretary and a Treasurer, and may, at the discretion of
the Board of Directors, also include one or more Vice Presidents and a
Controller (as well as a Vice Chairman who shall, however, not be a formal
officer of the Corporation). Except as otherwise provided in the Certificate of
Incorporation or these Bylaws, one person may hold the offices and perform the
duties of any two or more principal offices except the offices and duties of
President and Vice President or of Chairman of the Board or President and
Secretary. None of the principal officers need be Directors of the Corporation.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at its first meeting after
each annual meeting of stockholders. Such officers shall hold office at the
pleasure of the Board of Directors and until their successors are elected and
qualified. In its discretion, the Board of Directors by a vote of a majority
thereof may leave unfilled for such period as it may fix by resolution any
offices except those of President and Secretary.
Section 3. Vacancies and Removal. Vacancies in any office arising from any
cause may be filled by the Board of Directors at any regular or special meeting.
The Board of Directors may remove any officer, with or without cause, at any
time by an affirmative vote of a majority of the Board of Directors.
Section 4. President. The President shall be the principal executive
officer of the Corporation and shall have in his charge the general direction
and promotion of the Corporation's affairs with authority to do such acts and to
make such contracts as are necessary or proper to carry on the business of the
Corporation. He shall preside over all official meetings of the Corporation,
provided no one has been specifically elected to the office of Chairman of the
Board, and shall also perform those duties which usually devolve upon a
president of a Corporation under the laws of the State of Delaware. The
President may, during the absence of any officer, delegate said officer's duties
to any other officer or Director.
Section 5. Vice-President. The Vice-President, in the absence or
disability of the President, shall perform the duties of the President and shall
perform such other duties as may be delegated to him from time to time by the
Board of Directors or by the President.
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Section 6. Secretary. The Secretary shall issue notices of all meetings of
stockholders and all meetings of the Board of Directors, shall keep the minutes
of all such meetings, shall have charge of the seal of the Corporation, shall
serve as custodian for all corporate records, and shall make such reports and
perform such duties as are incident to his office or which may be delegated to
him by the President or Board of Directors.
Section 7. Treasurer. The Treasurer shall render to the President and the
Board of Directors at such times as may be requested an account of all his
transactions as Treasurer and of the financial condition of the Corporation. The
Treasurer shall perform such other duties as are incident to the office or as
may be delegated to that office by the President or by the Board
Section 8. Salaries. The salaries of the officers may be fixed from time
to time by the Board of Directors, and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director or
stockholder of the Corporation.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or officers, agent or agents of
the Corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates. Ownership of the capital shares of the
Corporation shall be represented by certificates, in such form as shall be
determined by the Board of Directors. Each certificate shall be signed by two of
the officers of the Corporation and may be sealed with the seal of the
Corporation or a facsimile thereof. A record of such certificates shall be kept.
Section 2. Cancellation. All certificates transferred on the books of the
Corporation shall be surrendered and cancelled. No new certificates shall be
issued until the former certificate, or certificates, for the same number of
shares have been surrendered and cancelled, except in case of lost or destroyed
certificates, when new certificates therefor may be issued under such conditions
as the Board of Directors may prescribe.
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Section 3. Transfer of Shares. Transfer of shares of the Corporation shall
be made only on the stock transfer books of the Corporation by the holder of
record thereof or by his legal representatives, who shall furnish proper
evidence of their authority in writing, upon the surrender for cancellation of
the certificate for such shares.
Section 4. Fixing Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 5. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VIII
DIVIDENDS
Section 1. Paying Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on the outstanding shares of the
Corporation in the manner and upon the terms and conditions provided by law and
by the Certificate of Incorporation of the Corporation or any amendments
thereto. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation.
Section 2. Setting Aside Funds. Before payment of any dividend, there may
be set aside out of any funds of the Corporation available for dividends such
sum or sums as the Directors from time to time, in their absolute discretion,
think proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Directors shall think conducive to the interest of
the Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE IX
INDEMNIFICATION
Section 1. Mandatory Indemnification of Directors and Officers.
(a) The Corporation shall indemnify, and shall pay in advance the
expenses of, each Director and officer of the Corporation and each person who is
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise 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
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indemnification rights than the law permitted prior to such change) and such
obligation to indemnify and to advance expenses shall continue as to a person
who has ceased to be a Director or officer of the Corporation or a director or
officer of any other such corporation, partnership, joint venture, trust or
other enterprise and shall inure to the benefit of his or her heirs, executors
and administrators.
(b) If a claim under Section 1(a) of this Article IX 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 2. Discretionary Indemnification of Employees and Agents. The
Corporation may, but shall have no obligation to, indemnify and may pay in
advance the expenses of employees and agents of the Corporation and persons who
are serving at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise to the
fullest extent permissible under Delaware law and to the extent approved by the
Board of Directors from time to time.
Section 3. Expenses as a Witness. To the extent that any Director,
officer, employee or agent of the Corporation, or any person who is serving at
the request of the Corporation as an officer, director, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise is,
by reason of such position or position with such other entity, 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 or on his or her behalf
in connection therewith.
Section 4. 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 expenses, 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 5. Indemnity Agreements. The Corporation may enter into agreements
with any Director, officer, employee or agent of the Corporation and with any
person who is or was serving at the request of the Corporation as an officer,
director, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, providing for indemnification to the fullest extent
permissible under Delaware law.
Section 6. 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.
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Section 7. Contract Right. Each of the rights conferred by Sections 1 and
3 of this Article IX 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. Further, the mandatory indemnification and expense advancement for
officers of the Corporation and such other persons who serve at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise set forth in Section 1 of this Article
IX shall apply solely with respect to acts or omissions of such officers and
directors occurring on or after August 6, 1998.
Section 8. 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
AMENDMENTS
These Bylaws may be altered, amended or repealed or new Bylaws may be
adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or Board of Directors, or at any special
meeting of the stockholders or of the Board of Directors if notice of such
alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal Bylaws is
conferred upon the Board of Directors by the Certificate of Incorporation, it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal these Bylaws.
ARTICLE XI
MISCELLANEOUS
Section 1. Fiscal Year. The initial taxable year of the Corporation shall
commence on the date the Certificate of Incorporation is filed, and end on such
date as the Board of Directors may determine, in accordance with all applicable
provisions of the Internal Revenue Code of 1986, as amended.
Section 2. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
The above Third Amended and Restated Bylaws were approved by
resolution of the Board of Directors of the Corporation on the 6th
day of August, 1998.
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EXHIBIT 10.2
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made and
entered into as of August 6, 1998 by and between MedPartners, Inc., a Delaware
corporation ("MedPartners") and E. Mac Crawford ("Executive"). Capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them in that certain Employment Agreement by and between MedPartners and
Executive dated March 18, 1998 (the "Employment Agreement").
WHEREAS, MedPartners and Executive entered in the Employment Agreement
whereby Executive agreed to serve as President and Chief Executive Officer of
MedPartners;
WHEREAS, pursuant to Section 5(d) of the Employment Agreement, MedPartners
granted on March 18, 1998 to Executive an option (the "Option") to purchase
3,250,000 shares of MedPartners, Inc. common stock, $.001 par value (the "Common
Stock") as a material inducement to Executive's entering into the Employment
Agreement; and
WHEREAS, MedPartners and Executive desire to amend certain provisions of the
Employment Agreement so as to reprice the exercise price of the Option to the
closing price of the Common Stock on the New York Stock Exchange on August 7,
1998.
NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual
covenants and agreements contained in this Amendment, the parties agree as
follows:
1. Amendment to Section 5. The last five sentences of Section 5(d) of the
Employment Agreement shall be deleted in their entirety. The following shall be
added to Section 5(d) of the Employment Agreement in lieu thereof:
MedPartners and Executive agree to reprice the exercise
price of the Option granted pursuant to this Section 5(d) so
that the exercise price per share of the Option shall be the
Fair Market Value of the Common Stock on August 7, 1998. The
Option shall vest based on the continued employment of the
Executive in increments of 1,250,000 shares on the date of
grant and 1,000,000 shares on each of March 18, 1999 and
March 18, 2000. The Option shall be subject to the terms and
conditions of a stock option agreement by and between the
parties hereto substantially in the form of Exhibit A,
attached hereto and incorporated herein by reference (the
"Stock Option Agreement"). Upon a Change in Control, as
defined in Section 8(b) hereof, the Option will become 100%
vested and exercisable. As used herein, the term "Fair
Market Value" shall mean the closing sale price of a share
of Common Stock as reported on the National Association of
Securities Dealer's New York Stock Exchange Composite
Reporting Tape.
2. Addition of Exhibit A. Exhibit A attached to this Amendment shall be the
Exhibit A referred to in Section 5(d) of the Employment Agreement, as amended by
Section 1 of this Amendment, and such Exhibit shall be incorporated by reference
into the Employment Agreement as if attached thereto.
3. No Other Amendment. Except as expressly modified by this Amendment, all
other terms and conditions of the Employment Agreement shall not be modified or
amended and shall remain in full force and effect.
4. Miscellaneous.
(a) Entire Agreement. This Amendment, together with the Employment
Agreement and the Stock Option Agreement, contains the entire agreement of the
parties relating to the subject matter hereof and thereof, and it replaces and
supersedes any prior agreements between the parties relating to said subject
matter.
<PAGE> 2
(b) Waiver and Amendment. No provision of this Amendment may be
waived except by a written agreement signed by the waiving party. The waiver of
any term or of any condition of this Amendment shall not be deemed to constitute
the waiver of any other term or condition. This Amendment may be amended only by
a written agreement signed by each of the parties hereto.
(c) Captions. Captions have been inserted solely for the convenience
of reference and in no way define, limit or describe the scope or substance of
any provisions of this Amendment.
(d) Severability. If this Amendment shall for any reason be or become
unenforceable by any party, this Amendment shall thereupon terminate and become
unenforceable by the other party as well. In all other respects, if any
provision of this Amendment is held invalid or unenforceable, the remainder of
this Amendment shall nevertheless remain in full force and effect and, if any
provision is held invalid or unenforceable with respect to particular
circumstances, it shall nevertheless remain in full force and effect in all
other circumstances.
(e) Governing Law. This Amendment shall be governed by the laws of
the State of Alabama.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
Attest: MEDPARTNERS, INC.
By: __________________________ By:_________________________
Name: ________________________ Richard M. Scrushy
Title: _______________________ Chairman of the Board
_________________________
E. Mac Crawford
<PAGE> 1
EXHIBIT 10.3
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT, is made and entered into as of
August 6, 1998, by and between, MEDPARTNERS, INC., a corporation organized and
existing under the laws of the State of Delaware with its principal place of
business in Birmingham, Alabama (the "Corporation"), and E. MAC CRAWFORD
("Optionee"), a resident of the State of Georgia (the "Agreement").
WITNESSETH:
WHEREAS, the Corporation and Optionee entered into an Employment Agreement,
dated as of March 18, 1998 (the "Employment Agreement"), whereby Optionee agreed
to serve as President and Chief Executive Officer of the Corporation;
WHEREAS, pursuant to Section 5(d) of the Employment Agreement, the
Corporation granted on March 18, 1998 to Optionee an option (the "Option") to
purchase 3,250,000 shares of common stock, par value $.001 per share (the
"Common Stock") of the Corporation as a material inducement to Optionee's
entering into the Employment Agreement;
WHEREAS, the Corporation and Optionee entered into the First Amendment,
dated as of August 6, 1998, to the Employment Agreement (the "First Amendment"
and the Employment Agreement as amended by the First Amendment is hereinafter
referred to as the "Amended Employment Agreement") to reprice the exercise price
of the Option to the closing price of the Common Stock on the New York Stock
Exchange on August 7, 1998 and to confirm that the Option shall be governed in
accordance with the terms and provisions of the Amended Employment Agreement and
this Agreement; and
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Amended Employment Agreement.
NOW THEREFORE, in consideration of the premises set forth in the Amended
Employment Agreement the parties hereto agree as follows:
1. GRANT OF STOCK OPTION. The Corporation hereby confirms the grant to
Optionee of the right, privilege and option to purchase 3,250,000 shares of
Common Stock (the "Option Shares") at a price of $3.25 per share (the "Exercise
Price"), in the manner and subject to the terms and conditions contained herein
and in the Amended Employment Agreement. The grant of this Option shall be
effective as of March 18, 1998 ("Grant Date") in accordance with the terms of
the Amended Employment Agreement. This Option is hereby designated as a
"Nonqualified Stock Option."
2. OPTION TERM. This Option shall specifically terminate ten (10) years from
the Grant Date ("Option Term") and , subject to the vesting terms set forth in
this Agreement, shall remain exercisable for the full term notwithstanding the
employment status of Optionee.
3. VESTING OF OPTION SHARES. The Option Shares shall vest and become
exercisable in accordance with the following schedule: (a) 1,250,000 of the
Option Shares shall be vested and exercisable as of the Grant Date; (b)
1,000,000 of the Option Shares shall become vested and exercisable on March 18,
1999, provided Optionee remains an employee of the Corporation as of such date;
and (c) 1,000,000 of the Option Shares shall become vested and exercisable on
March 18, 2000, provided Optionee remains an employee of the Corporation as of
such date. In addition, the Option Shares shall become immediately vested and
fully exercisable upon a Change in Control. Any vested portion of the Option
Shares not purchased on its vesting date may be purchased thereafter; provided,
however, that the Option granted hereunder shall terminate upon the expiration
of the Option Term. Optionee shall have the right hereunder to purchase solely
the Option Shares which have become vested and exercisable under this Agreement
and any portion of the Option Shares which shall not have become vested and
exercisable hereunder shall terminate and be forfeited by Optionee upon
termination of Optionee's status as an employee of the Corporation.
4. MANNER OF EXERCISE OF OPTIONS. To exercise the Options granted herein,
Optionee shall give written notice to the Corporation at its principal executive
office, to the attention of the Secretary of the Corporation, accompanied by a
proper notice of exercise setting forth the number of Option Shares with respect
to which the Option is to be exercised, and by payment of the Exercise Price in
one of the methods permitted by Section 9. Optionee further agrees
<PAGE> 2
that in connection with any exercise of all or part of this Option, Optionee
shall deliver to the Corporation such sum, if any, as the Corporation deems
necessary to satisfy any withholding and other tax obligations resulting from
such exercise. Optionee may elect to surrender to the Corporation shares of
common stock already owned by Optionee or shares that would otherwise have been
acquired upon exercise to fulfill any tax withholding obligation. The date on
which the Corporation receives written notice of an exercise hereunder
accompanied by payment of the Exercise Price will be considered the date this
Option was exercised. Promptly, and in no event more than five business days
after receipt of written notice of exercise of all or part of this Option, the
Corporation shall deliver to Optionee or such other person a certificate or
certificates for the requisite number of Option Shares. Optionee or a permitted
transferee of this Option hereunder shall not have any privileges as a
stockholder of the Corporation with respect to any stock covered by this Option
until the date of issuance of a stock certificate for such Option Shares.
Notwithstanding the foregoing, whenever there is a potential that a
Change in Control may occur, the Corporation shall assist and cooperate with the
Optionee so that the Optionee is permitted, provided he takes the requisite
actions that are within his control, to exercise this Option conditionally and
satisfy all other requirements which must be met for the Optionee to preserve
his rights to participate in the sale, and to ensure that the Optionee (a) fully
participates in the sale if the Change in Control occurs and (b) will not be
deemed to have exercised this Option if the Change in Control does not occur.
5. ADDITIONAL VESTING TERMS.
(a) If Optionee's association with the Corporation as an employee is
terminated by the Corporation without Cause or by Optionee for Good Reason, the
Option Shares shall become immediately and fully vested and exercisable for the
duration of the Option Term.
(b) If Optionee's association with the Corporation as an employee is
terminated due to Disability or death of Optionee, the Option Shares shall
become immediately and fully vested and exercisable for the duration of the
Option Term, and Optionee, Optionee's personal representative or any other
person who acquires the option rights from Optionee by will or the applicable
laws of descent and distribution or pursuant to Section 8 hereof, may, during
the duration of the Option Term, exercise such option rights.
6. CHANGES IN CAPITAL STRUCTURE. If the capital stock of the Corporation is
changed by reason of a stock split, reverse stock split, stock dividend or
recapitalization, or is converted into or exchanged for other securities as a
result of a merger, consolidation, or reorganization, appropriate equitable
adjustments shall be made in (a) the number and class of shares of Common stock
subject to this Option, and (b) the Exercise Price of this Option; provided,
however, that the Corporation shall not be required to issue fractional shares
as a result of any such adjustment. Each such adjustment shall be determined by
the Compensation Committee of the Board of Directors of the Corporation in good
faith, which determination shall, subject to the provisions of Section 15 of the
Amended Employment Agreement, be final and binding on all persons.
7. AUTHORIZED SHARES. The Corporation agrees to take all necessary and
appropriate steps to ensure that there are at all times sufficient authorized
shares of capital stock available for issuance upon exercise of this Option.
8. TRANSFER OF OPTION. To the extent not prohibited by any statute, rule or
regulation applicable to this Option or the registration of the Option Shares
with the Securities and Exchange Commission, all or a portion of this Option is
transferable by Optionee, without consideration, to or for the benefit of
Immediate Family Members, including but not limited to a partnership or trust
with respect to which Immediate Family Members are the sole partners or
beneficiaries, respectively. The right to transfer this Option is personal to
Optionee and any transferee of this Option shall not have the right to transfer
this Option to any person other than by the laws of descent. As used herein the
phrase "Immediate Family Members" shall mean the Optionee's spouse, children,
grandchildren, parents and grandparents.
9. PAYMENT OF EXERCISE PRICE. Except as provided below, payment of the
Exercise Price for the Option Shares shall be made (a) in cash, (b) by certified
check or bank cashier's check payable to the order of the Corporation in the
amount of such Exercise Price, (c) by delivery to the Corporation of shares of
Common Stock held by Optionee for at least six months having a fair market value
on the date of exercise equal to such Exercise Price, (d) by irrevocable
instructions to a broker to deliver promptly to the Corporation the amount of
sale or loan proceeds necessary to pay such Exercise Price and to sell the
shares of Common Stock to be issued upon exercise of this Option and deliver the
net cash proceeds (less the Exercise Price delivered to the Corporation and the
commissions and brokerage fees) to the Optionee or to deliver the remaining
shares of Common Stock to the Optionee, or (e) by any combination of the methods
of
<PAGE> 3
payment described in (a) through (d) above. Proceeds of any payment shall
constitute general funds of the Corporation. Before this Option is exercised,
the Compensation Committee, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(a) Acceptance of Optionee's full recourse promissory note for some
or all of the Exercise Price of the Option Shares being acquired (except for the
aggregate par value of the shares being acquired, which must be paid in cash or
other lawful consideration under applicable law), payable on such terms and
bearing such interest rate as determined by the Compensation Committee, and
secured in such manner as the Compensation Committee shall approve, including,
without limitation, by a security interest in shares of Common Stock or other
securities of the Corporation; and
(b) Any other property, so long as such property is acceptable to the
Compensation Committee and constitutes valid consideration under applicable law
for the shares of Common Stock being acquired and is surrendered in good form
for transfer.
10. GOVERNING LAW. This Agreement shall be interpreted and construed
according to and governed by the laws of the State of Delaware. Any disputes or
claims shall be resolved as provided in Section 15 of the Amended Employment
Agreement.
11. ENTIRE AGREEMENT. This Agreement and the Amended Employment Agreement
contain the entire agreement of the parties. To the extent that the terms and
provisions of this Agreement are in conflict with or inconsistent with the terms
and provisions of the Amended Employment Agreement, then the Amended Employment
Agreement shall be controlling and shall govern the relationship between the
parties. This Agreement may not be changed orally, but may be changed only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
12. SEVERABILITY. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision of
this Agreement.
13. AUTHORITY. The provisions of this Agreement required to be approved by
the Compensation Committee have been so approved and authorized.
14. BENEFIT. This Agreement shall bind all parties, their respective heirs,
executors, administrators and assigns. Except as provided in Section 8 hereof,
nothing contained herein shall be construed as an authorization or right of any
party to assign their respective rights or obligations hereunder and Optionee
shall have no right to assign this Option and any such attempted assignment
shall be ineffective. The Option, right and privilege herein granted to Optionee
to purchase Option Shares shall be binding upon the Corporation and its
successors or assigns.
15. TERMINATION OF AGREEMENT. This Agreement shall terminate: (a) upon the
written agreement of all parties; or (b) upon the terms and conditions set forth
herein and in the Amended Employment Agreement.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
Attest: MedPartners, Inc.
By:_______________________ By:__________________________
Name:_____________________ Richard M. Scrushy
Title:____________________ Chairman of the Board
Optionee
_____________________________
E. Mac Crawford
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 142,026
<SECURITIES> 0
<RECEIVABLES> 739,392
<ALLOWANCES> 192,104
<INVENTORY> 140,166
<CURRENT-ASSETS> 1,175,346
<PP&E> 548,011
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,875,804
<CURRENT-LIABILITIES> 943,900
<BONDS> 1,743,490
0
0
<COMMON> 199
<OTHER-SE> 60,217
<TOTAL-LIABILITY-AND-EQUITY> 2,875,804
<SALES> 0
<TOTAL-REVENUES> 5,234,972
<CGS> 0
<TOTAL-COSTS> 5,149,733
<OTHER-EXPENSES> 64,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,388
<INCOME-PRETAX> (59,741)
<INCOME-TAX> (18,071)
<INCOME-CONTINUING> (41,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,670)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MedPartners, Inc.
1998 New Employee Stock Option Plan
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 a compensation
plan to be known as the "MedPartners, Inc. 1998 New Employee Stock Option Plan"
(hereinafter referred to as the "Plan"), as set forth in this document. The Plan
permits the grant of Options and is intended to fit within the exception to the
New York Stock Exchange's shareholder approval requirement for options issued as
a material inducement to entering into an employment contract with the Company
set forth in section 312.03(a)(3) of the New York Stock Exchange Listed Company
Manual as of the date hereof.
The Plan shall become effective as of August 6, 1998 (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 stock options, 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 inducement for excellence in individual performance; to promote teamwork
among Participants; and to induce individuals to join the Company and execute
employment agreements with the Company.
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 11 hereof, until all Shares subject to it shall
have been purchased or acquired according to the Plan's provisions.
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
Options.
2.3 "AWARD AGREEMENT" means either (i) an agreement entered into by the
Company and each Participant setting forth the terms and provisions applicable
to Awards granted under this Plan or (ii) a certificate executed by the Company
and delivered to the Participant evidencing and setting forth the terms and
provisions applicable to Awards granted under this Plan.
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:
(a) 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
<PAGE> 2
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
(b) The Participant's conviction for committing an act of fraud,
embezzlement, theft or another act constituting a felony; or
(c) 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:
(a) The acquisition by any Person of Beneficial Ownership of 20% or more of
either (i) the then outstanding shares of Common Stock of the Company, or (ii)
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: (A) any acquisition directly from the Company
through a public offering of shares of Common Stock of the Company, (B) any
acquisition by the Company, (C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation pursuant to
a transaction which complies with clauses (i), (ii) and (iii) of subsection (c)
below;
(b) The cessation, for any reason, of the individuals who constitute the
Company's Board of Directors as of the date hereof ("Incumbent Board") to
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;
(c) 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, (i) 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;
(ii) 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 (iii) 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;
(d) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company; or
(e) Any other condition or event (i) that the Committee determines to be a
"Change in Control" within the meaning of this Section 2.7 and (ii) that is set
forth as a supplement to this Section 2.7 in the Award Agreement.
<PAGE> 3
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 "COMMON STOCK" means MedPartners, Inc. common stock, $.001 par value.
2.11 "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).
2.12 "DIRECTOR" means any individual who is a member of the Board of
Directors of MedPartners, Inc.
2.13 "DISABILITY", as applied to a Participant, means that the Participant
(a) 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 (b) has satisfied any requirement imposed by the
Committee in regard to evidence of such disability.
2.14 "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Section 1.1 hereof.
2.15 "ELIGIBLE PERSON" shall mean a person not previously employed by the
Company, whose grant of an Award is a material inducement to his/her entering
into an employment contract with the Company.
2.16 "EMPLOYEE" means any officer or employee of the Company.
2.17 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
2.18 "FAIR MARKET VALUE" Except as otherwise determined by the Committee,
the "Fair Market Value" of a share of Common Stock as of any date shall be equal
to the closing sale price of a share of Common Stock as reported on The National
Association of Securities Dealers' New York Stock Exchange Composite Reporting
Tape (or if the Common Stock is not traded on the New York Stock Exchange, the
closing sale price on the exchange on which it is traded or as reported by an
applicable automated quotation system) (the "Composite Tape"), on the applicable
date or, if no sales of Common Stock are reported on such date, the closing sale
price of a share of Common Stock on the date the Common Stock was last reported
on the Composite Tape (or such other exchange or automated quotation system, if
applicable).
2.19 "IMMEDIATE FAMILY MEMBERS" means the spouse, children and grandchildren
of a Participant.
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 "NONEMPLOYEE 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 "OPTION" 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 PRICE" means the price at which a Share may be purchased by a
Participant pursuant to an Option.
2.24 "PARTICIPANT" means an Eligible Person who has outstanding an Award
granted under the Plan.
<PAGE> 4
2.25 "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.
2.26 "PLAN" means the MedPartners, Inc. 1998 New Employee Stock Option Plan.
2.27 "SHARES" means Common Stock of MedPartners, Inc., par value $.001 per
share.
2.28 "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 "Nonemployee 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, the Committee shall have full power to select Participants
who shall participate in the Plan; determine the sizes and types of Awards;
determine the terms and conditions of Awards in a manner not inconsistent with
the Plan; construe and interpret the Plan and any agreement or instrument
entered into under the Plan as they apply to Participants; establish, amend or
waive rules and regulations for the Plan's administration as they apply to
Participants; alter, amend, suspend or terminate the Plan in whole or in part;
and (subject to the provisions of Article 11 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 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 4.2 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be Four Million (4,000,000).
Shares issued upon exercise of Options under the Plan may be either authorized
but unissued Shares or Shares reacquired by the Company. If, on or prior to the
termination of the Plan, an Award granted thereunder expires or is terminated
for any reason without having been exercised or vested in full, the unpurchased
or unvested Shares covered thereby will again become available for the grant of
Awards under the Plan. Shares covered by Options surrendered in connection with
the exercise of other Options shall not be deemed to have been exercised and
shall again become available for the grant of awards under the Plan.
4.2 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 (excluding cash dividends) 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, an 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
<PAGE> 5
prevent dilution or enlargement of rights; provided, however, that the number of
Shares subject to any Award shall always be a whole number.
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 Eligible Persons 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 that the
Option is intended to be a nonqualified stock option 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 VESTING OF OPTIONS. Unless otherwise designated by the Committee, each
Option granted pursuant to the Plan shall vest as follows:
(a) 34% of the Options granted shall vest on the Option grant date;
(b) 33% of the Options granted shall vest on each of the first anniversary
and second anniversary of the Option grant date; provided, however, that if
during the first year after the Option grant date, the stock price of the
Company's common stock closes at or above $12.00 for any twenty (20) out of
thirty (30) consecutive trading days, the 33% of the Options due to vest on the
first anniversary of the Option grant date shall vest immediately at the end of
such 20th day; and, provided further, that if during the second year after the
Option grant date, the stock price of the Company's common stock closes at or
above $18.00 for any twenty (20) out of thirty (30) consecutive trading days,
the 33% of Options due to vest on the second anniversary of the Option grant
date shall vest immediately at the end of such 20th day.
6.5 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 Option shall be exercisable later than the tenth anniversary
date of its grant.
6.6 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.
6.7 PAYMENT. Options granted under this Article 6 shall be exercised in
accordance with rules and procedures established by the Committee or, in the
absence of such rules and procedures, (i) in accordance with the Award Agreement
or (ii) by the delivery of a proper notice of exercise to the Company, setting
forth the number of Shares with respect to which the Option is to be exercised.
No shares of Common Stock shall be issued on the exercise of an Option unless
the Option Price is paid for in full at the time of exercise. Payment shall be
made in cash, check in a form acceptable to the Company or other instrument
acceptable to the Company. In addition, subject to compliance with applicable
laws and regulations and such conditions as the Committee may impose, the
Committee may elect to accept payment in shares of Common Stock of the Company
<PAGE> 6
which are already owned by the Participant, valued at the Fair Market Value
thereof on the date of exercise. The Committee may also allow a Participant to
exercise an Option by use of proceeds to be received from the sale of Common
Stock issuable pursuant to the Option being exercised. Moreover, the Committee,
acting in its absolute discretion, may authorize payment in any combination of
the foregoing payment options, and the Committee, acting in its absolute
discretion, may, subject to the applicable provisions of Delaware law, elect to
accept payment in the form of a note acceptable to the Committee or in the form
of any other property acceptable to the Committee.
As soon as practicable after receipt of proper notification of exercise and full
payment, the Company, if requested by the Participant 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).
6.8 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.
6.9 TERMINATION OF EMPLOYMENT. Unless otherwise designated by the
Committee, each Option, to the extent it has not been previously exercised,
shall terminate upon the earliest to occur of: (a) the expiration of the Option
period set forth in the Option Award Agreement; (b) the expiration of 12 months
following the Participant's death or Disability; (c) immediately upon
termination for Cause; or (d) the expiration of 90 days following the
Participant's termination of employment for any reason other than Cause, Change
in Control, death, or Disability.
6.10 TRANSFERABILITY OF OPTIONS. To the extent not prohibited by any
statute, rule or regulation applicable to the Plan, the Options, or the
registration with the Securities and Exchange Commission of the Common Stock to
be issued upon exercise of the Options, the Committee may, in its discretion,
authorize all or a portion of Options 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 (A) there may be no consideration for any such transfer,
(B) 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 (C) 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 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 in this 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. BENEFICIARY DESIGNATION
A Participant under the Plan may make written designation of a beneficiary on
forms prescribed by and filed with the Corporate Secretary of the Company. 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.
<PAGE> 7
ARTICLE 8. RIGHTS OF EMPLOYEES
8.1 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.
8.2 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 9. CHANGE IN CONTROL
9.1 TREATMENT OF OUTSTANDING AWARDS. Except as may otherwise be provided in
the applicable Award Agreement and unless otherwise specifically prohibited
under applicable laws, or by the rules and regulations of any governing
governmental agencies or national securities exchanges, upon the occurrence of a
Change in Control, any Option granted hereunder shall become immediately
exercisable, and shall remain exercisable throughout its term.
9.2 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 9 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.
ARTICLE 10. SALE OF BUSINESS UNIT OF COMPANY
The Committee, in connection with the sale of any Subsidiary, Affiliate,
division or other business unit of the Company, may, within the Committee's sole
and absolute discretion, cause any or all Options granted hereunder to
Participants whose Options or rights under Options will be adversely affected by
such transaction (a) to become immediately exercisable, or (b) to remain
exercisable after such transaction for such period as the Committee deems
appropriate under the circumstances, or both (a) and (b). The provisions of this
Article 10 and the actions of the Committee taken pursuant to this Article 10
shall be effective upon action of the Committee alone, without amendment to any
Award Agreement or the consent of any Participant.
ARTICLE 11. AMENDMENT, MODIFICATION AND TERMINATION
11.1 AMENDMENT, MODIFICATION AND TERMINATION. Subject to Section 9.2 of this
Plan, 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.
Notwithstanding the foregoing, neither the Company nor the Board or Committee on
its behalf may cancel outstanding Awards and issue substitute Awards in
replacement thereof, reduce the exercise price of any outstanding Options or
alter the class of participants in the Plan without stockholder approval.
11.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. Subject to Section 9.2 of this Plan, 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 4.2 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.
11.3 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.
<PAGE> 8
ARTICLE 12. WITHHOLDING
12.1 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.
12.2 SHARE WITHHOLDING. To the extent provided by the Committee, a
Participant may elect to have any distribution to be made under this Plan to be
withheld or to surrender to the Company shares of Common Stock already owned by
the Participant to fulfill any tax withholding obligation.
ARTICLE 13. 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 14. 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 15. LEGAL CONSTRUCTION
15.1 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.
15.2 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.
15.3 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.
15.4 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 comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
15.5 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.
