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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 0-27276
MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 63-1151076
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(Address of Principal Executive Offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code:
(205) 733-8996
Securities Registered Pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.001 PER SHARE THE NEW YORK STOCK EXCHANGE
THRESHOLD APPRECIATION PRICE SECURITIES(TM) THE NEW YORK STOCK EXCHANGE
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Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 1, 1998: Common Stock, par value $.001 per
share -- $2,291,503,584.
As of March 1, 1998, the Registrant had 197,860,913 shares of Common Stock,
par value $.001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information set forth under Items 10, 11, 12 and 13 of Part III of this
Annual Report on Form 10-K is incorporated by reference from the Registrant's
definitive proxy statement for its 1998 Annual Meeting of Stockholders that will
be filed no later than April 30, 1998.
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FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS. Statements in this document that are not
historical facts are hereby identified as "forward looking statements" for the
purpose of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act of 1933
(the "Securities Act"). MedPartners, Inc. ("MedPartners" or the "Company")
cautions readers that such "forward looking statements", including without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs and income, wherever
they occur in this document or in other statements attributable to the Company,
are necessarily estimates reflecting the best judgment of the Company's senior
management and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the "forward looking
statements". Such "forward looking statements" should, therefore, be considered
in light of various important factors, including those set forth below and
others set forth from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission (the "SEC").
These "forward looking statements" are found at various places throughout
this document. Additionally, the discussions herein under the captions
"Business -- Physician Practice Services", "Business -- Pharmaceutical
Services", "Business -- Contract Medical Services", "Business -- Information
Systems", "Business -- Competition", "Business -- Government Regulation",
"Business -- Corporate Liability and Insurance", "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are susceptible to the risks and uncertainties discussed below.
Moreover, the Company, through its senior management, may from time to time make
"forward looking statements" about the matters described herein or other matters
concerning the Company.
The Company disclaims any intent or obligation to update "forward looking
statements".
FACTORS THAT MAY AFFECT FUTURE RESULTS. The healthcare industry in general
and the businesses engaged in by the Company in particular are in a state of
significant flux. This, together with the circumstances that the Company has a
relatively short operating history in an industry that also is relatively young
and is the largest physician practice management company in the United States,
makes the Company particularly susceptible to various factors that may affect
future results such as the following:
Risks relating to the Company's growth strategy; risks relating
to integration in connection with the Company's acquisitions; risks
relating to the Company's capital requirements; risks relating to
identification of growth opportunities; risks relating to dependence
on HMO enrollee growth; risks relating to the capitated nature of
revenues; risks relating to utilization of medical services; risks
relating to control of healthcare costs; risks relating to certain
legal matters; risks relating to exposure to professional liability;
risks relating to government regulation; risks relating to pharmacy
licensing operations; risks relating to healthcare reform and proposed
legislation; and risks relating to the volatility and/or decline of
stock price.
For a more detailed discussion of these factors and their potential impact
on future results, see the applicable discussions herein.
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PART I
ITEM 1. BUSINESS.
GENERAL
MedPartners, Inc., a Delaware corporation ("MedPartners" or the "Company"),
is one of the largest healthcare companies in the United States, with net
revenue of approximately $6.3 billion for the year ended December 31, 1997. The
Company operates three separate business divisions: Physician Practice Services,
Pharmaceutical Services and Contract Medical Services. The Physician Practice
Services Division is larger than any other physician practice management company
("PPM") in the United States, based on annual net revenue in that business of
approximately $3.0 billion for the year ended December 31, 1997. The
Pharmaceutical Services Division operates one of the largest independent
prescription benefit management ("PBM") and therapeutic pharmaceutical services
programs in the United States, with revenues of approximately $2.4 billion for
the year ended December 31, 1997. The Contract Medical Services Division
operates one of the largest hospital-based physician management services and one
of the largest corrections and government services managed care businesses, with
combined net revenue of approximately $0.8 billion for the year ended December
31, 1997.
The Company's Physician Practice Services Division affiliates with
physicians who are seeking the resources necessary to function effectively in
healthcare markets that are evolving from fee-for-service to managed care payor
systems. MedPartners also affiliates with physicians who seek greater
efficiencies in operations of traditional fee-for-service practices. The Company
seeks to enhance clinic operations by centralizing administrative functions and
introducing management tools, such as clinical guidelines and medical management
processes. The Company provides affiliated physicians with access to capital and
to management information systems. In addition, the Company contracts with
health maintenance organizations (and other third-party payors that compensate
the Company and its affiliated physicians on a prepaid basis (collectively,
"HMOs")), hospitals and outside providers on behalf of its affiliated
physicians. These relationships provide physicians with the opportunity to
operate under a variety of payor arrangements.
The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of physician practice services entities or practice assets, either
for cash or equity, or by affiliation on a contractual basis. In all instances,
the Company enters into long-term practice management agreements that provide
for the management of the affiliated physicians by the Company while assuring
the clinical independence of the physicians.
The Company also manages PBM programs for more than 2,194 clients
throughout the United States, including corporations, insurance companies,
unions, government employee groups and managed care organizations. The Company
dispenses an average of 44,800 prescriptions daily through three mail service
pharmacies and manages patients' immediate prescription needs through a network
of approximately 53,000 retail and other pharmacies. The Company's therapeutic
pharmaceutical services are designed to meet the healthcare needs of individuals
with certain chronic diseases or conditions. These services include the design,
development and management of comprehensive programs comprising drug therapy,
physician support and patient education. The Company currently provides
therapies and services for individuals with such conditions as hemophilia,
growth disorders, immune deficiencies, cystic fibrosis and multiple sclerosis.
The Company is in the process of integrating the pharmaceutical services program
with the PPM business by providing pharmaceutical services to affiliated
physicians, clinics and HMOs.
The Contract Medical Services Division organizes and manages physicians and
other healthcare professionals engaged in the delivery of emergency, radiology
and teleradiology services, primary care and temporary staffing and support
services. Through its Team Health subsidiary the Company provides these services
to hospitals, clinics and managed care organizations, and the Company's
Government Services unit provides these services to correctional facilities,
Department of Defense facilities and government-affiliated physician groups
throughout the United States. This Division also provides occupational health
services to corporate industrial clients. Under contracts with hospitals and
other clients, the Contract Medical Services Division identifies and recruits
physicians and other healthcare professionals for admission to a client's
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medical staff and coordinates the ongoing scheduling of staff physicians and
other healthcare professionals who provide clinical coverage in designated areas
of care.
The Company was organized in 1993 with the goal of improving the nation's
healthcare system by building an integrated delivery system that is
physician-led and patient-centered. In pursuing this goal, the Company has grown
quickly, primarily through the acquisition of 287 physician practices with over
6,064 physicians, including the acquisition in November 1995 of Mullikin Medical
Enterprises, L.P. ("MME"), a privately held physician practice management entity
based in Long Beach, California, the acquisition in February 1996 of Pacific
Physician Services, Inc. ("PPSI"), a publicly traded physician practice
management company based in Redlands, California, which had previously acquired
Team Health, the acquisition in September 1996 of Caremark International Inc.
("Caremark"), a publicly traded physician practice management and pharmaceutical
services company based in Northbrook, Illinois and the acquisition in June 1997
of InPhyNet Medical Management Inc. ("InPhyNet"), which, when combined with Team
Health, created one of the largest hospital-based physician groups in the
country. In September 1997, the Company completed the acquisition of Talbert
Medical Management Holdings Corporation ("Talbert") for $187.1 million in cash.
Talbert operated 52 health centers in five Southwestern states with
approximately 258,000 patients in its network.
On October 29, 1997, the Company announced its plan to be acquired by
PhyCor, Inc. in a merger, but the transaction was terminated by mutual agreement
prior to consummation. On January 16, 1998, the Company announced that Richard
M. Scrushy, a Director of the Company and Chairman of the Board and Chief
Executive Officer of HEALTHSOUTH Corporation, had become Chairman of the Board
and acting Chief Executive Officer of the Company. On March 18, 1998, the
Company announced the appointment of Edwin M. Crawford, formerly Chairman of the
Board, President and Chief Executive Officer of Magellan Health Services, Inc.
(formerly Charter Medical Corporation), as President and Chief Executive Officer
and a Director of the Company. On the same date, the Company announced a net
loss for the fourth quarter of 1997 of $840.8 million, which included one-time
pre-tax charges totaling $647 million. See "-- Recent Developments" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Having acquired the critical mass attendant to a company with $6.3 billion
in annual net revenue, the Company's new leadership intends to concentrate on
further integration of its existing operations in order to generate internal
growth and capture the opportunities that exist within and across the Company's
three divisions. The Company has identified three business objectives: (i)
operational integration within existing business lines; (ii) business
integration across divisional lines to capitalize on internal opportunities; and
(iii) strategic relationship development, on a regional or national basis, with
payors, providers, suppliers and other related businesses. While it is
anticipated that the Company will continue to make selected, strategic
acquisitions to continue growing the Company during this period of
consolidation, the primary focus of management and the Company's 29,000
employees will be on improving the Company's existing operations.
The Company was incorporated under the laws of Delaware in August 1995 as
"MedPartners/Mullikin, Inc." to be the surviving corporation in the combination
of the businesses of the original MedPartners, Inc., incorporated under the laws
of Delaware in 1993, and MME. In September 1996, the Company changed its name to
"MedPartners, Inc." The executive offices of the Company are located at 3000
Galleria Tower, Suite 1000, Birmingham, Alabama 35244, and its telephone number
is (205) 733-8996.
RECENT DEVELOPMENTS
The Company experienced several adverse events in the fourth quarter of
1997 and in January 1998, including: (i) a fourth quarter pretax charge of
$646.7 million related primarily to the restructuring and impairment of selected
assets of certain of its clinic operations within the Physician Practice
Services Division; (ii) a fourth quarter after-tax charge from discontinued
operations of approximately $15.3 million; (iii) a fourth quarter after-tax
charge of $30.9 million related to the cumulative effect of a change in
accounting principle; (iv) a fourth quarter net loss from continuing operations;
(v) the termination of the merger agreement with PhyCor, Inc.; (vi) a steep drop
in the price of its Common Stock following the announcement
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of the termination of the PhyCor merger and (vii) the filing of various
stockholder class action lawsuits against the Company and certain of its
officers and directors in the aftermath of these events alleging violations of
federal securities laws. See Item 3. "Legal Proceedings".
In response to certain of these setbacks, assembly of a new management team
began in January 1998 when Richard M. Scrushy was named Chairman of the Board
and acting Chief Executive Officer. Another step was taken in March 1998 when
Edwin M. Crawford was named President and Chief Executive Officer. Mr. Scrushy
will remain Chairman of the Board and brings his extensive healthcare
experience, most recently his 13 years as Chairman of the Board and Chief
Executive Officer of HEALTHSOUTH Corporation, to this position. Mr. Crawford has
been credited with successfully turning around Magellan's operations,
transforming the company from a psychiatric provider operation into a managed
care company and expanding the company into the rapidly growing market of
specialty disease management. In addition to these management changes, the
Company reorganized and streamlined its PPM organizational structure to
strengthen management, speed integration, improve operations and facilitate
communications.
HEALTHCARE SERVICES INDUSTRY OVERVIEW
The Health Care Financing Administration ("HCFA") estimates that national
healthcare spending in 1996 was in excess of $1 trillion, or 9% of the gross
domestic product ("GDP"). HCFA projects that annual healthcare spending will
increase at a compound annual growth rate of over 8% to $1.5 trillion, or 16% of
the GDP by year 2000. The American Medical Association reports that
approximately 613,000 physicians are actively involved in patient care in the
United States, and that these physicians control more than 80% of the overall
healthcare industry expenditures. Expenditures directly attributable to
physicians are estimated at $246 billion, of which approximately $20 billion
were revenues for emergency physician services. Expenditures related to
pharmaceuticals are estimated at $90 billion, or 9% of overall expenditures.
Concerns over the cost of healthcare have resulted in the rapid growth of
managed care in the past several years. From 1991 to 1996, HMO enrollment in the
United States increased from 37 million to 60 million. As markets evolve from
traditional fee-for-service medicine to managed care, HMOs and healthcare
providers confront market pressures to provide high quality healthcare in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce premiums and to bring about greater accountability of HMOs and
providers with respect to accessibility, choice of provider, quality of care and
other matters that are fundamental to consumer satisfaction. At the same time,
the industry's emphasis on cost efficient treatment alternatives, in addition to
continuing advances in both medical technology and new drug development, has
produced and is expected to continue to produce significant increases in drug
utilization and related costs. These trends have increased the existing need for
more appropriate, efficient and cost-effective provider management and drug
delivery management.
PHYSICIAN PRACTICE SERVICES
The Company's Physician Practice Services Division is the largest PPM in
the United States based on revenues. As of December 31, 1997, this Division had
net revenue of $3.0 billion; had affiliated with 3,588 group physicians and
7,467 independent practice association ("IPA") physicians in 42 states; and
provided services to 1,168,032 professional and 895,980 globally capitated
enrollees.
The Company's Physician Practice Services Division affiliates with
physicians who are seeking the resources necessary to function effectively in
healthcare markets that are evolving from fee-for-service to managed care payor
systems. This Division enhances clinic operations by centralizing administrative
functions and introducing management tools, such as clinical guidelines and
medical management processes. The Company provides affiliated physicians with
access to capital and to advanced management information systems. In addition,
the Company contracts with HMOs, hospitals and outside providers on behalf of
its affiliated physicians. These relationships provide physicians with the
opportunity to operate under a variety of payor arrangements and to increase
their patient flow.
The Physician Practice Services Division's revenues are derived from
contracts with HMOs that compensate the Company and its affiliated physicians on
a prepaid basis and from providing fee-for-service
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medical services. In the prepaid arrangements, the Company, through its
affiliated physicians, typically is paid by HMOs a fixed amount per member
("enrollee") per month ("professional capitation") or a percentage of the
premium per enrollee per month ("percent of premium") paid to the HMOs by
employer groups and other purchasers of healthcare coverage. In return, the
Company, through its affiliated physicians, is responsible for substantially all
of the medical services required by enrollees. In many instances, the Company
and its affiliated physicians accept financial responsibility for hospital and
ancillary healthcare services in return for payments from HMOs on a capitated or
percent of premium basis ("institutional capitation"). In exchange for these
payments (collectively, "global capitation"), the Company, through its
affiliated physicians, provides the majority of covered healthcare services to
enrollees and contracts with hospitals and other healthcare providers for the
balance of the covered services. In March 1996, the California Department of
Corporations ("DOC") issued a healthcare service plan license (the "Restricted
License") to MedPartners Provider Network, Inc. ("MPN") (formerly Pioneer
Provider Network, Inc.), in accordance with the requirements of the Knox-Keene
Act which authorizes MPN to operate as a healthcare service plan in the state of
California. The Company utilizes the Restricted License for a broad range of
healthcare services. See "-- Government Regulation".
Physician Practice Management Industry
Cost-containment initiatives, including reduced reimbursement, have
hindered physician practice profitability while demands for increased clinical
documentation, cost, quality and utilization data have increased physicians'
administrative duties. Small and mid-sized practices generally do not have the
market presence, expertise or cost accounting and management systems required,
and may not have the time necessary, to evaluate and enter into capitated
risk-sharing arrangements or to continue practicing profitably under reduced
reimbursement. In addition, these practices often lack the capital required to
purchase new medical equipment and information systems necessary to enhance the
efficiency and quality of their practices. As a result, individual physicians
and small group practices are increasingly consolidating, either by affiliating
with larger group practices and physician practice management entities or by
forming networks or independent practice associations. By consolidating into
larger organizations, physicians can achieve lower administrative costs, gain
leverage in negotiating with managed care organizations and position themselves
to attract needed capital resources.
Additionally, as HMO enrollment and physician membership in group medical
practices have continued to increase, healthcare providers have sought to
reorganize themselves into healthcare delivery systems that are better suited to
the managed care environment. Physician groups and IPAs are joining with
hospitals, pharmacies and other institutional providers in various arrangements
to create vertically integrated delivery systems that provide medical and
hospital services ranging from community-based primary medical care to
specialized inpatient services. These healthcare delivery systems contract with
HMOs to provide hospital and medical services to enrollees pursuant to full risk
contracts. Under these contracts, generally called global capitation, providers
assume the obligation to provide a broad range of covered healthcare services to
HMO enrollees, including professional, institutional and other healthcare
services such as home healthcare and pharmaceuticals.
While the acceptance of greater responsibility and risk affords the
opportunity to retain and enhance market share and to operate at a higher level
of profitability, the acceptance of global capitation carries with it
significant requirements for capital, enhanced infrastructure, information
systems, network resources and financial and medical management. Physicians are
increasingly abandoning traditional individual or small group private practice
in favor of affiliations with larger organizations such as the Company that
offer skilled and innovative management, sophisticated information systems and
significant capital resources. Many payors and their intermediaries, including
governmental entities and HMOs, are also looking to outside providers of
physician and pharmacy services to develop and maintain healthcare delivery
systems. As a result, physicians are turning to organizations such as the
Company to provide the resources necessary to function effectively in a managed
care environment.
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Strategy
The strategy of the Physician Practice Services Division is to develop
locally prominent, integrated healthcare delivery networks that provide high
quality, cost-effective healthcare in selected geographic markets. The key
elements of this strategy include: (i) having affiliated physicians maintain
responsibility for decisions relating to patient care, thus ensuring the quality
of healthcare services; (ii) developing and implementing effective population
health management tools to improve patient health; (iii) analyzing and
developing best practices and procedures for patients and utilizing them
throughout the Company; (iv) taking the lead in developing and implementing
disease management programs that improve care and control costs for patients
with chronic illnesses; (v) assuming greater responsibility for the entire
spectrum of healthcare services (including hospital care and pharmaceuticals)
provided to patients to ensure they are best coordinated and managed; and (vi)
benefiting from the medical information systems, capital resources,
administrative support, economies-of-scale and sophisticated negotiating
capabilities that the Company develops and offers.
The Company believes it has built strong positions in key sectors of the
healthcare industry, because its strategy addresses two principal needs in the
healthcare marketplace. First is the need of employers, employees and their
families for quality treatment at an affordable price. The Company's ability to
meet this need is evidenced by the fact that in 1997 MedPartners, through its
affiliated physicians, provided primary and specialty healthcare services to
approximately 2.1 million prepaid managed care enrollees and over 5.0 million
fee-for-service patient encounters. Second is the need by physicians for
solutions that allow them to focus on and improve patient care, while at the
same time enhancing the administration of their practices. The Company has
developed a unique management structure in which physicians work side-by-side
with business managers to ensure the physicians' voices are heard and their
issues addressed at decision-making levels. This management model is called
paired-physician leadership, and the Company believes that it is the most
effective mechanism for driving meaningful change. The Company will attempt to
profit from increased revenues and operational efficiencies and synergies
produced by the exchange of ideas among physicians and managers across
geographic boundaries and varied areas of specialization. The Physician Practice
Services Division has established medical management committees that meet
monthly to discuss implementation of the best medical management techniques to
assist the Company's affiliated physicians in delivering the highest quality of
care at lower costs in a consistent fashion. The Physician Practice Services
Division has also created a medical advisory committee, which is developing
procedures for the identification, packaging and dissemination of the best
clinical practices within the Company's medical groups. The medical advisory
committee also provides the Company's affiliated physicians a forum to discuss
innovative ways to improve the delivery of healthcare. By leveraging the
intellectual capital and knowledge of, and providing appropriate tools and
resources to, its affiliated physicians, MedPartners allows physicians to drive
changes in healthcare.
Operations
To meet payor demand for price competitive, quality services, the Company
utilizes a market-based approach that incorporates primary care and specialty
physicians into a network of providers serving a targeted geographic area. The
Company engages in research and market analysis to determine the best network
configuration for a particular market. Primary care includes family practice,
internal medicine, pediatrics and obstetrics/gynecology. Key specialties include
orthopedics, cardiology, oncology, radiology, neurosciences, urology, surgery,
ophthalmology and ear, nose and throat. At certain locations, affiliated
physicians and support personnel operate centers for diagnostic imaging, urgent
care, cancer management, mental health treatment and health education. Network
physicians also treat fee-for-service patients on a per-occurrence basis.
After-hours care is available in several of the Company's clinics. The Company
markets its networks to managed care and third-party payors, referring
physicians and hospitals. Under its global capitation contracts, the Company,
through its affiliated medical practices or Knox-Kneene licensee, is obligated
to pay for inpatient hospitalization and related services for covered enrollees.
The Company has contracted with a network of hospitals in its service area to
provide hospital services to covered enrollees.
The Company operates U.S. Family Care Medical Center ("USFMC"), a 102-bed
acute care hospital in Montclair, California, and Friendly Hills Hospital
("Friendly Hills"), a 274-bed acute care hospital in La
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Habra, California. Many of the physicians on the professional staff rosters of
these hospitals are either employed by an affiliated professional corporation or
are under contract with the Company's IPAs. Other physicians who are
traditionally hospital-based, such as emergency physicians, anesthesiologists,
pathologists, radiologists and cardiologists, provide services through
contractual arrangements with the Company. Several of the Company's medical
clinics are located sufficiently close to hospitals where these physicians are
based to allow enrollees who use the clinics also to use those hospitals.
Approximately 85% of USFMC's and approximately 87% of Friendly Hills' daily
censuses are made up of the Company's affiliated medical group enrollees.
Affiliated Physicians. The Company offers medical group practices and
independent physicians a range of affiliation models. In all instances, the
Company enters into long-term practice management agreements that provide for
the Company's management of the affiliated physician practices while assuring
the clinical independence of the physicians. Under these various types of
agreements, revenue is assigned to the Company by the physician practice. The
Company is responsible for the billing and collection of all revenue for
services provided at its clinics, as well as for paying all expenses, including
physician compensation. The Company is not reimbursed for the clinic expenses,
rather it is responsible and at risk, with its affiliated physicians, for all
such expenses. See Note 1 of the accompanying audited Consolidated Financial
Statements.
IPAs. The Company's networks include 7,467 primary care and specialist IPA
physicians serving approximately 358,000 HMO enrollees. An IPA allows individual
practitioners to access patients in their respective areas through contracts
with HMOs without having to join a group practice. An IPA also coordinates
utilization review and quality assurance programs for its affiliated physicians.
Additionally, an IPA offers other benefits to physicians seeking to remain
independent, including economies of scale in the marketplace, enhanced
risk-sharing arrangements and access to other strategic alliances. The Company
identifies IPAs that need access to capitated HMO contracts, and such IPA
organizations typically agree to assign their existing HMO contracts to the
Company.
HMOs. The Company, through its affiliated physicians, began contracting
with HMOs to provide healthcare on a capitated reimbursement basis in 1975
(through predecessors). Under these contracts, the Company provides virtually
all covered medical services and receives a fixed monthly capitation payment
from HMOs for each member who chooses an affiliate physician as his or her
primary care physician. The capitation amount may be fixed, based upon a
percentage of premium, or adjustable based on the age and sex of the HMO
enrollee. Contracts for prepaid healthcare with HMOs accounted for approximately
32% of the Company's consolidated net revenue for 1997. MedPartners currently
has relationships with Pacificare, Foundation, CIGNA, PCA and California Care
which account for approximately 17.5% of net revenue of MedPartners for the year
ended December 31, 1997.
To the extent that enrollees require more care than is anticipated or
require supplemental medical care that is not otherwise reimbursed by HMOs or
other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained for catastrophic events. At December 31, 1997, approximately 2.1
million prepaid HMO enrollees were covered beneficiaries for services in the
Company's networks. These patients are covered under either commercial
(typically employer-sponsored) or senior (Medicare-funded) HMOs. Higher
capitation rates are typically received for senior patients because their
medical needs are generally greater. Consequently, the cost of their covered
care is higher. As of December 31, 1997, the Company's HMO enrollees comprised
approximately 1.7 million commercial enrollees and approximately 0.2 million
senior (over 65) enrollees and approximately 0.2 million Medicaid and other
enrollees. As of December 31, 1997, the Company was receiving institutional
capitation payments for approximately 1.0 million enrollees.
PHARMACEUTICAL SERVICES
The Company's Pharmaceutical Services Division is a national leader in
providing PBM and therapeutic pharmaceutical services to patients with certain
chronic conditions. Annual net revenue for the year ended December 31, 1997, for
this line of business was approximately $2.4 billion. The Division provides PBM
services to approximately 2,194 customer groups representing approximately 15
million managed lives in all 50
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states and therapeutic pharmaceutical services to approximately 13,400 patients
with long-term, chronic or genetic diseases.
Pharmaceutical Services Industry
PBMs initially emerged in the early 1980s primarily to provide cost
effective drug claims processing for the healthcare industry. In the mid-1980s
they evolved to include pharmacy networks and drug utilization review to address
the need to manage the total cost of pharmaceutical services. Through volume
discounts, retail pharmacy networks, mail pharmacy services, formulary
administration, claims processing and drug utilization review, PBMs created an
opportunity for health benefit plan sponsors to deliver drugs to their members
in a more cost-effective manner, while improving physician and patient
compliance with recommended guidelines for safe and effective drug use.
The PBM industry continues to demonstrate substantial growth both in terms
of revenues and lives covered. According to industry sources, PBM market
revenues have grown at an annual rate of approximately 35% for the last three
years. Approximately 50% of the U.S. population was covered by a PBM in 1995,
more than double the lives covered in 1990.
PBMs have focused on cost containment by: (i) obtaining discounted
prescription services through retail pharmacy networks, and from drug
wholesalers and pharmaceutical manufacturers for mail distribution; (ii)
establishing drug utilization review programs to reduce the risk of
inappropriate drug complications; (iii) encouraging substitution of generic for
branded medications; and (iv) generating rebates from pharmaceutical companies.
Over the last several years, in response to increasing payor demand, PBMs have
begun to develop sophisticated formulary management capabilities and
comprehensive, on-line customer decision support tools in an attempt to better
manage the delivery of healthcare and, ultimately, costs. Simultaneously, to
lower overall healthcare costs, health benefit plan sponsors have begun to focus
on the quality and efficiency of care, emphasizing disease prevention, or
wellness, and care management. This has resulted in a rapidly growing demand
among payors for comprehensive disease management programs. By effectively
managing appropriate prescription use, PBMs can positively affect both overall
medical costs and improve clinical outcomes.
The Company believes that future growth in the PBM industry will be driven
by (i) increased use of PBM services currently provided to existing PBM clients,
(ii) a continuing trend toward outsourcing of pharmacy management services by
managed care entities, insurance companies, corporations, labor unions,
government entities, other benefit plan sponsors and physician practice
management entities, (iii) increasing penetration by managed care entities,
which are large consumers of PBM services, into the growing Medicare and
Medicaid market and (iv) demand for comprehensive pharmacy benefit, medication
management and disease management services as healthcare service providers and
physician practice management entities assume medical care risk from managed
care entities.
The distribution of prescription drug therapies to patients with
specialized, long-term, chronic diseases is another area where the competitive
forces in the healthcare environment are challenging providers. In addition to
the Company, home healthcare companies, hospitals and other providers offer
disease management services and programs to these patients. Competitive pricing,
customer service and patient education are factors influencing the competition
for these patients.
Strategy
The strategy of the Pharmaceutical Services Division is to provide
innovative pharmaceutical solutions, quality customer service and clinical
excellence in order to enhance patient outcomes and better manage overall
healthcare costs. The Company intends to increase its market share and extend
its leadership in the pharmaceutical services industry. The Company believes
that its independence from ownership by any pharmaceutical manufacturer is a
competitive advantage, as it is able to make decisions regarding its formularies
free of any potential conflicts of interest.
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Operations
The Division manages outpatient PBM programs throughout the United States
for corporations, managed care organizations, insurance companies, unions,
coalitions, federal and state agencies and other funded benefit plans, as well
as for the Company's affiliated physicians and clinics. Prescription drug
benefit management involves the design and administration of programs for
reducing the costs and improving the safety, effectiveness and convenience of
prescription drugs. The Company dispenses prescription drugs to patients through
a network of approximately 53,000 pharmacies (approximately 95% of all retail
pharmacies in the United States) and through three mail service pharmacies. The
Division negotiates discounts and rebates with pharmaceutical manufacturers and
drug wholesalers and assembles preferred product lists, or formularies, which
help staff and network pharmacists manage customers' pharmaceutical expense.
All prescriptions are analyzed, processed and recorded by the Company's
proprietary prescription management information system and database. This system
assists staff and network pharmacists in processing prescription requests for
member eligibility, authorization, early refills, duplicate dispensing,
appropriateness of dosage, drug interactions or allergies, over-utilization or
potential fraud, and other information. The system collects comprehensive
prescription utilization information data valuable to pharmaceutical
manufacturers, managed care payors and customers. With this information, the
Company offers a full range of drug cost reporting services, including clinical
case management, drug utilization review, formulary management and customized
prescription programs for senior citizens.
The retail pharmacy program allows a member to obtain pharmaceuticals at
any of more than 53,000 pharmacies nationwide. When a member submits a
prescription request, the network pharmacist sends prescription data
electronically to the Company, which sends back a report including relevant
patient data, co-payment information and confirmation that the pharmacy will
receive payment for the prescription. In 1997, the Company processed 39.3
million retail prescriptions.
The Company operates three automated mail order service centers in San
Antonio, Chicago and Ft. Lauderdale. Patients send prescriptions via mail,
telephone and fax to staff pharmacists who review them with the assistance of
the prescription management information systems. This review often involves a
call to the prescribing physician and can result in generic substitution or
other actions to affect cost or to improve quality of treatment. Mail service is
typically less expensive to clients because of these clinical management
strategies and favorable pricing from manufacturers. In 1997, the Company filled
11.3 million mail service prescriptions, representing $964 million in revenue.
Under the Company's PBM quality assurance program, the Company maintains
rigorous quality assurance and regulatory policies and procedures. Each mail
service prescription undergoes a sequence of safety and accuracy checks and is
reviewed and verified by a registered pharmacist before shipment. A panel of
physician specialists who are affiliated with the Company advise it on the
clinical analyses of its intervention strategies and on cost-effective clinical
procedures.
The Company's therapeutic pharmaceutical services include comprehensive
long-term support for high-cost, chronic illnesses in an effort to improve
outcomes for patients and to lower costs. The Company provides therapies and
services to patients with such conditions as hemophilia, growth disorders,
multiple sclerosis, immune deficiencies, and cystic fibrosis. These services are
rendered at the patient's home, office or travel destination and generally
include ongoing injections of bio-pharmaceutical drugs. These drugs are
distributed from the Company's 23 specialty pharmacies throughout the country,
all of which have been accredited by the Joint Commission on Accreditation of
Healthcare Organizations. The programs utilize advanced protocols and offer the
patient greater convenience in working with insurers. Extensive patient
education information is provided to patients through individual instruction and
monitoring, written materials, and around-the-clock availability of customer
assistance via toll-free telephone. The largest components of this business come
from individuals with hemophilia and growth disorders. In 1997, growth came from
the implementation of a new program for multiple sclerosis patients. Major
initiatives such as Care Patterns(R) for disease management and Caremark
Consent(TM) for quick and easy patient access strengthen the Company's
leadership position in these markets.
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CONTRACT MEDICAL SERVICES
The Company's Contract Medical Services Division includes Team Health,
which manages one of the largest hospital-based physician groups in the country,
and the Government Services Division, one of the country's largest correctional
and government services healthcare delivery businesses. These groups produced
combined contract medical services revenue of $806 million in 1997. Team Health
organizes and manages physicians and other healthcare professionals engaged in
the delivery of emergency, radiology and teleradiology, hospital-based primary
care and temporary staffing and support services to hospitals, clinics, managed
care organizations and physician groups throughout the United States. Government
Services provides similar services to medical facilities at correctional
institutions and Department of Defense facilities. As of December 31, 1997, the
Company had 2,476 physicians in 39 states affiliated with its Contract Medical
Services Division.
Contract Medical Services Industry
Hospitals have been greatly affected by changes in the United States
healthcare industry during the last several years, including the increasing use
of capitation and other fixed payment systems that shift financial risk from
payors to providers. The evolving managed care environment requires hospitals to
be more cost-effective in all aspects of their operations, including the
recruiting, scheduling, retaining and managing of physicians, and billing and
collecting for their services. Hospitals have found it increasingly difficult to
recruit, retain and schedule the required emergency physician specialists and to
manage their emergency departments ("EDs") for unscheduled primary care.
Furthermore, the Company believes that EDs, in combination with primary care
clinics, which are often the first point of contact with patients, will play an
increasingly important role as 24-hour gatekeepers of the healthcare system. As
a result, many hospitals have turned to outside contract management
organizations like the Company as a more cost-effective and reliable alternative
to the development of in-house emergency physician staffing. Hospitals also look
to other hospital-based physicians, including radiologists, anesthesiologists
and pathologists to help control cost and improve quality in the new healthcare
environment. Smaller local groups of emergency or other hospital based
physicians find it increasingly difficult to meet these growing expectations,
which requires hospitals to seek alternatives that result in these groups
seeking affiliation and consolidation opportunities.
There are approximately 5,200 hospitals in the United States that operate
EDs. Approximately 80% of these hospitals use outsourced physicians to staff
their EDs. The groups to which ED services are outsourced are either national
groups, regional groups, or small local groups. The national groups serve
approximately 20% of the market. Approximately 40% of EDs use local physician
groups that manage only one or two EDs. The Company believes that these groups
are encountering increasing difficulty in controlling costs and satisfying
recordkeeping and other administrative and management requirements as demanded
in today's evolving health care industry. As a result, the Company believes that
there are significant consolidation opportunities within the emergency physician
practice management industry.
An additional opportunity for consolidation of contract medical services
exists in the area of government-owned facilities such as correctional
facilities and military bases. There are approximately 1.6 million inmates in
correctional facilities in the United States, and this population is growing at
an estimated rate of 5-8% per year. Difficulties in recruiting and managing
physicians and other healthcare professionals have compelled governmental
agencies to contract with management organizations to deliver on-site healthcare
services to inmates. Only approximately 30% of these facilities currently
contract with private companies to manage the delivery of healthcare. Trends
such as cost containment through managed care, increasing inmate populations and
pressure on government agencies to be more efficient are driving more of these
facilities to seek management services from organizations like the Company. The
outsourcing of such healthcare services allows governmental agencies to shift
the financial risk associated with the delivery of medical services to inmates
to private management organizations, which have greater experience in managing
such risks. Also, physician management companies have experience in meeting
federal and state mandated healthcare requirements.
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Strategy
The strategy of the Contract Medical Services Division consists of: (i)
growth through marketing to new hospitals and government entities; (ii) the
expansion of services offered to emergency facilities and departments; (iii)
assisting customers in controlling costs in their emergency facilities and
departments; (iv) assisting contracted physicians within developing managed care
environments; and (v) growth through acquisition of selected hospital and
government facility-based physician practice management entities.
Operations
Under contracts with hospitals and other clients, the Contract Medical
Services Division identifies and recruits physicians and other healthcare
professionals for admission to a client's medical staff and coordinates the
ongoing scheduling of staff physicians and other healthcare professionals who
provide clinical coverage in designated areas of care and facilitates changes to
improve clinical and financial performance in client facilities. To fulfill
these obligations, the Contract Medical Services Division retains the services
of physicians and other healthcare professionals who agree to provide the
necessary clinical coverage.
The management services provided by Team Health and Government Services
under contracts with hospitals, correctional institutions and other clients
include: (i) the identification and recruitment of physicians and other
healthcare professionals, (ii) utilization review of services and administrative
overhead; (iii) case management to assist medical directors and physicians in
the delivery of quality care and proper utilization of services; and (iv)
scheduling of staff physicians and other healthcare professionals who provide
clinical coverage in designated areas of care. The Contract Medical Services
Division also provides support and administrative services including billing and
collection of fees for professional services. Physician recruitment services
provided by the Division include a comprehensive series of interviews and
reference checks. Physicians are licensed to practice medicine and are generally
either board certified or board eligible. As part of the services provided under
its management contracts, the Contract Medical Services Division surveys
physician compensation patterns and programs to ensure that physician
compensation is competitive in the geographic area being serviced.
Emergency Departments. Team Health currently recruits physicians and other
healthcare professionals, coordinates staff scheduling and provides
administrative support services, such as billing and collection, to 263 EDs in
30 states. Team Health generally contracts with a particular ED to provide all
necessary physician coverage 24-hours-a-day throughout the year. Team Health
believes that it has the ability to control ED expenses through cost-effective
staffing, treatment protocols designed to reduce unnecessary testing and the
coordination of EDs and affiliated outpatient primary care clinics to direct
patients to the most appropriate level of care. When providing services to EDs,
Team Health contracts, directly or through affiliated entities, with physicians
and other healthcare professionals who provide all emergency department medical
services. Team Health provides the ED with a medical director who works directly
with the hospital medical staff and administration on such matters as quality
assurance, risk management and departmental accreditation to enhance the quality
and operational success of the ED.
Radiology. Team Health provides physician management services, including
recruiting and retention, management, temporary physician staffing, quality
assurance and billing and collection of professional services to hospital
radiology departments and outpatient imaging centers. Team Health believes that
hospitals will increasingly utilize contract management firms to solve problems
associated with the management of radiology departments, particularly as managed
care trends dictate more cost effective services. Team Health has contracts to
provide physician management services in 58 radiology departments of hospitals
in 14 states.
Team Health believes a key component in the successful management of many
radiology departments is the use of teleradiology technology. In teleradiology,
images are converted into a high-quality digital format and sent over telephone
lines or via satellite to distant locations for interpretation by radiologists.
Technological advances in teleradiology have improved the quality, while
decreasing the expense of required equipment, to the extent that the technology
is now affordable for reliable interpretations in small hospitals.
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Correctional Care. Government Services provides comprehensive medical
services, including mental health and dental services, to inmates in various
state and local correctional institutions. The Company provides primary care
physician services directly and typically subcontracts other services with
hospitals and medical specialists on either a capitated or discounted
fee-for-service basis. At December 31, 1997, the Company had contracts with
correctional institutions and managed the healthcare services provided to
approximately 57,372 inmates at 52 facilities.
Under correctional care contracts, the Company is typically paid monthly on
the basis of each correctional institution's average daily inmate population.
The Company is also entitled to additional reimbursement for any healthcare
related expenditures incurred above a certain dollar amount of outside medical
expenses per inmate per year, as well as reimbursement for the cost of treating
inmates in connection with certain extraordinary events.
Department of Defense. Government Services also provides physicians, nurse
and clerical support services for active duty and retired military personnel and
their dependents in emergency departments, ambulatory care centers and primary
care clinics operated by the Department of Defense. Under Department of Defense
contracts, the Company is generally paid a fixed amount, per patient visit or
per hour of service, without regard to the scope of professional services
provided. Under per patient fixed fee arrangements, the Company assumes the risk
if patient volume is below expectations. At December 31, 1997, the Company's
military medical services were provided under contracts with 15 facilities
generating approximately 300,000 annual patient visits.
INFORMATION SYSTEMS
The Company's overall information systems design is open, modular and
flexible. Given the diversity which has resulted from the Company's growth
through acquisitions, the Company has established an overall integrated
information systems architecture which guides capital investment and operational
improvement. In this effort, the establishment of an integrated eligibility
repository, the implementation of electronic medical record (EMR) functionality,
the commitment to a small number of strategic physician practice management
systems, the selection of an integrated claims management/managed care package
and the development of a patient centric integrated data warehouse are the key
elements of successful operations in the future.
Support for the Pharmaceutical Services Division is provided by an
information system currently in its second year of operation. This integrated
client/server system provides the basis for both mail and retail prescription
benefits management. Its integrated architecture allows all requests for service
(mail order prescription, retail pharmacy claim or customer service contact) to
operate against a complete history of the patient's prescription activity.
Information from this system is then integrated into a data repository, which
allows the merging of prescription claims with medical claims, laboratory
results and eventually clinical records.
Effective and efficient access to key clinical patient and pharmaceutical
data is critical in obtaining quality outcomes and improving costs as the
Company enters into more capitation contracts. The Company uses its existing
information system to measure patient satisfaction and outcomes, improve
productivity, manage complex reimbursement procedures and integrate information
from multiple facilities throughout the healthcare spectrum. These systems allow
the Company to analyze clinical and cost data to determine thresholds of
profitability under various capitation arrangements.
The Company utilizes a number of different computer software programs and
environments in its business, many of which were designed and developed without
considering the impact of the upcoming turn of the century (the "Year 2000
Issue"). MedPartners has assessed the potential impact and costs of addressing
the Year 2000 Issue and is in the process of implementing a plan of action to
address the Year 2000 Issue. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
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COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. The Company competes with national, regional and local entities
including PPMs, ED groups and hospital contract management companies. In
addition, certain companies, including hospitals and insurers, are expanding
their presence in the PPM market. The Company also competes with prescription
drug benefit programs, prescription drug claims processors, regional claims
processors, providers of disease management services and insurance companies.
GOVERNMENT REGULATION
General. As a participant in the healthcare industry, the Company's
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state and local levels. The
Company believes its operations are in material compliance with applicable laws.
Nevertheless, because the structure of the relationship with the physician
groups is unique and the PPM industry as a whole is relatively young, many
aspects of the Company's business operations have not been the subject of state
or federal regulatory interpretation. Thus, there can be no assurance that a
review of the Company's or the affiliated physicians' businesses by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company or of its affiliated physicians. Nor can
there be any assurance that the healthcare regulatory environment will not
change so as to restrict the Company's or the affiliated physicians' existing
operations or their growth. Any significant restriction could have a material
adverse effect on the operating results and financial condition of the Company.
Federal Reimbursement, Fraud and Abuse and Referral Laws. Approximately 7%
of the net revenue of the Company's affiliated physician practices are derived
from payments made by government-sponsored healthcare programs (principally,
medicare and state reimbursed programs). As a result, the Company is subject to
the laws and regulations that govern reimbursement under Medicare and Medicaid.
Any change in reimbursement regulations, policies, practices, interpretations or
statutes could adversely affect the operations of the Company. There are also
state and federal civil and criminal statutes imposing substantial penalties
(including civil penalties and criminal fines and imprisonment) on healthcare
providers that fraudulently or wrongfully bill governmental or other third-party
payors for healthcare services. The Company believes it is in material
compliance with such laws, but there can be no assurance that the Company's
activities will not be challenged or scrutinized by governmental authorities or
that any such challenge or scrutiny would not have a material adverse effect on
the operating results and financial condition of the Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the United States Department of Health and Human Services
(the "DHHS") has the authority to exclude anyone, including individuals or
entities, who has committed any of the prohibited acts from participation in the
Medicare and Medicaid programs. If applied to the Company or any of its
subsidiaries or affiliated physicians, such exclusion could result in a
significant loss of reimbursement for the Company, up to a maximum of the
approximately 7% of revenues of the Company's affiliated physician groups, which
could have a material adverse effect on the operating results and financial
condition of the Company. Although the Company believes that it is not in
violation of the Anti-Kickback Statute or similar state statutes, its operations
do not fit within any of the existing or proposed federal safe harbors.
Federal law prohibits, with some exceptions, an entity from filing a claim
for reimbursement under the Medicare or Medicaid programs for certain designated
services if the entity has a financial relationship with the referring
physician. Federal law (the "Medicare Referral Payments Law") also prohibits the
solicitation
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or receipt of remuneration in exchange for, or the offer or payment of
remuneration to induce, the referral of Medicare or Medicaid beneficiaries.
Significant prohibitions against physician referrals were enacted by the United
States Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to
certain exemptions, a physician is prohibited from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest or with which the
physician has entered into a compensation arrangement. The provisions of the
Anti-Kickback Statute and the Medicare Referral Payments Law are complex, and
the future interpretations of these provisions and their applicability to the
Company's operations cannot be predicted or analyzed in such a way as to predict
with certainty the effect of such rules and regulations on the Company. Although
the Company seeks to arrange its business relationships to comply with these
healthcare rules and regulations, its operations do not fit within any of the
existing or published proposed federal safe harbors. As a result, there can be
no assurance that the Company's present or future operations will not be
challenged under such provisions. The Company does not believe it is in
violation of the Anti-Kickback Statute or the Medicare Referral Payment law and
associated regulations because the revenues which are assigned to the Company
pursuant to the management agreements between the Company and its affiliated
physician practices represent payments made by the HMO to satisfy claims
submitted through the Company on behalf of the affiliated physician for the
furnishing of healthcare services by the physician to an individual. The monies
retained by the Company do not exceed the aggregate amount due the Company for
the reasonable and necessary physician practice management services provided by
the Company pursuant to the management agreement between the Company and the
affiliated physician or physician practice, i.e., transfer agreement or
management services agreement. The Company believes that such payments do not
fall within the scope or the intent of such rules and regulations. Further, the
Company does not believe it is in violation of the Anti-Kickback Statute and the
Medicare Referral Payment Law because the Company does not refer, or influence
the referral of, patients or services reimbursed under governmental programs to
the physician practices. While the Company believes it is in compliance with
such legislation, future regulations and interpretations of existing regulations
could require the Company to modify the form of its relationship with physician
groups which could have a material adverse effect on the operating results and
financial condition of the Company.
The Office of the Inspector General of DHHS (the "OIG") has promulgated
regulatory "safe harbors" under the Medicare Referral Payments Law that describe
payment practices between healthcare providers and referral sources that will
not be subject to criminal prosecution and that will not provide the basis for
exclusion from the Medicare and Medicaid programs. The Company retains
healthcare professionals to provide advice and non-medical services to the
Company in return for compensation pursuant to employment, consulting or service
contracts. The Company also enters into contracts with hospitals under which the
Company provides products and administrative services for a fee. Many of the
parties with whom the Company contracts refer or are in a position to refer
patients to the Company. The breadth of these federal laws, the paucity of court
decisions interpreting these laws, the limited nature of regulatory
interpretations and the absence of court decisions interpreting the safe harbor
regulations have resulted in ambiguous and varying interpretations of these
federal laws and regulations. The OIG or the United States Department of Justice
(the "DOJ") could seek a determination that the Company's past or current
policies and practices regarding contracts and relationships with healthcare
providers violate federal law. In such event, no assurance can be given that the
Company's interpretation of these laws will prevail, except with respect to
those matters that were the subject of the OIG investigation. See Item 3. "Legal
Proceedings" and Note 13 of the accompanying audited Consolidated Financial
Statements. If the Company's interpretation of these laws should not prevail it
could materially adversely affect the operating results and financial condition
of the Company.
Caremark agreed, in its settlement agreement with the OIG and DOJ prior to
the Caremark Acquisition, to continue to enforce certain compliance-related
oversight procedures. Should the oversight procedures reveal violations of
federal law, Caremark would be required to report such violations to the OIG and
DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the
event that Caremark commits legal or regulatory violations, it may be subject to
an increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services which could have a material adverse
effect on the operating results and financial condition of the Company. See Item
3. "Legal Proceedings" and Note 13 of the accompanying audited Consolidated
Financial Statements.
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State Referral Payment Laws. The Company is also subject to state statutes
and regulations that prohibit payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. State statutes and regulations generally apply to services
reimbursed by both governmental and private payors. Violations of these laws may
result in prohibition of payment for services rendered, loss of pharmacy or
health provider licenses as well as fines and criminal penalties. State statutes
and regulations that may affect the referral of patients to healthcare providers
range from statutes and regulations that are substantially the same as the
federal laws and the safe harbor regulations to a simple requirement that
physicians or other healthcare professionals disclose to patients any financial
relationship the physicians or healthcare professionals have with a healthcare
provider that is being recommended to the patients. These laws and regulations
vary significantly from state to state, are often vague, and, in many cases,
have not been interpreted by courts or regulatory agencies. Management believes
the Company's operations are in material compliance with existing law, but there
can be no assurance that the Company's existing business arrangements will not
be successfully challenged in one or more states. The Company is not materially
dependent upon revenues derived from any single state. Adverse judicial or
administrative interpretations of such laws in several states, taken together,
could, however, have a material adverse effect on the operating results and
financial condition of the Company. In addition, expansion of the Company's
operations to new jurisdictions could require structural and organizational
modifications of the Company's relationships with physician groups in order to
comply with new or revised state statutes. Such structural and organizational
modifications could have a material adverse effect on the operating results and
financial condition of the Company.
Corporate Practice of Medicine Laws. The laws of many states prohibit
physicians from splitting fees with non-physicians and prohibit non-physician
entities from practicing medicine. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. The Company believes that it has perpetual and unilateral
control over the assets and operations of the various affiliated professional
corporations. However, there can be no assurance that regulatory authorities
will not take the position that such control conflicts with state laws regarding
the practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.
Antitrust Laws. In connection with the corporate practice of medicine laws
referred to above, the physician practices with which the Company is affiliated
necessarily are organized as separate legal entities. As such, the physician
practice entities may be deemed to be persons separate both from the Company and
from each other under the antitrust laws and, accordingly, subject to a wide
range of laws that prohibit anticompetitive conduct among separate legal
entities. The Company believes it is in compliance with these laws and intends
to comply with any state and federal laws that may affect its development of
integrated healthcare delivery networks. There can be no assurance, however,
that a review of the Company's business by courts or regulatory authorities
would not adversely affect the operations of the Company and its affiliated
physician groups.
Insurance Laws. The assumption of risk on a prepaid basis by health
provider networks is occurring with increasing frequency, and the practice is
being reviewed by various state insurance commissioners as well as the National
Association of Insurance Commissioners ("NAIC") to determine whether the
practice constitutes the business of insurance. The Company believes that it is
currently in material compliance with
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the insurance laws in the states where it is operating, and it intends to comply
with interpretative and legislative changes as they may develop. There can be no
assurance, however, that the Company's activities will not be challenged or
scrutinized by governmental authorities or that future interpretations of the
insurance laws by such governmental authorities will not require licensure or
restructuring of some or all of the Company's operations in any such state. In
the event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
operating results and financial condition while the licensure process is
pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which the Company may not be able to meet.
Further, once licensed, the Company would be subject to continuing oversight by,
and reporting to, the respective regulatory agency.
The NAIC recently adopted the Managed Care Plan Network Adequacy Model Act
(the "Model Act") which is intended to establish standards for the creation and
maintenance of networks by health carriers. The Model Act is also intended to
establish requirements for written agreements between health carriers offering
managed care plans, participating providers and intermediaries, like the
Company, which negotiate provider contracts. An NAIC model insurance act does
not carry the force of law unless it is adopted by applicable state
legislatures. The Company does not know which states, if any, will adopt the
Model Act. There can be no assurance that the Company will be able to comply
with the Model Act if it is adopted in any state in which the Company does
business or that any inability of the Company to so comply would not have a
material adverse effect on the operating results and financial condition of the
Company.
Other State and Local Regulation. In March 1996, the DOC issued the
Restricted License to MPN in accordance with the requirements of the Knox-Keene
Act. The Restricted License authorizes MPN to operate as a healthcare service
plan in the State of California. The Company, through MPN, utilizes the
Restricted License to contract with HMOs for a broad range of healthcare
services, including both institutional and professional medical services. The
Knox-Keene Act and the regulations promulgated thereunder subject entities that
are licensed as healthcare service plans in California to substantial regulation
by the DOC. In addition, licensees under the Knox-Keene Act must file periodic
financial data and other information (that generally become available to the
public), maintain substantial tangible net equity on their balance sheets and
maintain adequate levels of medical, financial and operational personnel
dedicated to fulfilling the licensee's statutory and regulatory requirements.
The DOC is empowered to take enforcement actions against licensees that fail to
comply with such requirements.
The operation of USFMC and Friendly Hills is highly regulated, and each is
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
Accreditation from the Joint Commission on Accreditation of Healthcare
Organizations allows USFMC and Friendly Hills to serve Medicare patients and
provides authorization from the California Department of Health Services and the
Los Angeles County Department of Health to operate as licensed hospital
facilities. Both USFMC and Friendly Hills are licensed and regulated as general
acute care hospitals by the State of California Department of Health Services.
Additionally, each of USFMC and Friendly Hills have a clinical laboratory
license from the State of California Department of Health Services, a clinical
laboratory license for its cardio-pulmonary laboratory and a pharmacy license
for its inpatient pharmacy.
Pharmacy Licensing and Operation. The PBM and therapeutic pharmaceutical
services of the Company are subject to state and federal statutes and
regulations governing the operation of pharmacies, repackaging of drug products,
dispensing of controlled substances, reimbursement under federal and state
medical assistance programs, financial relationships between healthcare
providers and potential referral sources, medical waste disposal, risk sharing
by non-insurance companies and workplace health and safety. The Company's
operations may also be affected by changes in ethical guidelines and changes in
operating standards of professional and trade associations and private
accreditation commissions such as the American Medical Association, the National
Committee for Quality Assurance and the Joint Commission on Accreditation of
Healthcare Organizations. Federal controlled substance laws require the Company
to register its pharmacies with the United States Drug Enforcement
Administration and comply with security, record-keeping, inventory control and
labeling standards in order to dispense controlled substances. State controlled
15
<PAGE> 18
substance laws require registration and compliance with the licensing,
registration or permit standards of the state pharmacy licensing authority.
State pharmacy licensing, registration and permit laws impose standards on the
qualifications of an applicant's personnel, the adequacy of its prescription
fulfillment and inventory control practices and the adequacy of its facilities.
In general, pharmacy licenses are renewed annually. Pharmacists employed by each
branch must also satisfy state licensing requirements.
Several states have enacted legislation that requires mail service
pharmacies located outside such state to register with the state board of
pharmacy prior to mailing drugs into the state and to meet certain operating and
disclosure requirements. These statutes generally permit a mail service pharmacy
to operate in accordance with the laws of the state in which it is located. In
addition, various pharmacy associations and state boards of pharmacy have
promoted enactment of laws and regulations directed at restricting or
prohibiting the operation of out-of-state mail service pharmacies by, among
other things, requiring compliance with all laws of certain states into which
the mail service pharmacy dispenses medications whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent that such laws or regulations are found to be applicable to the Company's
operations, the Company would be required to comply with them. Some states have
enacted laws and regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to plan sponsors that offer
mail service prescription programs. The United States Department of Labor has
commented that such laws and regulations are preempted by the Employee
Retirement Income Security Act of 1974, as amended. The Attorney General in one
state has reached a similar conclusion and has raised additional constitutional
issues. Finally, the Bureau of Competition of the Federal Trade Commission
("FTC") has concluded that such laws and regulations may be anticompetitive and
not in the best interests of consumers. To date, there have been no formal
administrative or judicial efforts to enforce any of such laws against the
Company. To the extent that any of the foregoing laws or regulations prohibit or
restrict the operation of mail service pharmacies and are found to be applicable
to the Company, they could have an adverse effect on the Company's prescription
mail service operations. While United States Postal Service regulations
expressly permit the transmission of prescription drugs through the postal
system, the United States Postal Service has authority to restrict such
transmission.
Future Legislation, Regulation and Interpretation. As a result of the
continued escalation of healthcare costs and the inability of many individuals
to obtain health insurance, numerous proposals have been or may be introduced in
the United States Congress and state legislatures relating to healthcare reform.
There can be no assurance as to the ultimate content, timing or effect of any
healthcare reform legislation, nor is it possible at this time to estimate the
impact of potential legislation, which may be material, on the Company. Further,
although the Company exercises care in structuring its arrangements with
physicians to comply in all material respects with the above-referenced laws,
there can be no assurance that (i) government officials charged with
responsibility for enforcing such laws will not assert that the Company or
certain transactions in which the Company is involved are in violation thereof
and (ii) such laws will ultimately be interpreted by the courts in a manner
consistent with the Company's interpretation. Therefore, it is possible that
future legislation, regulation and the interpretation thereof could have a
material adverse effect on the operating results and financial condition of the
Company.
CORPORATE LIABILITY AND INSURANCE
The Company's business entails an inherent risk of claims of medical
professional liability. In recent years, participants in the healthcare industry
have become increasingly subject to large claims based on theories of medical
malpractice that entail substantial defense costs. Through the ownership and
operation of USFMC and Friendly Hills, both acute care hospitals, the Company
could also be subject to allegations of negligence and wrongful acts. To protect
its overall operations from such potential liabilities, the Company has a
multi-tiered corporate structure and preserves the operational integrity of each
of its operating subsidiaries. In addition, the Company maintains professional
liability insurance, general liability and other customary insurance on a
claims-made and modified occurrence basis, in amounts deemed appropriate by
management based upon historical claims and the nature and risks of the
business, for many of the affiliated physicians, practices and operations. The
Company has accrued for or purchased "tail" coverage for claims against the
Company's affiliated medical organizations to cover incidents which were or are
incurred but not reported
16
<PAGE> 19
during the periods for which the related risk was covered by "claims made"
insurance. There can be no assurance that a future claim will not exceed the
limits of available insurance coverage or that such coverage will continue to be
available.
Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability insurance coverage.
Such insurance would provide coverage, subject to policy limits, in the event
the Company were held liable as a co-defendant in a lawsuit for professional
malpractice against a physician. In addition, generally, the Company is
indemnified under the practice management agreements by the affiliated physician
groups for liabilities resulting from the performance of medical services.
However, there can be no assurance that any future claim or claims will not
exceed the limits of these available insurance coverages or that indemnification
will be available for all such claims.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 29,256 persons and
was affiliated with 13,531 physicians. The Company believes that its relations
with its employees are good.
ITEM 2. PROPERTIES.
The Company leases approximately 150,000 square feet at its corporate
headquarters located at 3000 Galleria Tower in Birmingham, Alabama.
Additionally, the Company has corporate offices in Long Beach, California,
(approximately 73,040 square feet in 5000 Airport Plaza Drive and 49,065 square
feet in 5001 Airport Plaza Drive), Knoxville, Tennessee (approximately 35,000
square feet) and Northbrook, Illinois (approximately 199,116 square feet). The
Company currently owns or leases facilities providing medical services,
including two hospitals, in 42 states, Puerto Rico and two foreign countries.
These facilities range in size from 500 square feet to large multi-story
buildings which house medical clinics. The Company also leases, subleases or
occupies, pursuant to certain acquisition agreements, the clinic facilities of
the affiliated physician groups. The Company anticipates that as the affiliated
practices continue to integrate their operations, existing corporate facilities
should be adequate for the immediate future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to certain legal actions arising in the ordinary
course of business. MedPartners is named as a defendant in various legal actions
arising primarily out of services rendered by physicians and others employed by
its affiliated physician entities and the two hospitals it owns, as well as
personal injury and employment disputes. In addition, certain of its affiliated
medical groups are named as defendants in numerous actions alleging medical
negligence on the part of their physicians. In certain of these actions,
MedPartners' and/or the medical group's insurance carrier has either declined to
provide coverage or has provided a defense subject to a reservation of rights.
Management does not view any of these actions as likely to result in an
uninsured award that would have a material adverse effect on the operating
results and financial condition of MedPartners.
In June 1995, Caremark agreed to settle an investigation with certain
agencies of the U.S. government and related state investigative agencies in all
50 states and the District of Columbia (the "OIG Settlement"), as described in
Note 13 of the audited Consolidated Financial Statements. The OIG Settlement
allows Caremark to continue participating in Medicare, Medicaid and other
government healthcare programs. In its agreement with the OIG and the DOJ,
Caremark agreed to continue to maintain certain compliance-related oversight
procedures. Should these oversight procedures reveal credible evidence of legal
or regulatory violations, Caremark is required to report such violations to the
OIG and DOJ. Caremark is, therefore, subject to increased regulatory scrutiny
and, in the event it commits legal or regulatory violations, Caremark may be
subject to an increased risk of sanctions or penalties, including
disqualification as a provider of Medicare or Medicaid services, which would
have a material adverse effect on the operating results and financial condition
of MedPartners.
In connection with the matters described above relating to the OIG
Settlement, Caremark is the subject of various non-governmental claims and may
in the future become subject to additional OIG-related claims.
17
<PAGE> 20
Caremark is the subject of, and may be in the future subjected to, various
private suits and claims being asserted in connection with matters relating to
the OIG Settlement by Caremark's stockholders, patients who received healthcare
services from Caremark and such patients' insurers. MedPartners cannot determine
at this time what costs or liabilities may be incurred in connection with future
disposition of non-governmental claims or litigation. Such additional costs or
liabilities, if incurred, could have a material adverse effect on the operating
results and financial condition of MedPartners.
In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark Inc. and Caremark
International Inc., as well as two other corporations, in the United States
District Court for the District of Hawaii (Case No. 96-00474 ACK) alleging
violations of the federal antitrust laws, the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and California's unfair business practices statute.
In this action, styled Phamacare, et al. v. Caremark Inc., Caremark
International Inc., et al., the plaintiffs seek unspecified treble damages and
attorneys' fees and expenses. MedPartners intends to defend this case
vigorously. Although management believes, based on information currently
available, that the ultimate resolution of this matter is not likely to have a
material adverse effect on the operating results and financial condition of
MedPartners, there can be no assurance that the ultimate resolution of the
matter, if adversely determined, would not have a material adverse effect on the
operating results and financial condition of MedPartners.
In March 1998, a group of 22 private payors filed an action styled Blue
Cross and Blue Shield of Alabama et al. v. Caremark Inc. and Caremark
International Inc. (Case No. 98C-1285) in the United States District Court for
Northern District of Illinois seeking recovery for losses allegedly suffered by
the plaintiffs during the period 1986-1995 as a result of an allegedly
fraudulent scheme conceived and implemented by the defendants to submit and
cause other providers to submit fraudulent claims for payment of healthcare
benefits by the plaintiffs related to Caremark's home infusion business.
Caremark sold its home infusion business in 1995. The plaintiffs allege that
Caremark failed to disclose to the plaintiffs the existence and nature of
certain relationships that Caremark had with various physicians and the fact
that certain funds were paid to such physicians without the plaintiffs'
knowledge or approval. The action prays for an unspecified amount in damages and
for trebled damages under RICO and other related fraud claims. Caremark intends
to defend this lawsuit vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of MedPartners, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of MedPartners.
In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. The complaint alleged violations of the federal mail and wire fraud
statutes, RICO and the state consumer fraud statute, as well as conspiracy to
breach a fiduciary duty, negligence and fraud. The complaint sought unspecified
treble damages, and attorney's fees and expenses. In July 1996, these plaintiffs
also filed a separate purported class action lawsuit in the Minnesota State
Court in the County of Hennepin against Caremark alleging all of the claims
contained in the federal complaint and sought unspecified damages, attorneys'
fees and expenses and an award of punitive damages. In November 1996, in
response to a motion by the plaintiffs, the Court dismissed the United States
District Court cases without prejudice. On March 28, 1997, the Minnesota state
court lawsuit was dismissed with prejudice, which decision was affirmed by the
Minnesota Court of Appeals on November 4, 1997. On December 31, 1997, the
Minnesota Supreme Court denied plaintiffs' petition for further reconsideration.
This lawsuit is concluded because plaintiffs have no further avenue of appeal.
In July 1995, another patient of this same physician filed a separate complaint
in the District Court of South Dakota against the physician, Caremark and
another corporation alleging violations of the federal laws prohibiting payment
of remuneration to induce referral of Medicare and Medicaid beneficiaries, the
federal mail fraud statutes and RICO. The complaint also alleges the intentional
infliction of emotional distress and seeks trebling of at least $15.9 million in
general damages, attorney's fees and costs, and
18
<PAGE> 21
an award of punitive damages. In August 1995, the parties agreed to a stay of
all proceedings until final judgment was entered in a criminal case that was
then pending against this physician. All charges against the physician have been
dismissed. Caremark has moved for the dismissal of the South Dakota case or
transfer of the case to Minnesota. Management believes, based on information
currently available, that the ultimate resolution of this matter is not likely
to have a material adverse effect on the operating results and financial
condition of MedPartners.
In December 1997, a class action was filed in the United States District
Court for the Central District of California styled, Padilla, et al. v.
MedPartners, Inc., et al. (Case No. SACV 97-978). The action purports to be a
class action on behalf of all of the shareholders of Talbert which was acquired
by MedPartners in a cash tender offer transaction closed in September 1997,
pursuant to which each outstanding share of Talbert was acquired for $63 cash
per share. The action alleges that MedPartners violated Rule 14d-10 under the
Securities Exchange Act of 1934, the so-called "all holder, best price" rule, by
reason of provisions in the employment agreements of two senior officers of
Talbert, which provided for a certain contingent payment under certain
circumstances. The complaint requests class certification and claims damages and
interest. The defendants have filed a Motion to Dismiss this action on a number
of grounds, asserting that the complaint fails to state a claim upon which
relief can be granted. Although management believes, based on information
currently available, that the ultimate resolution of this matter is not likely
to have a material adverse effect on the operating results and financial
condition of MedPartners, there can be no assurance that the ultimate resolution
of the matter, if adversely determined, would not have a material adverse effect
on the operating results and financial condition of MedPartners.
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, which have since been revised downward. 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. To
date, there are 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 alleges 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. Four of the lawsuits, one filed in
the Circuit Court of Jefferson County, Alabama, and three filed in the United
States Federal Court for the Northern District of Alabama, were 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. The
state complaint also asserts claims under Sections 11 and 15 of the Securities
Act of 1933, as well as Sections 8-6-17(a)(2) and 8-6-19 of the Alabama Code.
Collectively, these complaints seek class certification, damages and interest,
as well as costs and expenses. Exhibit 99-1 attached to this Annual Report on
Form 10-K is a schedule of the stockholder suits of which the Company has
knowledge. 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.
Beginning in September 1994, Caremark was named as a defendant in a series
of lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The lawsuits, filed in federal district
courts in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers in violation
19
<PAGE> 22
of the Robinson-Patman Act. Each complaint seeks unspecified treble damages,
declaratory and equitable relief and attorney's fees and expenses. All of these
actions have been transferred by the Judicial Panel for Multi-district
Litigation to the United States District Court for the Northern District of
Illinois for coordinated pretrial procedures. Caremark was not named in the
class action. In April 1995, the Court entered a stay of pretrial proceedings as
to certain Robinson-Patman Act claims in this litigation, including the
Robinson-Patman Act claims brought against Caremark, pending the conclusion of a
first trial of certain of such claims brought by a limited number of plaintiffs
against five defendants not including Caremark. On July 1, 1996, the district
court directed entry of a partial final order in the class action approving an
amended settlement with certain of the pharmaceutical manufacturers. The amended
settlement provides for a cash payment by the defendants in the class action
(which does not include Caremark) of approximately $351.0 million to class
members in settlement of conspiracy claims as well as a commitment from the
settling manufacturers to abide by certain injunctive provisions. All class
action claims against non-settling manufacturers as well as all opt out and
other claims generally, including all Robinson-Patman Act claims against
Caremark, remain unaffected by the settlement. The district court has scheduled
a trial of the remaining class action claims for the fall of 1998. It is
expected that trials of the remaining individual conspiracy claims will also
precede the trial of any Robinson-Patman Act claims. MedPartners intends to
defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of MedPartners, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of MedPartners.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders of the Company
during the fourth quarter of 1997.
20
<PAGE> 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "MDM". The following table sets forth, for the calendar
periods indicated, the range of high and low sales prices from January 1, 1996.
Prior to February 21, 1996, the Company's Common Stock traded on the NASDAQ
National Market System.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First Quarter (from February 21)............................ $34.75 $28.50
Second Quarter.............................................. 30.25 20.13
Third Quarter............................................... 23.13 16.63
Fourth Quarter.............................................. 24.50 19.88
1997
First Quarter............................................... $25.00 $18.00
Second Quarter.............................................. 23.50 17.375
Third Quarter............................................... 24.188 19.813
Fourth Quarter.............................................. 28.375 20.00
1998
First Quarter (through March 30)............................ $22.375 $ 7.125
</TABLE>
On March 30, 1998, the closing sale price of the Company's Common Stock on
the NYSE was $10.50.
There were 42,109 holders of record of the Company's Common Stock as of
March 1, 1998.
The Company has never paid a cash dividend on its Common Stock. Future
dividends, if any, will be determined by the Company's Board of Directors in
light of circumstances existing from time to time, including the Company's
growth, profitability, financial condition, results of operations, continued
existence of the restrictions described below and other factors deemed relevant
by the Company's Board of Directors. Restrictions contained in the Credit
Facility (as defined in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations") limit the payment of non-stock
dividends on the Company's Common Stock.
21
<PAGE> 24
UNREGISTERED SALES OF SECURITIES
The following table indicates all unregistered sales of the Company's
Common Stock during the last fiscal year that have not previously been reported
on a Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
MARKET
TRANSACTION PURPOSE DATE VALUE
- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C>
Summit Medical Group, P.A. Merger January 31, 1997 $49,965,496
Georgia Urology, P.A. Contract January 2, 1997 5,250,000
Modification
SOUTHVIEW Medical Group, P.C. Merger January 2, 1997 10,750,000
Hirsch, Strassberg, Kenward & Vizoso, M.D.s, Inc. Acquisition January 27, 1997 787,500
North Carolina Medical Associates, P.A. Contract February 14, 1997 1,724,800
Modification
Chase Dennis Medical Group, Inc. Asset Acquisition February 14, 1997 17,330,000
IMHC Management, Inc. Merger May 14, 1997 7,809,381
Pacific Medical Group Acquisition May 14, 1997 1,573,669
Obstetric & Gynecologic Associates of Columbus, P.C. Contract May 16, 1997 916,000
Modification
Northwest Diagnostic Clinic, P.A. Asset Acquisition May 30, 1997 290,996
Aldine Women's Clinic, P.A. Asset Acquisition May 30, 1997 49,999
L. Stayton Halberdler, Jr., M.D., P.A. Asset Acquisition May 30, 1997 25,010
Alan G. Moore, M.D., P.A. Asset Acquisition May 30, 1997 59,995
Jeffrey C. Lambert, M.D., P.A. Asset Acquisition May 30, 1997 25,010
Herschel Fischer, Inc. Merger July 11, 1997 17,999,980
Karl G. Mangold, Inc. Merger July 11, 1997 26,999,981
Doctor's Essential Services, Inc. Asset Acquisition July 11, 1997 1,000,000
Suburban Heights Medical Center, S.C. Asset Acquisition July 28, 1997 9,700,000
Doctors Medical Associates, Pinola, Inc. Asset Acquisition October 30, 1997 9,600
Health First Medical Group, P.C. Merger December 16, 1997 6,255,052
Kelsey-Seybold Contingent Stock Right Exercises through Stock Right through December 1,576,598
December 31, 1997 Exercises 31, 1997
</TABLE>
None of these sales was underwritten, and all of the shares issued were
taken for investment by the entity or individual to whom they were issued. The
Company believes all of the securities issued were exempt from registration
under Section 4(2) of the Securities Act. Approximately 63% of the shares issued
in the above transactions have been registered subsequently, or the Rule 144 one
year holding period restricting the sale of the shares has lapsed.
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<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the Company
derived from the Company's Consolidated Financial Statements. The selected
financial data should be read in conjunction with the accompanying Consolidated
Financial Statements and the related Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue.......................... $1,980,967 $2,909,024 $3,908,717 $5,222,019 $6,331,151
Income (loss) from continuing
operations......................... 55,017 63,510 32,189 (76,790) (693,742)
Income (loss) from discontinued
operations......................... 30,808 25,902 (136,528) (68,698) (95,988)
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative
effect of a change in accounting
principle.......................... 85,825 89,412 (104,339) (145,488) (789,730)
Cumulative effect of a change in
accounting principle............... -- -- -- -- (30,885)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 85,825 $ 89,412 $ (104,339) $ (145,488) $ (820,615)
========== ========== ========== ========== ==========
Earnings (loss) per common share
outstanding(1):
Income (loss) from continuing
operations......................... $ 0.42 $ 0.49 $ 0.21 $ (0.45) $ (3.73)
Income (loss) from discontinued
operations......................... 0.24 0.20 (0.90) (0.40) (0.52)
Cumulative effect of a change in
accounting principle............... -- -- -- -- (0.17)
---------- ---------- ---------- ---------- ----------
Net income (loss) per share.......... $ 0.66 $ 0.69 $ (0.69) $ (0.85) $ (4.42)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding........................ 130,903 130,435 152,453 169,897 185,830
Diluted earnings (loss) per common
share outstanding(2):
Income (loss) from continuing
operations......................... $ 0.42 $ 0.43 $ 0.20 $ (0.45) $ (3.73)
Income (loss) from discontinued
operations......................... 0.24 0.18 (0.86) (0.40) (0.52)
Cumulative effect of a change in
accounting principle............... -- -- -- -- (0.17)
---------- ---------- ---------- ---------- ----------
Net income (loss) per share.......... $ 0.66 $ 0.61 $ (0.66) $ (0.85) $ (4.42)
========== ========== ========== ========== ==========
Weighted average common and dilutive
equivalent shares outstanding...... 130,903 146,773 158,109 169,897 185,830
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 44,852 $ 101,101 $ 87,581 $ 127,397 $ 215,801
Working capital...................... 251,736 180,198 286,166 226,409 75,747
Total assets......................... 1,117,557 1,682,345 1,964,130 2,423,120 2,890,529
Long-term debt, less current
portion............................ 177,141 394,811 541,391 715,996 1,470,622
Total stockholders' equity........... 491,039 644,918 674,442 837,408 90,854
</TABLE>
- ---------------
(1) Earnings (loss) per share is computed by dividing net income (loss) by the
number of common shares outstanding during the periods presented in
accordance with the applicable rules of the Commission.
(2) For the computation of diluted earnings (loss) per share, no incremental
shares related to options are included for years with net losses from
continuing operations.
23
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The purpose of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations and financial
condition. This discussion should be read in conjunction with the audited
Consolidated Financial Statements and the Notes thereto. Unless the context
otherwise requires, as used herein, the term "MedPartners" or the "Company"
refers collectively to MedPartners, Inc. and its subsidiaries and affiliates.
GENERAL
MedPartners is one of the largest healthcare companies in the United
States, with net revenue of approximately $6.3 billion for the year ended
December 31, 1997. The Company operates three separate business divisions:
Physician Practice Services, Pharmaceutical Services and Contract Medical
Services. The Physician Practice Services Division is larger than any other PPM
in the United States, based on annual revenues in that business of approximately
$3.0 billion for the year ended December 31, 1997. The Pharmaceutical Services
Division operates one of the largest independent PBM and therapeutic
pharmaceutical services programs in the United States, with revenues of
approximately $2.4 billion for the year ended December 31, 1997. The Contract
Medical Services Division operates one of the largest hospital-based physician
management services and one of the largest corrections and government services
managed care businesses, with combined revenues of approximately $806 million
for the year ended December 31, 1997.
The Company's Physician Practice Services Division affiliates with
physicians who are seeking the resources necessary to function effectively in
healthcare markets that are evolving from fee-for-service to managed care payor
systems. MedPartners also affiliates with physicians who seek greater
efficiencies in operations of traditional fee-for-service practices. The Company
enhances clinic operations by centralizing administrative functions and
introducing management tools, such as clinical guidelines and medical management
processes. The Company provides affiliated physicians with access to capital and
to advanced management information systems. In addition, the Company contracts
with health maintenance organizations (and other third-party payors that
compensate the Company and its affiliated physicians on a prepaid basis
(collectively, "HMOs")), hospitals and outside providers on behalf of its
affiliated physicians. These relationships provide physicians with the
opportunity to operate under a variety of payor arrangements and to increase
their patient flow.
The Company offers medical group practices and independent physicians a
range of affiliation models which are described in Note 1 of the accompanying
audited Consolidated Financial Statements. These affiliations are carried out by
the acquisition of PPM entities or practice assets, either for cash or equity,
or by affiliation on a contractual basis. In all instances, the Company enters
into long-term practice management agreements with the affiliated physicians
that provide for both the management of their practices by the Company and the
clinical independence of the physicians.
The Company also manages PBM programs for more than 2,194 clients
throughout the United States, including corporations, insurance companies,
unions, government employee groups and managed care organizations. The Company
dispenses an average of 44,800 prescriptions daily through three mail service
pharmacies and manages patients' immediate prescription needs through a network
of approximately 53,000 retail and other pharmacies. The Company's therapeutic
pharmaceutical services are designed to meet the healthcare needs of individuals
with certain chronic diseases or conditions. These services include the design,
development and management of comprehensive programs comprising drug therapy,
physician support and patient education. The Company currently provides
therapies and services for individuals with such conditions as hemophilia,
growth disorders, immune deficiencies, cystic fibrosis and multiple sclerosis.
The Company is in the process of integrating the pharmaceutical services program
with the PPM business by providing pharmaceutical services to affiliated
physicians, clinics and HMOs.
The Contract Medical Services Division organizes and manages physicians and
other healthcare professionals engaged in the delivery of emergency, radiology
and teleradiology services, primary care and
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<PAGE> 27
temporary staffing and support services. Through its Team Health subsidiary the
Company provides these services to hospitals, clinics and managed care
organizations, and the Company's Government Services unit provides these
services to correctional facilities, Department of Defense facilities and
government-affiliated physician groups throughout the United States. The
Division also provides occupational health services to corporate industrial
clients. Under contracts with hospitals and other clients, the Contract Medical
Services Division identifies and recruits physicians and other healthcare
professionals for admission to a client's medical staff and coordinates the
ongoing scheduling of staff physicians and other healthcare professionals who
provide clinical coverage in designated areas of care.
The Company experienced several adverse events in the fourth quarter of
1997 and the month of January 1998, including: (i) a fourth quarter pretax
charge of $646.7 million related primarily to the restructuring and impairment
of selected assets of certain of its clinic operations within the physician
practice management division; (ii) a fourth quarter after-tax charge from
discontinued operations of approximately $15.3 million; (iii) a fourth quarter
after-tax charge of $30.9 million related to a cumulative effect of a change in
accounting principle; (iv) a fourth quarter net loss from continuing operations,
excluding the impact of restructuring and asset impairment charges of $190.0
million; (v) the termination of the merger agreement with PhyCor, Inc.; (vi) a
steep drop in the price of its Common Stock following the announcement of the
termination of the PhyCor merger; and (vii) the filing of various stockholder
class action lawsuits against the Company and certain of its officers and
directors in the aftermath of these events alleging violations of federal
securities laws. See Item 3. "Legal Proceedings".
In response to certain of these setbacks, assembly of a new management team
began in January 1998 when Richard M. Scrushy was named Chairman of the Board
and acting Chief Executive Officer. Another step was taken in March 1998 when
Edwin M. Crawford was named President and Chief Executive Officer. Mr. Scrushy
will remain Chairman of the Board and brings his extensive healthcare
experience, most recently his 13 years as Chairman of the Board and Chief
Executive Officer of HEALTHSOUTH Corporation, to this position. Mr. Crawford
joins MedPartners from Magellan Health Services, Inc.(formerly Charter Medical
Corporation) where he served as Chairman of the Board, President and Chief
Executive Officer. Mr. Crawford has been credited with successfully turning
around Magellan's operations, transforming the company from a psychiatric
provider operation into a managed care company, and expanding the company into
the rapidly growing market of specialty disease management. In addition to these
management changes, the Company reorganized and streamlined its PPM
organizational structure to strengthen management, speed integration, improve
operations and facilitate communications.
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<PAGE> 28
RESULTS OF OPERATIONS
In June 1997, the Company combined with InPhyNet in a transaction that was
accounted for as a pooling of interests. The financial information referred to
in this discussion reflects the combined operations of this entity and several
other entities accounted for as additional poolings of interests. The following
table sets forth the earnings summary by service area for the periods indicated.
(Operating income (loss) represents earnings (loss) before interest and income
taxes and excludes merger expenses and restructuring and impairment charges.):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Services
Net revenue................................ $1,646,656 $2,397,120 $3,036,303
Operating income (loss).................... 65,483 102,935 (150,969)
Margin..................................... 3.98% 4.29% (4.97)%
Pharmaceutical Services
Net revenue................................ $1,840,249 $2,159,479 $2,363,404
Operating income........................... 125,484 133,543 122,061
Margin..................................... 6.82% 6.18% 5.16%
Contract Medical Services
Net revenue................................ $ 342,412 $ 567,042 $ 806,350
Operating income........................... 38,045 55,836 46,905
Margin..................................... 11.11% 9.85% 5.82%
International
Net revenue................................ $ 79,400 $ 98,378 $ 125,094
Operating income (loss).................... 1,300 (1,749) 620
Margin..................................... 1.64% (1.78)% 0.50%
Corporate Services
Operating loss............................. $ (30,524) $ (31,555) $ (28,566)
Percentage of total net revenue............ (0.78)% (0.60)% (0.45)%
</TABLE>
Physician Practice Services
The Company's PPM revenues have increased substantially over the past three
years primarily due to growth in prepaid enrollment, existing practice growth
and new practice affiliations. Of the total 1997 PPM revenue, $0.4 billion can
be attributed to acquisitions made during the year. The Company's PPM operations
in the western region of the country function in a predominantly prepaid
environment. The Company's PPM operations in the other regions of the country
are in predominantly fee-for-service environments with limited but increasing
managed care penetration. The following table sets forth the breakdown of net
revenue for the PPM services area for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Prepaid............................................ $1,030,226 $1,492,672 $1,891,623
Fee-for-Service.................................... 596,804 889,908 1,108,862
Other.............................................. 19,626 14,540 35,818
---------- ---------- ----------
Total net revenue from PPM service
area................................... $1,646,656 $2,397,120 $3,036,303
========== ========== ==========
</TABLE>
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<PAGE> 29
The Company's prepaid revenue reflects the number of HMO enrollees for whom
it receives monthly capitation payments. The Company receives professional
capitation to provide physician services and institutional capitation to provide
hospital care and other non-professional services. The table below reflects the
growth in enrollment for professional and global capitation:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Professional enrollees................................ 603,391 983,543 1,168,032
Global enrollees (professional and institutional)..... 509,720 678,200 895,980
--------- --------- ---------
Total enrollees............................. 1,113,111 1,661,743 2,064,012
========= ========= =========
</TABLE>
During 1997, prepaid revenues increased 27% while prepaid enrollees
increased 24%. The reason for this difference relates to the mix of professional
capitation enrollment to total enrollment (which includes institutional
capitation). The percentage of professional capitation enrollment to total
enrollment was 57% at December 31, 1997 compared to 59% at December 31, 1996.
Revenue per enrollee for professional capitation is substantially lower than
global capitation. Therefore, the lower percentage of professional capitation
enrollment accounts for the higher percentage increase in prepaid revenue as
compared to the percentage increase in total enrollment.
The Company will attempt to profit from increased revenues, operational
efficiencies and synergies produced by the exchange of ideas among physicians
and managers across geographic boundaries and varied areas of specialization.
The PPM service area, for example, has established medical management committees
that meet monthly to discuss implementation of the best medical management
techniques to assist the Company's affiliated physicians in delivering the
highest quality of care at lower costs in a consistent fashion. The PPM service
area has also created a medical advisory committee, which is developing
procedures for the identification, packaging and dissemination of the best
clinical practices within the Company's medical groups. The medical advisory
committee also provides the Company's affiliated physicians a forum to discuss
innovative ways to improve the delivery of healthcare.
During the fourth quarter of 1997, the PPM service area began a difficult
process of restructuring and reorganization which included practice
disassociations, site closings, physician and staff reductions and systems
standardization and conversions. Specifically, the Company closed a total of 60
clinic locations, primarily in southern California. Some closings also occurred
in Nevada, Arizona and northern California. Most of the locations were redundant
in nature due to the rapid acquisition of several group practices in the region.
The closings resulted in the elimination of approximately 114 physicians and 600
employees. The Company has also disassociated with 24 smaller practices, all of
which were in the eastern area of the country. These practices, which represent
approximately 124 physicians, accounted for approximately $54 million in annual
revenue. The disassociations were by mutual agreement and were the result of the
fact that the economics of the practice management agreements were not in the
best interest of the Company or the physicians.
As part of the restructuring process, the West Coast operations were
restructured into three regions: Southern California, Northwest (Idaho, Oregon,
and Washington) and Southwest (Arizona, Nevada, New Mexico, Oklahoma, Texas and
Utah). Each region is headed by a leadership team composed of physicians and
managers. Additionally, the Company moved to strengthen the financial capability
of its West Coast operations, internalize its actuarial capabilities to enhance
risk management functions and strengthen the managed care contracting process.
The Company recorded a pre-tax charge during the fourth quarter of 1997 of
$646.7 million related primarily to the restructuring and impairment of selected
assets of certain of its clinic operations within the PPM division. Of the total
charge, $39.2 million relates to cash charges including employee and physician
severance ($17.1 million), leases ($19.0 million) and other exits costs ($3.1
million), $552.4 million relates to the impairment of goodwill, primarily in the
Southern California and Southwestern markets, and $55.1 million relates to the
write down of various assets. The impairment of goodwill and write down of other
assets are non-cash charges.
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<PAGE> 30
The operating loss for the year ended December 31, 1997, was $151.0 million
compared to an operating profit of $102.9 million for the year ended December
31, 1996. The loss was the result of greater than anticipated costs in the
Company's PPM operations, primarily related to higher than expected medical
utilization, additions to medical claims reserves, additional allowances for
uncollectible receivables, recognition of losses on certain contracts, and
delays in the implementation of certain integration activities.
Pharmaceutical Services
Pharmaceutical Services revenues continue to exhibit sustained growth. This
growth is entirely internal and has not been supplemented by acquisitions. Key
factors contributing to this growth include high customer retention, additional
penetration of retained customers, new customer contracts and drug cost
inflation. These growth factors were partially offset in 1995, 1996 and 1997 by
selective non-renewal of certain accounts not meeting threshold profitability
levels. The preponderance of Pharmaceutical Services revenue is earned on a
fee-for-service basis through contracts covering one to three-year periods.
Revenues for selected types of services are earned based on a percentage of
savings achieved or on a per-enrollee or per-member basis; however, these
revenues are not material to total revenues.
Operating income experienced accelerated growth in 1995 and 1996, and
margins decreased slightly from 6.8% in 1995 to 6.2% in 1996. Operating margin
fell to 5.2% in 1997, due almost entirely to a $20 million loss recognized on a
risk-share contract. This particular contract is the only significant risk-share
contract to which the Pharmaceutical Services Division is a party. Operating
income and margins in 1997 were enhanced by reduced information systems costs
achieved through renegotiations of a contract with an outsource service vendor,
continued improvements in the acquisition costs of drugs, increased penetration
of higher margin value-oriented services and an overall 13% reduction in selling
and administrative expenses.
Contract Medical Services
The Contract Medical Services Division includes Team Health, which manages
one of the largest hospital-based physician groups in the country, and
Government Services, one of the largest correctional and government services
managed care delivery businesses. These groups produced combined contract
medical services revenue of $806 million in 1997. Team Health organizes and
manages physicians and other healthcare professionals engaged in the delivery of
emergency, radiology and teleradiology services, hospital-based primary care and
temporary staffing and support services to hospitals, clinics, managed care
organizations and physician groups throughout the United States. Government
Services provides similar services to medical facilities at correctional
institutions and Department of Defense facilities. As of December 31, 1997, the
Company had 2,476 physicians in 39 states affiliated with its Contract Medical
Services Division.
Team Health. Since becoming part of MedPartners as a result of the PPSI
merger in 1996, Team Health has grown into one of the nation's largest providers
of hospital-based physician management services. Team Health's growth is based
upon a strategy of seeking out high quality, regional hospital-based physician
management groups for affiliation. Beginning in 1996, Team Health acquired
regional groups in New Jersey (Emergency Physician Associates), Florida (The
Emergency Associates for Medicine and Sheer, Ahearn and Associates) and Ohio
(Emergency Professional Services). Team Health also assumed management
responsibility for a hospital-based group that was already part of PPSI in
Washington (Northwest Emergency Physicians) prior to PPSI's acquisition of Team
Health. In 1997, Team Health continued to grow by making significant inroads
into the strategically important California market with the acquisition of
Quantum Plus, followed several months later by the acquisition of Fischer
Mangold. During 1997, MedPartners acquired InPhyNet and Team Health assumed
responsibility for management of the hospital-based division of InPhyNet. Team
Health also continued to expand its radiology line with the acquisition of
Reich, Seidelmann, and Janicki in Ohio in late 1997. In addition to growth by
acquisition of regional groups, Team Health aggressively seeks internal growth
through sales of contract staffing opportunities as well as acquisition of
smaller hospital-based groups that "roll in" to existing regional offices.
Team Health has determined that timely and successful integration of
acquired groups is critical when growing quickly, and places significant
emphasis on integration efforts. Additionally, it is crucial to find ways
28
<PAGE> 31
to add value to the practices that choose to affiliate with Team Health. Local
operations are coordinated out of the regional offices under the guidance of a
senior physician leader, but all corporate support functions such as accounting
and payroll are centralized in the Team Health corporate office. Common
information platforms and databases are developed to facilitate the efficient
capture of clinical and operating data. The two major initiatives currently
under way involve migration of all Team Health billing onto a common IDX-based
billing system and creation of a company-wide physician database and management
system. Both initiatives are expected to be significantly complete by the end of
1998. Management effort is also focused on evaluating the best clinical
practices and exporting this knowledge throughout all the affiliates of Team
Health in order to continually improve the quality of patient care provided by
Team Health physicians. Attention is also focused on finding ways to reduce the
cost of the clinical support services. For example, during 1997, the operations
of Quantum Plus and Fischer Mangold were merged together and now operate from
one regional office, thus saving a significant amount of duplicate overhead
costs.
Team Health is currently affiliated with more than 2,100 emergency
physicians and 140 radiologists. As of December 31, 1997, Team Health operates
under 362 hospital-based contracts in 31 states compared to 302 contracts at
December 31, 1996.
Team Health revenue is driven primarily by the number of contracts with
hospitals and other providers (such as outpatient imaging centers) that are
staffed by hospital based physicians. The revenue under these contracts is
almost entirely fee-for-service. Accordingly, the capitated revenue of Team
Health is minimal. Under the Team Health staffing contracts, revenue is
generated either through direct billing of patients and payors, payments from
the hospital or other provider, or a combination of both. Therefore, revenue can
be affected by changes in patient volume and reimbursement levels from payors as
well as changes in the contracted payment rate between the hospital or other
providers and Team Health. Operating income and margins declined in 1997
primarily as a result of increased costs associated with the Company's changes
in malpractice programs and other matters associated with the acquisition of
InPhyNet.
Government Services. Government Services currently has 228 affiliated
physicians working in 52 correctional facilities in 15 states with approximately
57,400 globally capitated lives, making the Company the nation's second largest
provider of correctional medical services ("Correctional Care"). The contracts
with correctional facilities are concentrated mainly on the East Coast (from
Florida to Vermont), the Midwest and in California. Another 195 physicians work
in 15 military facilities, covering 300,000 annual patient visits ("Military
Services"). The revenues under the Correctional Care contracts are generally
capitated while some of the Military Services contacts reimburse the Company on
an hourly basis.
Government Services revenue has increased significantly in the last three
years, primarily as a result of Correctional Care contract growth. The Company
obtained 34 contracts from year-end 1995 through 1997, and increased globally
capitated lives from 21,888 in 1995 to 57,372 in 1997. The stated growth
resulted from individual contract awards and the purchase of National Health
Services, Inc. in July 1996, which contributed $12.3 million in revenue in 1996.
International
Internationally, the Company, through Caremark, had established home care
businesses in the United Kingdom, Canada, Germany, France, the Netherlands,
Puerto Rico and Japan. The international operations are currently in the process
of being sold. The home infusion operations in Germany, the Netherlands and
Canada have been sold to Fresenius A. G. Other international operations in
Puerto Rico, Japan and the Netherlands are being or have been sold to various
parties. Revenue from international operations during 1997 totaled $125.1
million.
Discontinued Operations
During 1995, Caremark divested its Caremark Orthopedic Services, Inc.
subsidiary as well as its Clozaril(R) Patient Management System, home infusion
business and oncology management services business. The Company's Consolidated
Financial Statements present the operating income and net assets of these
29
<PAGE> 32
discontinued operations separately from continuing operations. Prior periods
have been restated to conform with this presentation. Discontinued operations
for 1995 reflect the net after-tax gain on the disposal of the Clozaril(R)
Patient Management System, the home infusion business and a $154.8 million
after-tax charge for the settlement related to the OIG investigation discussed
in Note 13 of the accompanying audited Consolidated Financial Statements.
Discontinued operations for 1996 reflects a $67.9 million after-tax charge
related to settlements with private payors discussed in Note 13 of the
accompanying audited Consolidated Financial Statements and an after-tax gain on
disposition of the nephrology services business, net of disposal costs, of $2.5
million. During the second quarter of 1997, the Company settled a dispute with
Coram Health Corporation arising from Caremark's sale of its home infusion
therapy business to Coram, and, during the third quarter of 1997, the Company
settled a class action lawsuit also related to Caremark, both of which are
discussed in Note 13 of the accompanying audited Consolidated Financial
Statements. During the fourth quarter of 1997, the Company recorded a charge
related to amounts due from and due to third parties as well as miscellaneous
litigation, all of which resulted from operations previously owned by the
Company's Caremark subsidiary.
Results of Operations for the Years Ended December 31, 1997 and 1996
For the year ended December 31, 1997, net revenue was $6,331.2 million,
compared to $5,222.0 million for 1996, an increase of 21%. The increase in net
revenue resulted primarily from affiliations with new physician practices and
the increase in Pharmaceutical Services' net revenue, which accounted for $371.3
million and $203.9 million of the increase in net revenue, respectively. The
increase in Pharmaceutical Services' net revenue is attributable to
pharmaceutical price increases, the addition of new customers, further
penetration of existing customers and the sale of new products.
The net loss was $820.6 million for the year ended December 31, 1997
compared to a net loss of $145.5 million for the year ended December 31, 1996.
The Company incurred a charge of $646.7 million in 1997 related to restructuring
and impairment. See Note 15 of the accompanying audited Consolidated Financial
Statements. Changes in operations have previously been discussed for each
division.
Included in the pre-tax loss for 1997 were merger expenses totaling $59.4
million related to the business combinations with InPhyNet and several other
entities, the major components of which are listed in Note 11 of the
accompanying audited Consolidated Financial Statements.
In November 1997, the Emerging Issues Task Force ("EITF") issued EITF 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology" ("EITF 97-13"). EITF 97-13 requires process reengineering costs, as
defined, which had been previously capitalized as part of an information
technology project to be written off as a cumulative catch-up adjustment in the
fourth quarter of 1997. The Company recorded a charge of $30.9 million, net of
tax of $18.9 million, as a result of EITF 97-13. The Company incurred such costs
primarily in connection with the process reengineering associated with the new
operating systems installed for its PBM operations.
Under Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes" (SFAS 109), the Company is required to record a net deferred tax
asset for the future tax benefits of tax loss and tax credit carryforwards, as
well as for other temporary differences, if realization of such benefits is more
likely than not. In assessing the realizability of deferred tax assets,
management has considered reversing deferred tax liabilities, projected future
taxable income and tax planning strategies. However, the ultimate realization of
the deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences become deductible and
net operating losses can be carried forward.
Management believes, considering all available information, including the
Company's history of earnings from continuing operations (after adjustments for
nonrecurring items, restructuring charges, permanent differences and other
appropriate adjustments) and after considering appropriate tax planning
strategies, it is more likely than not that the Company will generate sufficient
taxable income in the appropriate carryforward periods to realize the $247.8
million in net deferred tax assets related to net operating losses and future
deductible temporary differences of which $148.3 million was recognized in
fiscal year 1997 (includes the
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<PAGE> 33
current tax benefit from discontinued operations of $51.4 million and the tax
benefit from the change in accounting methods of $18.9 million). The total net
deferred tax assets (both current and noncurrent) have been reduced to the
amount management considers realizable by establishing valuation allowances
aggregating $109.3 million. The valuation allowances have been established due
to the uncertainty associated with forecasting future income. The valuation
allowance also includes $9.3 million related to certain net operating losses of
non-consolidated entities that can only offset future taxable income generated
by those entities.
While management expects the Company to be profitable, future levels of
operating income are dependent upon general economic conditions, including
competitive pressures on sales and profit margins, and other factors beyond the
Company's control. Management has considered these factors in reaching its
conclusion that it is more likely than not that future taxable income will be
sufficient to utilize certain net operating loss carryforwards and other
temporary differences prior to their expiration.
Results of Operations for the Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, net revenue was $5,222.0 million,
compared to $3,908.7 million for 1995, an increase of 33.6%. The increase in net
revenue resulted primarily from affiliations with new physician practices and
the increase in PBM net revenue, which accounted for $339.9 million and $352.1
million of the increase in net revenue, respectively. The most significant
physician practice acquisition during this period was the CIGNA Medical Group
which was acquired in January 1996. This acquisition accounted for 92% of the
new practice revenue. The increase in PBM net revenue is attributable to
pharmaceutical price increases, the addition of new customers, further
penetration of existing customers and the sale of new products.
Operating income for the PPM and PBM services areas increased 57.2% and
35.3%, respectively, for 1996 compared to 1995. This growth was the result of
higher net revenues in both areas and increases in operating margins resulting
from the spreading of fixed overhead expenses over a larger revenue base and
continued integration of operations in the PPM services area. Operating income
and margins declined in the corresponding periods for the therapeutic services
area as a result of lower volumes in the hemophilia business and continued
pricing pressures for growth hormone products.
Included in the pre-tax loss for 1996 were merger expenses totaling $308.9
million related to the business combinations with Caremark, PPSI and several
other entities, the major components of which are listed in Note 11 of the
accompanying audited Consolidated Financial Statements.
PHYCOR AND AMERICA SERVICE GROUP INC. MERGER AGREEMENTS AND SUBSEQUENT
TERMINATIONS
On October 29, 1997, the Boards of Directors of the Company and PhyCor,
Inc. unanimously approved a merger agreement under which PhyCor would acquire
the Company, with the Company's stockholders receiving 1.18 shares of PhyCor
common stock for each share of the Company's Common Stock. On January 7, 1998,
it was announced that the merger agreement had been terminated by mutual
agreement.
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 customary
non-competition and non-solicitation provisions and provides for the payment of
certain expenses and costs by the Company.
Other Matters
Year 2000 Compliance. The Company has assessed the potential impact and
costs of addressing the Year 2000 Issue and is in the process of implementing a
plan of action to address the Year 2000 Issue. This plan of action is a
significant undertaking which is expected to require a significant amount of
time and attention of senior management and other personnel to resolve. The
Company estimates that the total cost of
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<PAGE> 34
all of the work to be carried out to resolve its Year 2000 Issue will be
approximately $47.7 million over the years 1998 and 1999. Of this amount,
approximately $31 million was work already budgeted without regard to the Year
2000 Issue. Thus the incremental costs of the Company's efforts to address the
Year 2000 Issue will be approximately $16.7 million. The Company's current plan
of action projects that the program to be carried out will be completed sometime
in mid-1999; however, there can be no assurance that the program will be
implemented as planned and that there will not be adverse effects on the
Company's operations, financial condition and results of operations not
currently anticipated in addressing the Year 2000 Issue. The Year 2000 Issue is
also expected to affect the systems of various entities with which the Company
interacts, including payors, suppliers and vendors. There can be no assurance
that the systems of other companies on which the Company's systems rely will be
timely corrected, or that a failure by another company's systems to be year 2000
compliant would not have a material adverse effect on the company.
EITF 97-2. In 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued EITF 97-2 concerning the consolidation of
physician practice revenues. PPMs will be required to consolidate financial
information of a physician practice where the PPM acquires a "controlling
financial interest" in the practice through the execution of a contractual
management agreement even though the PPM does not own a controlling equity
interest in the physician practice. EITF 97-2 outlines six requirements for
establishing a controlling financial interest. EITF 97-2 is effective for the
Company's financial statements for the year ended December 31, 1998. The Company
does not believe that the implementation of EITF 97-2 will have a material
impact on its financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results and financial condition of the Company are
dependent on the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. The future operating results and financial condition of the Company may
be affected by a number of additional factors, including: the Company's growth
strategy, which involves the ability to raise the capital required to support
growth, competition for expansion opportunities, integration risks and
dependence on HMO enrollee growth; efforts to control healthcare costs; exposure
to professional liability; and pharmacy licensing, healthcare reform and
government regulation. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.
The Company completed its acquisition of Caremark in September 1996. There
are various Caremark legal matters which, if materially adversely determined,
could have a material adverse effect on the Company's operating results and
financial condition. See Note 13 to the accompanying audited Consolidated
Financial Statements of the Company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $75.7 million and
had cash and cash equivalents of $215.8 million. During 1997, the Company
generated $80.4 million from operating activities, which was used primarily to
fund acquisitions as well as liabilities related to restructuring charges.
During 1997 and 1996, the Company incurred cash expenditures in connection
with acquisitions of the assets of physician practices of $415.3 million and
$160.5 million, respectively, capital expenditures for property and equipment
were approximately $123.0 million and $126.9 million, respectively. During 1997
and 1996, the Company paid $120.1 million and $143.3 million, respectively, in
cash for merger costs. During 1997, these expenditures were funded by
approximately $76.6 million derived from capital contributions and net
incremental borrowings of $677.3 million. During 1996, these expenditures were
funded by approximately $271.9 million derived from issuance of common stock and
net incremental borrowings of $124.4 million. Investments in acquisitions and
property and equipment are anticipated to continue to be uses of funds in future
periods.
Effective September 5, 1996, the Company established a $1 billion unsecured
revolving Credit Facility with a final maturity date of September 5, 2001 (the
"Credit Facility"). This Credit Facility replaced the Company's then existing
Credit Facility. The purpose of the facility is to provide funds for working
capital,
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<PAGE> 35
acquisitions and other general corporate purposes. As of December 31, 1997, $524
million was outstanding under the Credit Facility. The Credit Facility contains
affirmative and negative covenants which include requirements that the Company
maintain certain financial ratios (including minimum net worth, minimum fixed
charge coverage ratio and maximum indebtedness to cash flow), and establishes
certain restrictions on investments, mergers and sales of assets. Additionally,
the Company is required to obtain bank consent for acquisitions with an
aggregate purchase price in excess of $75 million and for which more than half
of the consideration is to be paid in cash. The Credit Facility is unsecured but
provides a negative pledge on substantially all assets of the Company.
On January 14, 1998, the Company obtained a waiver of all financial
covenants and ratios contained in Section 8.1 of the Credit Facility. The
financial covenants are currently waived through May 29, 1998. The Company
expects to negotiate an amendment to the Credit Facility or replace it prior to
the expiration of the waiver.
On September 19, 1997, the Company completed a $420 million senior
subordinated note offering. These three year notes carry a coupon rate of
6 7/8%. Interest on the notes is payable semi-annually on March 1 and September
1 of each year. The notes are not redeemable by the Company prior to maturity
and are not entitled to the benefit of any mandatory sinking fund. The notes are
general unsecured obligations of the Company ranking junior in right of payment
to all existing and future senior debt of the Company. In addition, the notes
are effectively subordinated to all existing and future indebtedness of the
Company's subsidiaries. Net proceeds from the offering were used to reduce
amounts outstanding under the Credit Facility.
In September 1997, the Company issued 21.7 million 6 1/2% Threshold
Appreciation Price Securities ("TAPS") with a stated amount of $22.1875 per
security. Each TAPS consists of (i) a stock purchase contract which obligates
the holder to purchase common stock from the Company on the final settlement
date (August 31, 2000) and (ii) 6 1/4% U.S. Treasury Notes due August 31, 2000.
Under each stock purchase contract the Company is obligated to sell, and the
TAPS holder is obligated to purchase on August 31, 2000, between 0.8197 of a
share and one share of the Company's Common Stock. The exact number of common
shares to be sold is dependent on the market value of the Company's Common Stock
in August 2000. The number of shares issued by the Company in conjunction with
this security will not be more than approximately 21.7 million or less than
approximately 17.8 million (subject to certain anti-dilution adjustments). The
Treasury Notes forming a part of the TAPS have been pledged to secure the
obligations of the TAPS holders under the purchase contracts. Pursuant to the
TAPS, TAPS holders receive payments equal to 6 1/2% of the stated amount per
annum consisting of interest on the Treasury Notes at the rate of 6 1/4% per
annum and yield enhancement payments payable semi-annually by the Company at the
rate of 0.25% of the stated amount per annum. Additional paid-in capital has
been reduced by $20.4 million for issuance costs and the present value of the
annual 0.25% yield enhancement payments payable to the holders of the TAPS.
These securities are not included on the Company's balance sheet; an increase in
stockholders' equity will be reflected when cash proceeds of $481.4 million are
received by the Company on August 31, 2000.
On October 8, 1996, the Company completed a $450 million Senior Note
offering. The ten year notes carry a coupon rate of 7 3/8%. Interest on the
notes is payable semi-annually on April 1 and October 1 of each year. The notes
are not redeemable by the Company prior to maturity and are not entitled to the
benefit of any mandatory sinking fund. The notes are general unsecured
obligations of the Company, ranking senior in right of payment to all existing
and future subordinated indebtedness of the Company and pari passu in right of
payment with all existing and future unsubordinated and unsecured obligations of
the Company. The notes are effectively subordinated to all existing and future
secured indebtedness of the Company and to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. Net proceeds from the note
offering were used to reduce amounts under the Credit Facility.
33
<PAGE> 36
QUARTERLY RESULTS (UNAUDITED)
The following tables set forth certain unaudited quarterly financial data
for 1996 and 1997. In the opinion of the Company's management, this unaudited
information has been prepared on the same basis as the audited information and
includes all adjustments (consisting of normal recurring items) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
---------- ---------- ------------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue.......... $1,237,715 $1,286,692 $1,313,019 $1,384,593 1,467,933 $1,560,600
Operating expenses... 1,181,064 1,226,971 1,246,846 1,308,128 1,386,301 1,467,029
Net interest
expense............ 7,030 4,158 5,395 8,132 9,781 12,549
Merger expenses...... 34,448 250 263,000 11,247 -- 59,434
Restructuring and
impairment
charges............ -- -- -- -- -- --
Other, net........... (107) 51 328 (1,347) -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes....... 15,280 55,262 (202,550) 58,433 71,851 21,588
Income tax expense
(benefit).......... 8,878 19,271 (53,423) 28,489 27,454 19,540
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations......... 6,402 35,991 (149,127) 29,944 44,397 2,048
Loss from
discontinued
operations, net of
taxes.............. (68,698) -- -- -- -- (75,434)
Cumulative effects of
a change in
accounting
principle.......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).... $ (62,296) $ 35,991 $ (149,127) $ 29,944 $ 44,397 $ (73,386)
========== ========== ========== ========== ========== ==========
<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net revenue.......... $1,614,062 $1,688,556
Operating expenses... 1,512,142 1,975,628
Net interest
expense............ 13,969 19,449
Merger expenses...... -- --
Restructuring and
impairment
charges............ -- 646,651
Other, net........... -- --
---------- ----------
Income (loss) from
continuing
operations before
income taxes....... 87,951 (953,172)
Income tax expense
(benefit).......... 33,509 (158,543)
---------- ----------
Income (loss) from
continuing
operations......... 54,442 (794,629)
Loss from
discontinued
operations, net of
taxes.............. (5,273) (15,281)
Cumulative effects of
a change in
accounting
principle.......... -- (30,885)
---------- ----------
Net income (loss).... $ 49,169 $ (840,795)
========== ==========
</TABLE>
The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to December 31,
1997 that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q were filed prior to the
Mergers and thus, differ from the amounts for the quarters included herein. The
differences caused solely by the operation of the merged companies are
summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, 1997
------------------------
FORM 10-Q AS RESTATED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net revenue................................................. $1,332,271 $1,467,933
Income from continuing operations before income taxes....... 65,411 71,851
Income tax expense.......................................... 24,925 27,454
Net income.................................................. 40,486 44,397
</TABLE>
34
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements of the Company meeting the requirements
of Regulation S-X are filed on the succeeding pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 36
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... 37
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... 38
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997.............. 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... 40
Notes to Consolidated Financial Statements.................. 41
</TABLE>
Other financial statements and schedules required under regulation S-X are
listed in Item 14(a)(2) of this Annual Report on Form 10-K.
35
<PAGE> 38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
MedPartners, Inc.
We have audited the accompanying consolidated balance sheets of
MedPartners, Inc. as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MedPartners,
Inc. at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
March 13, 1998
36
<PAGE> 39
MEDPARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 127,397 $ 215,801
Accounts receivable, less allowances for bad debts of
$143,449 in 1996 and $204,249 in 1997.................. 660,150 763,551
Inventories............................................... 150,586 164,049
Deferred tax assets, net.................................. 52,261 72,203
Income tax receivable..................................... 2,496 10,446
Prepaid expenses and other current assets................. 69,225 86,991
---------- ----------
Total current assets.............................. 1,062,115 1,313,041
Property and equipment, net................................. 516,769 530,033
Intangible assets, net...................................... 686,975 731,586
Deferred tax assets, net.................................... 18,333 175,619
Other assets................................................ 138,928 140,250
---------- ----------
Total assets...................................... $2,423,120 $2,890,529
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 288,023 $ 340,106
Other accrued expenses and liabilities.................... 404,334 670,615
Accrued medical claims payable............................ 114,753 208,937
Current portion of long-term debt......................... 28,596 17,636
---------- ----------
Total current liabilities......................... 835,706 1,237,294
Long-term debt, net of current portion...................... 715,996 1,470,622
Other long-term liabilities................................. 34,010 91,759
Contingencies (Note 13)
Stockholders' equity:
Common stock, $.001 par value; 400,000 shares authorized,
issued-- 183,950 in 1996 and 197,766 in 1997........... 184 198
Additional paid-in capital................................ 855,162 937,233
Notes receivable from stockholders........................ (1,665) (1,367)
Unrealized loss on marketable securities.................. -- (5,035)
Shares held in trust, 9,317 in 1996 and 1997.............. (150,200) (150,200)
Retained earnings (deficit)............................... 133,927 (689,975)
---------- ----------
Total stockholders' equity........................ 837,408 90,854
---------- ----------
Total liabilities and stockholders' equity........ $2,423,120 $2,890,529
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE> 40
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenue.............................................. $3,908,717 $5,222,019 $6,331,151
Operating expenses:
Clinic expenses........................................ 1,785,564 2,683,107 3,690,859
Non-clinic goods and services.......................... 1,688,075 2,019,895 2,254,079
General and administrative expenses.................... 172,896 173,428 275,719
Depreciation and amortization.......................... 62,394 86,579 120,443
Net interest expense................................... 19,114 24,715 55,748
Restructuring and impairment charges (Note 15)......... -- -- 646,651
Merger expenses........................................ 69,064 308,945 59,434
Losses on investments.................................. 86,600 -- --
Other, net............................................. (192) (1,075) --
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes................................. 25,202 (73,575) (771,782)
Income tax expense (benefit)............................. (6,987) 3,215 (78,040)
---------- ---------- ----------
Income (loss) from continuing operations....... 32,189 (76,790) (693,742)
Discontinued operations:
Income (loss) from discontinued operations, net of
taxes of $(72,100), $(35,849) and $(51,352) in 1995,
1996 and 1997, respectively......................... (168,342) (71,221) (95,988)
Net gains on sales of discontinued operations.......... 31,814 2,523 --
---------- ---------- ----------
Loss from discontinued operations.............. (136,528) (68,698) (95,988)
---------- ---------- ----------
Loss before cumulative effect of a change in
accounting principle......................... (104,339) (145,488) (789,730)
Cumulative effect of a change in accounting principle,
net of taxes of $(18,930).............................. -- -- (30,885)
---------- ---------- ----------
Net loss................................................. $ (104,339) $ (145,488) $ (820,615)
========== ========== ==========
Earnings (loss) per common share outstanding:
Income (loss) from continuing operations............... $ 0.21 $ (0.45) $ (3.73)
Loss from discontinued operations...................... (0.90) (0.40) (0.52)
Cumulative effect of a change in accounting
principle........................................... -- -- (0.17)
---------- ---------- ----------
Net loss................................................. $ (0.69) $ (0.85) $ (4.42)
========== ========== ==========
Weighted average common shares outstanding............... 152,453 169,897 185,830
========== ========== ==========
Diluted earnings (loss) per common share outstanding:
Income (loss) from continuing operations............... $ 0.20 $ (0.45) $ (3.73)
Loss from discontinued operations...................... (0.86) (0.40) (0.52)
Cumulative effect of a change in accounting
principle........................................... -- -- (0.17)
---------- ---------- ----------
Net loss................................................. $ (0.66) $ (0.85) $ (4.42)
========== ========== ==========
Weighted average common and dilutive equivalent shares
outstanding............................................ 158,109 169,897 185,830
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
38
<PAGE> 41
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year................................ $ 136 $ 165 $ 184
Beginning balance of immaterial poolings of interests
entities................................................ 1 6 --
Common stock issued and capital contributions............. 10 10 7
PPSI common stock issued during the two months ended
December 31, 1995....................................... -- 1 --
Conversion of preferred stock............................. 7 -- --
Stock issued in connection with acquisitions.............. 2 2 7
Contributions to employee benefit trust................... 9 -- --
--------- --------- ---------
Balance, end of year...................................... 165 184 198
ADDITIONAL PAID-IN-CAPITAL:
Balance, beginning of year................................ 246,494 541,230 855,162
Beginning balance of immaterial poolings of interests
entities................................................ 6 620 2,396
Common stock issued and capital contributions............. 115,027 226,190 --
Exercise of stock options................................. 2,335 46,654 75,964
Stock issued in connection with acquisitions.............. 36,373 39,880 23,466
Issuance costs and present value of yield enhancement
payments payable to holders of Threshold Appreciation
Price Securities........................................ -- -- (20,417)
Contribution to employee benefit trust.................... 150,191 -- --
Conversion of preferred stock............................. 19,994 -- --
Capital distributions..................................... (30,970) -- --
PPSI common stock issued during the two months ended
December 31, 1995....................................... -- 588 --
Transfer of predecessor company retained earnings to
additional paid-in capital upon conversion from an S to
a C corporation......................................... 1,780 -- --
Deferred compensation on issuance of options.............. -- -- 662
--------- --------- ---------
Balance, end of year...................................... 541,230 855,162 937,233
NOTES RECEIVABLE FROM STOCKHOLDERS:
Balance, beginning of year................................ (2,349) (1,930) (1,665)
Net change in notes receivable from stockholders.......... 419 265 298
--------- --------- ---------
Balance, end of year...................................... (1,930) (1,665) (1,367)
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES:
Balance, beginning of year................................ 17 149 --
Unrealized gain (loss) on marketable securities, net of
taxes................................................... 132 (149) (5,035)
--------- --------- ---------
Balance, end of year...................................... 149 -- (5,035)
UNAMORTIZED DEFERRED COMPENSATION:
Balance, beginning of year................................ (3,552) (2,682) --
Amortization of deferred compensation..................... 870 2,682 --
--------- --------- ---------
Balance, end of year...................................... (2,682) -- --
SHARES HELD IN TRUST:
Balance, beginning of year................................ -- (150,200) (150,200)
Contribution to employee benefit trust.................... (150,200) -- --
--------- --------- ---------
Balance, end of year...................................... (150,200) (150,200) (150,200)
RETAINED EARNINGS (DEFICIT):
Balance, beginning of year................................ 404,172 287,710 133,927
Beginning balance of immaterial poolings of interests
entities................................................ 1,472 (238) (3,287)
Net (loss)................................................ (104,339) (145,488) (820,615)
Dividends and distributions paid.......................... (11,815) -- --
Transfer of predecessor company retained earnings to
additional paid-in capital upon conversion from an S to
a C corporation......................................... (1,780) -- --
Net loss for two months ended December 31, 1995 for
PPSI.................................................... -- (8,057) --
--------- --------- ---------
Balance, end of year...................................... 287,710 133,927 (689,975)
--------- --------- ---------
Total stockholders' equity......................... $ 674,442 $ 837,408 $ 90,854
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE> 42
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Net (loss).................................................. $(104,339) $ (145,488) $ (820,615)
Adjustments for non-cash items:
Net loss from discontinued operations..................... 136,528 68,698 95,988
Cumulative effect of change in accounting principle, net
of taxes................................................ -- -- 30,885
Restructuring and impairment charges...................... -- -- 646,651
Depreciation and amortization............................. 62,394 86,579 120,443
Deferred tax(benefit)..................................... (68,422) (36,056) (83,428)
Merger expenses........................................... 69,064 308,945 59,434
Loss on sale of investments............................... 86,600 -- --
Other..................................................... 1,505 1,161 (1,513)
Changes in operating assets and liabilities, net of effects
of acquisitions........................................... (36,337) (107,342) 32,532
--------- ----------- -----------
Net cash and cash equivalents provided by continuing
operations............................................ 146,993 176,497 80,377
Investing activities:
Cash paid for merger expense.............................. (53,600) (143,285) (120,054)
Net cash used to fund acquisitions........................ (212,063) (160,485) (415,329)
Additions to intangibles.................................. (7,235) (19,515) (16,969)
Purchase of property and equipment........................ (128,428) (126,873) (123,020)
Proceeds from sale of property and equipment.............. -- -- 15,332
Proceeds from sale of marketable securities............... 1,636 27,558 --
Other..................................................... 1,964 1,083 136
--------- ----------- -----------
Net cash and cash equivalents used in investing
activities............................................ (397,726) (421,517) (659,904)
Financing activities:
Common stock issued and capital contributions............. 100,380 271,882 76,588
Issuance costs related to Threshold Appreciation Price
Securities.............................................. -- -- (18,378)
Capital distributions..................................... (37,771) -- --
Net borrowings (repayments) under Credit Facility......... 72,100 (77,000) 311,500
Proceeds from issuance of senior subordinated notes....... -- -- 420,000
Proceeds from issuance of bonds payable................... -- 450,000 --
Net repayment of other debt............................... (2,638) (248,577) (54,165)
Dividends and distributions paid.......................... (9,355) -- --
Other..................................................... (3) 266 297
--------- ----------- -----------
Net cash and cash equivalents provided by financing
activities............................................ 122,713 396,571 735,842
Cash provided by (used in) discontinued operations.......... 114,500 (115,835) (68,412)
--------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........ (13,520) 35,716 87,903
Cash and cash equivalents at beginning of year.............. 101,101 88,386 127,397
Beginning cash and cash equivalents of immaterial poolings
of interests entities..................................... -- 3,295 501
--------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 87,581 $ 127,397 $ 215,801
========= =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid (received) during the period for:
Interest................................................ $ 35,204 $ 42,979 $ 62,175
========= =========== ===========
Income taxes............................................ $ 24,939 $ (16,848) $ 4,513
========= =========== ===========
</TABLE>
Non-cash investing activities include notes and other obligations issued
for acquisitions of $30.8 million in 1995, and $123.6 million in notes and other
securities received from divestitures in 1995. Non-cash financing activities
include the issuance of $55.1, $39.9 and $23.5 million of stock for acquisitions
in 1995, 1996 and 1997, respectively.
See accompanying Notes to Consolidated Financial Statements.
40
<PAGE> 43
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
Description of Business
MedPartners, Inc. (The "Original Predecessor") was incorporated in January
1993, and affiliated with its initial physician practice in November 1993.
Mullikin Medical Enterprises, L.P. ("MME") was formed by the merger of several
physician partnerships in 1994, and the original business was organized in 1957.
MedPartners/Mullikin, Inc. was formed as a result of the November 1995 business
combination between the Original Predecessor and MME. In February and September
of 1996, MedPartners/Mullikin, Inc. combined with Pacific Physician Services,
Inc. ("PPSI") and Caremark International Inc. ("Caremark"), respectively. These
business combinations were accounted for as poolings of interests. The combined
companies were renamed MedPartners, Inc. (herein referred to as the "Company" or
"MedPartners") in conjunction with the business combination with Caremark. In
June 1997, MedPartners combined with InPhyNet Medical Management Inc.
("InPhyNet") in a business combination accounted for as a pooling of interests.
The financial information referred to in this discussion reflects the combined
operations of these entities and several additional immaterial entities
accounted for as poolings of interests.
The Company operates three separate business divisions: Physician Practice
Services, Pharmaceutical Services and Contract Medical Services. The Physician
Practice Services Division is larger than any other physician practice
management company ("PPM") in the United States, based on revenues in that
business of approximately $3.0 billion for the year ended December 31, 1997.
Through its network of affiliated group and independent practice association
("IPA") physicians, the Company provides primary and specialty healthcare
services to prepaid enrollees and fee-for-service patients. The Pharmaceutical
Services Division operates one of the largest independent prescription benefit
management ("PBM") and therapeutic pharmaceutical services programs in the
United States, with revenues of approximately $2.4 billion for the year ended
December 31, 1997. The Contract Medical Services Division operates one of the
largest hospital-based physician management service businesses and one of the
largest corrections and government services managed care businesses in the
United States, with revenues of approximately $806 million for the year ended
December 31, 1997.
The Company's Physician Practice Services Division affiliates with
physicians who are seeking the resources necessary to function effectively in
healthcare markets that are evolving from fee-for-service to managed care payor
systems. The Company enhances clinic operations by centralizing administrative
functions and introducing management tools, such as clinical guidelines,
utilization review and medical management processes. The Company provides
affiliated physicians with access to capital and to advanced management
information systems. In addition, the Company contracts with health maintenance
organizations (and other third-party payors that compensate the Company and its
affiliated physicians on a prepaid basis (collectively, "HMOs")), hospitals and
outside providers on behalf of its affiliated physicians. These relationships
provide physicians with the opportunity to operate under a variety of payor
arrangements.
The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of physician practice services entities or practice assets, either
for cash or equity, or by affiliation on a contractual basis. In all instances,
the Company enters into long-term practice management agreements that provide
for the management of the affiliated physicians by the Company while assuring
the clinical independence of the physicians.
The Company also manages PBM programs for more than 2,194 clients
throughout the United States, including corporations, insurance companies,
unions, government employee groups and managed care organizations. The Company
dispenses approximately 44,222 prescriptions daily through three mail service
pharmacies and manages patients' immediate prescription needs through a network
of approximately 53,000 retail and other pharmacies. The Company's therapeutic
pharmaceutical services are designed to meet the
41
<PAGE> 44
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
healthcare needs of individuals with certain chronic diseases or conditions.
These services include the design, development and management of comprehensive
programs comprising drug therapy, physician support and patient education. The
Company currently provides therapies and services for individuals with such
conditions as hemophilia, growth disorders, immune deficiencies, cystic fibrosis
and multiple sclerosis. The Company is in the process of integrating the
pharmaceutical services program with the PPM business by providing
pharmaceutical services to affiliated physicians, clinics and HMOs.
The Contract Medical Services Division organizes and manages physicians and
other healthcare professionals engaged in the delivery of emergency, radiology
and teleradiology services, hospital-based primary care and temporary staffing
and support services. Through its Team Health subsidiary the Company provides
these services to hospitals, clinics and managed care organizations, and the
Company's Government Services unit provides these services to correctional
facilities, Department of Defense facilities and government-affiliated physician
groups throughout the United States. The Division also provides occupational
health services to corporate industrial clients. Under contracts with hospitals
and other clients, the Contract Medical Services division identifies and
recruits physicians and other healthcare professionals for admission to a
client's medical staff, monitors the quality of care and proper utilization of
services and coordinates the ongoing scheduling of staff physicians and other
healthcare professionals who provide clinical coverage in designated areas of
care.
Basis of Presentation
The Consolidated Financial Statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its
subsidiaries. The Company also consolidates professional corporations (PCs) in
which it obtains a controlling financial interest by virtue of a long-term
practice management agreement (and, in some cases, a transfer agreement) between
a wholly-owned subsidiary of the Company and the PC.
Where there is a transfer agreement with the PC, it enables the Company to
require the stockholder(s) of the PC at any time and for any reason to transfer,
at a nominal price, shares of the PC to a transferee selected by the Company.
Where such agreements exist, the physician-stockholders of the PC are, as a
general rule, designated by the Company and are senior members of the Company's
management. Because each stockholder of the PC is the Company's nominee, whom
the Company can replace at will, the transfer agreement provides the Company
with unilateral control.
Contracts with hospitals and payors for the provision of medical services
which are entered into directly between the hospitals or the payor (e.g., HMOs
and health plans) and the Company or a wholly-owned subsidiary of the Company,
contributed approximately 70% of the Company's 1997 PPM revenue (43% of
consolidated revenue, since PPM revenue comprised 61% of consolidated revenue).
In these cases, the contractual revenue is earned by the Company or a legal
subsidiary of the Company. In some cases, the Company contracts with its PCs to
provide medical services under these payor or hospital contracts. The Company
consolidates these PCs by virtue of its rights under a practice management
agreement and, in most cases, a transfer agreement. The PCs do not have any
external revenue because, as noted above, all revenue is generated through
contracts with the Company. Consolidation of these PCs, therefore, does not
materially affect the Company's Consolidated Financial Statements.
For PCs that have directly entered into contracts with payors and/or that
have the right to receive payment directly from payors for the provision of
medical services in the Company's clinics, the Company consolidates these PCs
because it obtains a controlling financial interest solely by virtue of a
long-term practice management agreement with the PC (the Company generally does
not have a transfer agreement with these types of PCs). The revenue earned by
these PCs represented 30% of PPM revenue (18% of consolidated revenue) during
1997. Practice management agreements with PCs that hold payor contracts
42
<PAGE> 45
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and/or the right to receive payment directly from payors provide three general
types of financial arrangements regarding the compensation of the
physician-stockholders of those PCs.
PCs that contributed 2% of PPM revenue (1% of consolidated net revenue)
during 1997 have practice management agreements that provide the
physician-stockholders a negotiated fixed dollar amount. At the Company's sole
discretion, the physicians are eligible to receive a bonus paid by the Company
based on performance criteria and goals. The amount of any discretionary bonus
is determined solely by the Company's management and is not directly correlated
to clinic revenue or gross profit. To the extent the clinic's net revenue
increases or decreases under these practice management agreements, physician
compensation will also increase or decrease, pro rata, based on the practice's
compensation as a percentage of the clinic net revenue.
PCs that contributed 5% of PPM revenue (3% of consolidated net revenue)
during 1997 have practice management agreements that compensate the
physician-stockholder on a fee-for-service basis. The respective clinics
generally earn revenue on a fee for service basis, and physician compensation
typically represents between 40 and 70 percent of the clinic's net revenue.
PCs that contributed 23% of PPM revenue (14% of consolidated net revenue)
during 1997 provided physician-stockholders with a salary, plus bonus, and/or a
profit-sharing payment of a percentage of the clinic's net income (i.e.,
contractual revenue less base physician compensation, bonus and clinic
expenses).
Under these various types of agreements, revenue is assigned to the Company
by the PC. The Company is responsible for the billing and collection of all
revenue for services provided at its clinics, as well as for paying all
expenses, including physician compensation. The Company compensates the PCs,
which in turn compensate the physicians. The Company is not reimbursed for the
clinic expenses, rather it is responsible and at risk for all such expenses. In
effect, the Company retains any residual from the operations of its PCs (and
funds any deficit). No earnings accumulate in its PCs or are available for the
payment of dividends to the physician-stockholders. In addition, the legal
owners of its PCs do not have a substantive capital investment that is at risk,
and the Company has substantially all of the capital at risk. Based on the terms
of the practice management agreement, there is no economic value attributable to
the capital stock of those PCs.
The Company's practice management agreements with its PCs are long-term.
The practice management agreements include the following provisions: (i) the
initial term is 20 to 40 years; (ii) renewal provisions call for automatic and
successive extension periods; (iii) the PCs cannot unilaterally terminate their
agreements with the Company unless the Company fails to cure a breach of its
contractual responsibilities thereunder within 30 days after notification of
such breach; (iv) the Company is obligated to maintain a continuing investment
of capital; (v) the Company employs the non-physician personnel of its PCs; and
(vi) the Company assumes full responsibility for the operating expenses of the
PC in return for an assignment of the PC's revenue.
The Company has unilateral control over its PCs because the practice
management agreements provide the following: (i) the Company has exclusive
authority over all operating decision making (except for the dispensing of
medical services); (ii) the Company has the exclusive authority to negotiate and
execute contracts on behalf of its PCs: (iii) the Company has the exclusive
authority to establish and approve operating and capital budgets of its PCs,
including establishing total amounts to be paid to the physicians (budgets are
established with the advice of an Advisory Board composed of physicians and
members of the Company's management); (iv) the Company has the authority to
hire, assign and terminate non-medical personnel employed by its PCs; (v) the
practice management agreement establishes guidelines for the selection, hiring
and termination of physicians by its PCs, and the Company recruits candidates
for physician openings; (vi) the physician-stockholders of its PCs are required
to cooperate with the Company to expand their respective practices at the
Company's direction; (vii) where the physicians are eligible for bonuses,
determination of the amount of the bonus is within the sole discretion of the
Company; (viii) the Company
43
<PAGE> 46
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
manages and administers all business functions of its PCs, including billing and
collecting all medical service revenue, paying all expenses and purchasing all
capital assets; (ix) the Company receives an assignment from its PCs of all
rights to receive revenue from the provision of medical services; (x) the
Company owns all the operational and depository accounts and has total control
of all cash deposits related to clinic revenue; (xi) under an assignment, the
Company owns all of its PCs' accounts receivable; (xii) the Company contracts
for the provision of medical care with each of its PCs and not with individual
physicians; and (xiii) the Company performs the negotiations and controls the
implementation and administration of all payor contracts. The execution of any
contracts on behalf of the Company's PCs by physician-stockholders of those PCs
is simply perfunctory. The approval of the physician-stockholders of the PC is
required with respect to the financial and operational actions of the PC only in
rare and isolated cases. In all circumstances, the rights of the legal owners of
the PC are protective in nature and do not allow the legal owners of the PC to
participate in the control of the PC in any substantive fashion.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying Consolidated
Financial Statements and Notes thereto. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
of all cash and cash equivalents approximate fair value.
Marketable Securities
Effective August 1, 1994, the Company adopted Statement of Financial
Accounting Standard ("SFAS") 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires that investments in equity securities
that have readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity unless a decline in value is judged other than temporary.
When this is the case, unrealized losses are reflected in the results of
operations. The amortized cost of debt securities in this category is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. The cost of securities sold is
based on the specific identification method.
Inventories
Inventories, which are primarily finished goods, consist of pharmaceutical
drugs, medical equipment and supplies and are stated at the lower of cost
(first-in, first-out method) or market.
Property and Equipment
Property and equipment are stated at cost, which for the used assets being
acquired is usually determined by an independent appraisal. Depreciation of
property and equipment is calculated using either the declining balance or the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the underlying leases. Estimated useful lives range from 3
to 10 years for equipment, 10 to 20 years for
44
<PAGE> 47
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leasehold improvements and 10 to 40 years for buildings and improvements based
on type and condition of assets. Routine maintenance and repairs are charged to
expense as incurred, while costs of betterments and renewals are capitalized.
Interest costs associated with the construction of certain capital assets
are capitalized as part of the cost of those assets. Interest costs
approximating $1.5 million were capitalized in 1997. The Company also
capitalizes purchased and internally developed software costs to the extent they
are expected to benefit future operations.
Intangible Assets
Excess of cost over fair value of assets acquired (goodwill) is being
amortized using the straight-line method over terms of the related practice
management agreements, generally 20 to 40 years. The carrying value of goodwill
is reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined based
on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the carrying value of the goodwill is reduced by the
estimated shortfall of cash flows. Costs of obtaining practice management
agreements are capitalized as incurred and are amortized using the straight-line
method. These costs include all direct costs of obtaining such agreements, which
include such items as filing fees, legal fees and travel and related development
costs. The Company has elected to amortize these costs over a period not to
exceed the term of the related practice management agreements. Other intangible
assets include costs associated with obtaining long-term financing, which are
being amortized, and included in interest expense, systematically over the terms
of the related debt agreements.
Restatement of Financial Statements
The Company has merged with several entities during 1996 and 1997 in
transactions that were accounted for as poolings of interests. Accordingly, the
financial statements for all periods prior to the effective dates of these
mergers have been restated to include these entities (see Note 11).
Income Taxes
The Company is a corporation subject to federal and state income taxes.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting (see Note 8).
Net Revenue
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined.
During 1995, 1996 and 1997, approximately 7% of net revenue was received
from governmental programs. Governmental programs pay for physician services
based on fee schedules which are determined by the related government agency.
The Company has contracts with various managed care organizations to
provide physician services based on negotiated fee schedules. Under various
contracts with HMOs, capitation is received to cover all physicians and hospital
services needed by the HMO members. Capitation payments are recognized as
revenue on the accrual basis, and represent approximately 28%, 31% and 32% of
the Company's total net revenue in 1995, 1996 and 1997, respectively. A total of
five HMO's, Pacificare, Foundation, CIGNA, PCA and California Care, represent
approximately 17.5% of net revenue of MedPartners for the year ended December
31, 1997. Liabilities for physician services provided and hospital services
incurred are accrued in the month services are
45
<PAGE> 48
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rendered. The provision for accrued claims payable, which represents the amount
payable for services incurred by patients not yet paid, is validated by
actuarial review. Management believes that the provision at December 31, 1997 is
adequate to cover claims which will ultimately be paid.
Reclassifications
Certain prior-year balances have been reclassified to conform with the
current year's presentation. Such reclassifications had no material effect on
the previously reported consolidated financial position, results of operations
or cash flows of the Company.
Fiscal Year
At January 1, 1996, PPSI changed its fiscal year-end from July 31 to
December 31. Amounts consolidated for PPSI prior to January 1, 1996 were based
on an October 31 year-end. As a result, the Consolidated Financial Statements
for the year ended December 31, 1995 include the 12 months of operations of PPSI
for the year ended October 31, 1995.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. The
Company applies APB 25 and related interpretations in accounting for its plans
because the alternative fair value accounting provided for under FASB Statement
123, "Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128,
"Earnings per Share". SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
In February, 1997, SFAS 129 "Disclosure of Information about Capital
Structure", was issued by the FASB and is effective for fiscal years beginning
after December 15, 1997. The new standard reinstates various securities
disclosure requirements previously in effect under Accounting Principles Board
("APB") 15, which has been superseded by SFAS 128. The Company does not expect
adoption of SFAS 129 to have a material effect, if any, on its financial
condition or results of operations.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
SFAS 130 establishes reporting and display requirements with respect to
comprehensive income and its components. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. This Statement is effective
for fiscal years beginning after December 15, 1997 and will require
reclassification of financial statements for prior periods for comparative
purposes. The Company does
46
<PAGE> 49
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not expect adoption of SFAS 130 to have a material effect, if any, on its
financial condition or results of operations.
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 financial statements for fiscal years beginning after December 15,
1997. The adoption of SFAS 131 will have no impact on the Company's results of
operations, financial position or cash flows.
The Emerging Issues Task Force ("EITF") issued guidance during 1997, EITF
97-2, on the consolidation of physician practice revenues. Under EITF 97-2 PPMs
will be required to consolidate financial information of a physician practice
where the PPM acquires a "controlling financial interest" in the practice
through the execution of a contractual management agreement even though the PPM
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 continued in EITF 97-2 is effective for the Company's financial
statements for the year ended December 31, 1998. The Company does not believe
that the implementation of this guidance will have a material impact on its
financial condition, results of operations or cash flows.
In November 1997, the EITF issued EITF 97-13 "Accounting for Costs Incurred
in Connection with a Consulting Project or an Internal Project that Combines
Business Process Reengineering and Information Technology". EITF 97-13 requires
process reengineering costs, as defined, which had been previously capitalized
as part of an information technology project to be written off by cumulative
catch-up adjustment in the fourth quarter of 1997. The Company incurred such
costs primarily in connection with the process reengineering associated with the
new operating systems installed for its PBM operations.
2. DISCONTINUED OPERATIONS
During 1995, Caremark divested several non-strategic businesses. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the Company's Consolidated Financial Statements present the
operating results and net assets of discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.
Effective March 31, 1995, Caremark sold its Clozaril(R) Patient Management
System to Health Management, Inc. for $23.3 million in cash and notes. This
business involved managing the care of schizophrenia patients nationwide through
the distribution of the Clozaril(R) drug and related testing services to monitor
patients for potentially serious side effects. Net revenue of this business was
$12.3 million for the three months ended March 31, 1995 and $84.0 million for
the year ended December 31, 1994. The after-tax gain on disposition of this
business was $11.1 million.
Effective April 1, 1995, Caremark sold its home infusion business to Coram
Healthcare Corporation ("Coram") for $309 million in cash and securities,
subject to post-closing adjustments based on the net assets transferred. The
sale included Caremark's home intravenous infusion therapy, women's health
services and the Home Care Management System. Certain severance and legal
obligations remained with Caremark (see Note 13). Net revenue of this business
was $96.1 million for the period ended April 1, 1995 and $441.9 million for the
year ended December 31, 1994. The after-tax loss on disposition of this business
was $4.0 million. In 1995 net losses from this business reflected in
discontinued operations include $154.8 million related to the legal settlement
discussed in Note 13.
Effective September 15, 1995, Caremark sold its oncology management
services business to Preferred Oncology Networks of America, Inc., for
securities valued at $3.6 million. The business provides management
47
<PAGE> 50
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services to single-specialty oncology practices. Net revenue of this business
for the 1995 period up to the date of sale was $8.9 million and $29.4 million
for the year ended December 1994. There was no after-tax gain or loss on the
disposition.
Effective December 1, 1995, Caremark sold its Caremark Orthopedic Services,
Inc. subsidiary to HEALTHSOUTH Corporation for $127.0 million in cash, subject
to post-closing adjustments. This business provides outpatient physical therapy
and rehabilitation services. Net revenue of this business for the 1995 period up
to the date of sale was $69.1 million and $55.8 million for the year ended
December 31, 1994. The after-tax gain on disposition of this business was $24.7
million.
Effective February 29, 1996, Caremark sold its Nephrology Services business
to Total Renal Care, Inc. for $49.0 million in cash, subject to certain
post-closing adjustments. The after-tax gain on disposition of this business,
net of disposal costs, was $2.5 million, which was included in discontinued
operations.
In March 1996 Caremark agreed to settle all disputes with a number of
private payors related to its home infusion business which was sold to Coram in
1995. The settlements resulted in an after-tax charge of $43.8 million. In
addition, Caremark agreed to pay $24.1 million after-tax to cover the private
payors' pre-settlement and settlement related expenses. An after-tax charge for
the above amounts has been recorded in 1996 discontinued operations.
In September 1995, Coram filed a complaint in the San Francisco Superior
Court against Caremark, its subsidiary, Caremark Inc., and others. The
complaint, which arose from Caremark's sale to Coram of Caremark's home infusion
therapy business in April 1995 for approximately $209.0 million in cash and
$100.0 million in securities, alleged breach of the sale agreement and made
other related claims seeking compensatory damages of $5.2 billion, in the
aggregate. Caremark filed counterclaims against Coram and also filed a lawsuit
in the United States District Court in Chicago against Coram, claiming
securities fraud. On July 1, 1997, the parties to the Coram litigation announced
that a settlement had been reached pursuant to which Caremark returned for
cancellation all of the securities issued by Coram in connection with the
acquisition and paid Coram $45 million in cash. The settlement agreement also
provided for the termination and resolution of all disputes and issues between
the parties and for the exchange of mutual releases. The settlement resulted in
a 1997 after-tax charge from discontinued operations of approximately $75.4
million.
Also included in discontinued operations for 1997 is a third quarter
after-tax charge of $5.3 million related to the settlement of a class action
lawsuit filed in August and September 1994 against Caremark. In addition, the
Company recorded an after-tax charge from discontinued operations of
approximately $15.3 million in the fourth quarter of 1997. This charge relates
to changes in estimates of amounts due from and due to third parties as well as
various litigation, all of which resulted from operations previously owned by
Caremark.
3. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
investments in marketable and non-marketable securities and debt obligations.
The carrying value of marketable and non-marketable securities, which
approximated fair value, are not material. The carrying value of debt
obligations was $450.0 million and $870.0 million at December 31, 1996 and 1997,
respectively. The fair value of these obligations approximated $451.9 million
and $858.3 million at December 31, 1996 and 1997, respectively. The fair value
of marketable securities is determined using market quotes and rates. The fair
value of non-marketable securities are estimated based on information provided
by these companies. The fair value of long-term debt has been estimated using
market quotes.
48
<PAGE> 51
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company recorded a pre-tax charge to income of $86.6
million ($52.0 million after tax) to reflect unrealized losses on investments
that were judged other than temporary.
Interest expense totaled $32.9, $35.6 and $67.6 million in 1995, 1996 and
1997, respectively. Interest income totaled $13.8, $10.9 and $11.9 million in
1995, 1996 and 1997, respectively.
4. INTANGIBLE ASSETS
Net intangible assets totaled $687.0 million and $731.6 million at December
31, 1996 and 1997, respectively. As of December 31, 1996 and 1997, accumulated
amortization totaled $55.3 million and $68.1 million, respectively. Goodwill,
which represents the excess of consideration paid for companies acquired in
purchase transactions over the fair value of net assets acquired, and
consideration paid clinic service agreements, represent the primary components
of intangible assets. During the fourth quarter of 1997 the Company reduced the
carrying value of goodwill related to several transactions. See Note 15 for
further discussion.
5. PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 54,340 $ 45,804
Buildings and leasehold..................................... 186,406 191,264
Improvements and equipment.................................. 409,911 482,896
Construction-in-progress.................................... 91,923 83,435
--------- ---------
742,580 803,399
Less accumulated depreciation and amortization.............. (225,811) (273,366)
--------- ---------
$ 516,769 $ 530,033
========= =========
</TABLE>
The net book value of capitalized lease property approximated $11.1 and
$10.4 million at December 31, 1996 and 1997, respectively. Capitalized software
costs included in construction-in-progress approximated $56.5 million at
December 31, 1996, the majority of which was placed into service on January 1,
1997.
6. LONG-TERM DEBT
LONG-TERM DEBT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Advances under Credit Facility, due 2001.................... $213,000 $ 524,500
Bonds Payable with interest at 7 3/8%, interest only paid
semi-annually, due in 2006................................ 450,000 450,000
Senior subordinated notes with interest at 6 7/8%, interest
only paid semi-annually, due in 2000...................... -- 420,000
Other long-term notes payable............................... 63,339 82,091
Capital lease obligations................................... 18,253 11,667
-------- ----------
744,592 1,488,258
Less amounts due within one year............................ (28,596) (17,636)
-------- ----------
$715,996 $1,470,622
======== ==========
</TABLE>
49
<PAGE> 52
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective September 5, 1996, the Company established a $1 billion unsecured
revolving Credit Facility with a final maturity date of September 5, 2001 (the
"Credit Facility"). This Credit Facility replaced the Company's then existing
Credit Facility. The purpose of the facility is to provide funds for working
capital, acquisitions and other general corporate purposes. As of December 31,
1997, $524.5 million was outstanding under the Credit Facility. The Credit
Facility contains affirmative and negative covenants which include requirements
that the Company maintain certain financial ratios (including minimum net worth,
minimum fixed charge coverage ratio and maximum indebtedness to cash flow), and
establishes certain restrictions on investments, mergers and sales of assets.
Additionally, the Company is required to obtain bank consent for acquisitions
with an aggregate purchase price in excess of $75 million and for which more
than half of the consideration is to be paid in cash. The Credit Facility is
unsecured but provides a negative pledge on substantially all assets of the
Company.
On January 14, 1998, the Company obtained a waiver of all financial
covenants contained in the Credit Facility. The financial covenants are
currently waived through May 29, 1998. The Company expects to negotiate an
amendment to the Credit Facility or replace it prior to the expiration of the
waiver.
Effective September 19, 1997, the Company completed a $420 million senior
subordinated note offering. These three year notes carry a coupon rate of
6 7/8%. Interest on the notes is payable semi-annually on March 1 and September
1 of each year. The notes are not redeemable by the Company prior to maturity
and are not entitled to the benefit of any mandatory sinking fund. The notes are
general unsecured obligations of the Company ranking junior in right of payment
to all existing and future senior debt of the Company. In addition, the notes
are effectively subordinated to all existing and future indebtedness of the
Company's subsidiaries. Net proceeds from the offering were used to reduce
indebtedness outstanding under the Credit Facility.
Effective October 8, 1996, the Company completed a $450 million Senior Note
offering. The ten year notes carry a coupon rate of 7 3/8%. Interest on the
notes is payable semi-annually on April 1 and October 1 of each year. The notes
are not redeemable by the Company prior to maturity and are not entitled to the
benefit of any mandatory sinking fund. The notes are general unsecured
obligations of the Company, ranking senior in right of payment to all existing
and future subordinated indebtedness of the Company and pari passu in right of
payment with all existing and future unsubordinated and unsecured obligations of
the Company. The notes are effectively subordinated to all existing and future
secured indebtedness of the Company and to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. Net proceeds from the note
offering were used to reduce amounts under the Credit Facility.
The following is a schedule of principal maturities of long-term debt as of
December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998........................................................ $ 18,557
1999........................................................ 19,454
2000........................................................ 455,576
2001........................................................ 530,261
2002........................................................ 5,369
Thereafter.................................................. 461,864
Amounts representing interest and discounts................. (2,823)
----------
Total............................................. $1,488,258
==========
</TABLE>
To manage interest rates and to lower its cost of borrowing, the Company
entered into an interest rate swap during 1997. The notional principal amount of
the swap is $200 million and is used solely as the basis for which the payment
streams are calculated and exchanged. The notional amount is not a measure of
the exposure to the company through the use of the swap. The interest rate swap
matures in relationship to its existing long-term debt and has a final
expiration of October 1, 2006. The purpose of the interest rate swap was
50
<PAGE> 53
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to essentially modify the interest rate characteristics of a portion of the
Company's debt, from fixed to floating rate. Under the terms of the contract,
the Company and a major financial institution agree to pay, on a semi-annual
basis, the differential between a fixed rate and a floating rate index, as
stipulated in its contracts. Amounts to be paid or received under the contracts
are recorded as an adjustment to interest expense. The Company is subject to
market risk as interest rates fluctuate and impact the interest payments due on
the notional principal amount. The fair value of the interest rate swap contract
is determined based on the difference between the contract rate of interest and
the rates currently quoted for contracts of similar terms and maturities. The
market value of the contract at December 31, 1997 if it were to be sold or
unwound was not material.
Operating Leases: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are located
and administrative office space. These leases generally have five-year terms
with renewal options. The following is a schedule of future minimum lease
payments under noncancelable operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998........................................................ $123,225
1999........................................................ 111,797
2000........................................................ 99,235
2001........................................................ 73,576
2002........................................................ 64,980
Thereafter.................................................. 269,010
--------
Total............................................. $741,823
========
</TABLE>
7. CAPITALIZATION
The Company's Third Restated Certificate of Incorporation provides that the
Company may issue 9.5 million shares of Preferred Stock, par value $0.001 per
share, 0.5 million shares of Series C Junior Participating Preferred Stock, par
value $0.001 per share, and 400 million shares of Common Stock, par value $0.001
per share. As of December 31, 1997 no shares of the preferred stock were
outstanding.
On March 13, 1996, the Company completed a secondary public offering of 6.6
million shares of its common stock. The net proceeds of the offering were $194.0
million. Proceeds of the offering were used to pay outstanding indebtedness
under the then existing Credit Facility. In April 1996, $69 million of the
proceeds were used to repay PPSI's convertible subordinated debentures. The
remainder of the net proceeds were used to fund acquisitions of certain assets
of physician practices, expansion of physician services, working capital and
other general corporate purposes.
In September 1997, the Company issued 21.7 million 6 1/2% Threshold
Appreciation Price Securities ("TAPS") with a stated amount of $22.1875 per
security. Each TAPS consists of (i) a stock purchase contract which obligates
the holder to purchase common stock from the Company on the final settlement
date (August 31, 2000) and (ii) 6 1/4% U.S. Treasury Notes due August 31, 2000.
Under each stock purchase contract the Company is obligated to sell, and the
TAPS holder is obligated to purchase on August 31, 2000, between 0.8197 of a
share and one share of the Company's common stock. The exact number of common
shares to be sold is dependent on the market value of the Company's common
shares in August 2000. The number of shares issued by the Company in conjunction
with this security will not be more than approximately 21.7 million or less than
approximately 17.8 million (subject to certain anti-dilution adjustments). The
Treasury Notes forming a part of the TAPS have been pledged to secure the
obligations of the TAPS holders under the purchase contracts. Pursuant to the
TAPS, TAPS holders receive payments equal to 6 1/2% of the stated amount per
annum consisting of interest on the Treasury Notes at the rate of 6 1/4% per
annum and yield enhancement payments payable semi-annually by the Company at the
rate of 0.25% of the
51
<PAGE> 54
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stated amount per annum. Additional paid-in capital has been reduced by
approximately $20.4 million for issuance costs and the present value of the
annual 0.25% yield enhancement payments payable to the holders of the TAPS.
These securities are not included on the Company's balance sheet; an increase in
stockholders' equity will be reflected when cash proceeds of $481.4 million are
received by the Company on August 31, 2000.
The earnings (loss) per common share outstanding computation 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 share, no incremental shares related to options are included for the
years ended December 31, 1996 and 1997, due to losses from continuing
operations. The weighted average common and dilutive equivalent shares
outstanding for the year ended December 31, 1995 of 158.1 million includes 4.5
million common shares issuable on exercise of certain stock options and 1.1
million weighted average shares of redeemable preferred stock.
8. INCOME TAX EXPENSE
At December 31, 1997, the Company had a cumulative net operating loss
("NOL") carryforward for federal income tax purposes of approximately $645
million available to reduce future amounts of taxable income. If not utilized to
offset future taxable income, the net operating loss carryforwards will expire
on various dates through 2012.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Merger/acquisition costs.................................. $51,696 $ 22,325
Bad debts................................................. 15,971 14,640
Restructuring............................................. -- 18,900
Malpractice............................................... -- 7,119
Goodwill amortization..................................... -- 128,269
Accrued vacation.......................................... 5,427 9,202
NOL carryforward.......................................... 72,484 215,147
Alternative minimum tax credit carryforward............... 20,195 20,195
Other..................................................... 32,147 55,308
------- ---------
Gross deferred tax assets................................... 197,920 491,105
Valuation allowance for deferred tax assets................. (2,419) (109,278)
Deferred tax liabilities
Malpractice reserves...................................... -- 16,529
Change in accounting method............................... -- 3,390
Prepaid expenses.......................................... -- 4,339
State taxes............................................... 2,264 5,399
Merger reserves........................................... 4,235 --
Legal reserve............................................. 4,400 --
Shared risk receivable.................................... 7,135 4,423
</TABLE>
52
<PAGE> 55
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Securities write-down..................................... 13,449 --
Excess tax depreciation................................... 30,363 15,546
Goodwill.................................................. 9,648 --
Other amortization........................................ 31,115 71,256
Other..................................................... 22,298 13,123
------- ---------
Gross deferred tax liabilities.............................. 124,907 134,005
------- ---------
Net deferred tax asset...................................... $70,594 $ 247,822
======= =========
</TABLE>
Management believes, considering all available information, including the
Company's history of earnings from continuing operations (after adjustments for
nonrecurring items, restructuring charges, permanent differences and other
appropriate adjustments) and after considering appropriate tax planning
strategies, it is more likely than not that the Company will generate sufficient
taxable income in the appropriate carryforward periods to realize the $247.8
million in net deferred tax assets. The total net deferred tax assets (both
current and noncurrent) have been reduced to the amount management considers
realizable by establishing valuation allowances aggregating $109.3 million at
December 31, 1997. The valuation allowances have been established due to the
uncertainty associated with forecasting future income. The valuation allowances
also include $9.3 million related to certain net operating losses of
non-consolidated entities that can only offset future taxable income generated
by those entities.
Income tax expense (benefit) on continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ 50,768 $ 34,508 $ 294
State................................................ 10,667 4,763 5,094
-------- -------- --------
61,435 39,271 5,388
Deferred:
Federal.............................................. (58,950) (30,054) (72,173)
State................................................ (9,472) (6,002) (11,255)
-------- -------- --------
(68,422) (36,056) (83,428)
-------- -------- --------
$ (6,987) $ 3,215 $(78,040)
======== ======== ========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate......................... $ 8,821 $(25,751) $(270,123)
Add (deduct):
State income tax, net of federal tax benefit........ (713) (401) (3,879)
Non deductible amortization......................... -- -- 42,272
Non deductible restructuring........................ -- -- 29,387
Increase (decrease) in valuation allowance.......... (14,240) 1,170 106,859
Non deductible merger expense....................... -- 24,786 16,331
Other............................................... (855) 3,411 1,113
-------- -------- ---------
$ (6,987) $ 3,215 $ (78,040)
======== ======== =========
</TABLE>
53
<PAGE> 56
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK BASED COMPENSATION PLANS
The Company offers participation in stock option plans to certain employees
and individuals. All of the outstanding options under these plans were granted
at 100% of the market value of the stock on the dates of grant. Awarded options
typically vest and become exercisable in incremental installments over four
years and expire no later than ten years and one day from the date of grant. The
number of shares authorized under the various plans was approximately 34.4
million as of December 31, 1997.
The following table summarizes stock option activity for the indicated
years:
<TABLE>
<CAPTION>
1996 1997
--------------------------- ---------------------------
OPTIONS WEIGHTED- OPTIONS WEIGHTED-
(IN AVERAGE (IN AVERAGE
THOUSANDS) EXERCISE PRICE THOUSANDS) EXERCISE PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding:
Beginning of year............................. 17,008 $13.71 19,294 $14.69
Granted....................................... 12,448 19.11 10,047 19.02
Exercised..................................... (4,281) 10.87 (6,315) 10.26
Canceled/expired.............................. (5,881) 23.98 (1,330) 18.05
------- -------
End of year................................... 19,294 14.69 21,696 17.50
Exercisable at end of year.................... 12,472 13.57 11,755 15.66
Weighted-average fair value of options granted
during the year............................... $12.06 $ 8.19
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-
OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE RANGE AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- -------------------- -------------- ---------------- ---------------- -------------- --------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $12.00.............. 2,393 3.46 $ 8.77 2,194 $ 9.52
$12.00-$16.99............. 8,090 7.47 16.04 5,446 15.75
$17.00 and above.......... 11,213 9.19 19.15 4,115 18.82
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock-based compensation plans under the fair value method as
described in Statement 123. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Risk-free interest rates.................................... 6.21% 6.03%
Expected volatility......................................... 0.442 0.396
Expected option lives (years)............................... 5.4 5.4
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the
54
<PAGE> 57
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's net loss and loss per share would have been reduced to pro forma net
loss from continuing operations of $(123.0) and $(761.1) million and pro forma
net losses of $(191.7) and $(888.0) million for the years ended December 31,
1996 and 1997, respectively. Per share amounts would have been reduced to pro
forma net loss from continuing operations of $(0.72) and $(4.10) and pro forma
net losses per share of $(1.13) and $(4.78) for the years ended December 31,
1996 and 1997, respectively.
10. ACQUISITIONS
During the years ended December 31, 1995, 1996 and 1997, the Company,
through its wholly-owned subsidiaries, acquired certain operating assets of
various medical practices. Simultaneously with each medical practice
acquisition, the Company entered into a practice management agreement which
generally has a 20-40 year term. (See "Basis of Presentation" in Note 1).
In May 1995, Caremark entered into a long-term affiliation agreement with
Friendly Hills HealthCare Network ("Friendly Hills"), an integrated health care
delivery system headquartered in La Habra, California. Friendly Hills operates
18 medical offices and an acute care hospital. Caremark acquired substantially
all of the assets of Friendly Hills for approximately $140 million and agreed to
provide various management and administrative services. The transaction has been
accounted for by the purchase method of accounting. The Company invested
approximately $151.2 million in cash, stock and notes for other acquisitions in
1995.
In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed healthcare subsidiary of CIGNA Corporation, to acquire
substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los
Angeles area staff model delivery system ("CIGNA") for approximately $80.4
million in cash. The transaction has been accounted for by the purchase method
of accounting. During the year ended December 31, 1996, $160.5 million in cash
and 2 million shares of stock valued at $39.9 million were given in exchange for
the net assets of CIGNA and other entities.
In May 1997, the Company completed an acquisition of Aetna U.S.
Healthcare's PPM business for approximately $56.8 million in cash. The Company's
acquisition of Healthways Family Medical Center included 47 health centers
located in Atlanta, the Baltimore/D.C. and northern Virginia area, Philadelphia,
Dallas, Akron, Chicago and southern California.
In September 1997, the Company completed the acquisition of Talbert Medical
Management Holdings Corporation ("Talbert") for $187.1 million in cash. Talbert
operated 52 health centers in five Southwestern states with approximately
258,000 patients in the network.
In December 1997, the Company completed the acquisition of the Health
Centers Division of Blue Cross Blue Shield of Massachusetts for $103.1 million
in cash. Of this amount, $51.9 million is to be paid in the first quarter of
1998 and is included in other accrued liabilities at December 31, 1997. The
transaction includes 10 health centers locations mainly in the Boston and
Springfield metropolitan areas. The health centers currently provide services to
80,000 patients enrolled with Blue Cross and Blue Shield. The transaction also
includes a 10-year provider agreement that extends to all current and future
MedPartners' affiliated physicians in Massachusetts.
During the year ended December 31, 1997, $415.3 million in cash and 1.1
million shares of stock valued at $23.5 million were given in exchange for the
net assets of these and other entities acquired in purchase transactions.
All of the aforementioned acquisitions have been accounted for by the
purchase method of accounting. As such, operating results of acquired businesses
are included in the Company's Consolidated Financial Statements as of their
respective dates of acquisition.
55
<PAGE> 58
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. MERGERS
Effective February 22, 1996, and September 5, 1996, the Company merged with
PPSI and Caremark, respectively, in transactions that were accounted for as
poolings of interests. The Company exchanged 11.0 million and 90.5 million
shares of its common stock for all of the outstanding common stock of PPSI and
Caremark, respectively. During the year ended December 31, 1996, the Company
also exchanged 11.3 million shares of its common stock in additional
transactions accounted for as poolings of interests. Effective June 27, 1997,
the Company merged with InPhyNet in a transaction that was accounted for as a
pooling of interests. The Company exchanged approximately 19.3 million shares of
its common stock for all outstanding common stock of InPhyNet. The Company's
historical financial statements for all periods have been restated to include
the results of all material transactions accounted for as poolings of interests.
<TABLE>
<CAPTION>
COMBINED
MEDPARTNERS INPHYNET (AS REPORTED)
----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1995
Net revenue.............................................. $3,583,377 $325,340 $3,908,717
Net (loss) income........................................ (115,627) 11,288 (104,339)
Year ended December 31, 1996
Net revenue.............................................. 4,813,499 408,520 5,222,019
Net (loss) income........................................ (158,529) 13,041 (145,488)
Year ended December 31, 1997
Net revenue.............................................. 5,728,922 602,229 6,331,151
Net loss................................................. (782,449) (38,165) (820,614)
</TABLE>
Included in pre-tax loss for the year ended December 31, 1996 are merger
costs totaling $308.9 million. Approximately $32.5 and $251.3 million relate to
the mergers with PPSI and Caremark, respectively. The components of this cost
are as follows (in thousands):
<TABLE>
<S> <C>
Investment banking fees..................................... $ 30,435
Professional fees........................................... 30,149
Other transaction costs..................................... 30,818
Transition and debt restructuring........................... 27,701
Severance costs for identified employees.................... 53,547
Impairment of assets........................................ 27,373
Abandonment of facilities................................... 13,909
Conforming of accounting policies........................... 39,002
Operational restructuring................................... 42,116
Other charges............................................... 13,895
--------
Total....................................................... $308,945
========
</TABLE>
56
<PAGE> 59
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in pre-tax loss for the year ended December 31, 1997, are merger
costs totaling $59.4 million primarily related to the business combination with
InPhyNet. The components of this costs are as follows (in thousands):
<TABLE>
<S> <C>
Brokerage fees, professional fees, filing fees and other
transaction costs......................................... $24,739
Conforming of accounting policies........................... 15,971
Severance and related benefits.............................. 5,272
Impairment of assets........................................ 2,824
Operational restructuring................................... 1,500
Transition and debt restructuring........................... 1,112
Other charges............................................... 8,016
-------
Total....................................................... $59,434
=======
</TABLE>
Prior to its merger with the Company, PPSI reported on a fiscal year ending
on July 31. The restated financial statements for all periods prior to and
including December 31, 1995, are based on a combination of the Company's results
for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all Consolidated Financial Statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two months
ending December 31, 1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996, to adjust for the effect of
excluding PPSI's results of operations for the two months ending December 31,
1995. The net loss for the two month period ended December 31, 1995, relates
primarily to increases in PPSI's reserves to conform to the Company's
methodology of calculating reserves. The following is a summary of operations
and cash flow for the two months ending December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Statement of Operations Data:
Net revenue............................................... $ 69,850
Net loss.................................................. (8,057)
Statement of Cash Flow Data:
Net cash used by operating activities..................... (3,569)
Net cash provided by investing activities................. 4,455
Net cash used in financing activities..................... (81)
</TABLE>
12. RETIREMENT SAVINGS PLAN
The Company and certain subsidiaries have employee benefit plans to provide
retirement, disability and death benefits to substantially all of their
employees and affiliates. The plans primarily are defined contribution plans.
Effective January 1, 1998, the Board of Directors approved a Retirement Savings
Plan for employees and affiliates. The plan is a defined benefit contribution
plan in accordance with the provisions of Section 401(k) of the Internal Revenue
Code. Full-time employees and affiliates are eligible to enroll in the plan in
the first quarter following two months of service. Individuals on a part-time
and per diem basis are eligible to participate in the quarter following
completion of one year of service. For employees, the Company makes a matching
contribution of 50% of the employee's pretax contribution, up to 6% of the
employee's compensation, in any calendar year. Under the plan, no matching
contribution is made for affiliates. The various entities that have been
acquired or merged into the Company have various retirement plans that will be
evaluated for possible termination or incorporation into the Company's Plan.
57
<PAGE> 60
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. CONTINGENCIES
In June 1995, Caremark agreed to settle an investigation with the Office of
the Inspector General of the U.S. Department of Health and Human Services (the
"OIG") and the U.S. Department of Justice ("DOJ"), the Veterans Administration,
the Federal Employee Health Benefits Program ("FEHBA"), the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS") and related state
investigative agencies in all 50 states and the District of Columbia (the "OIG
Settlement"). Under the terms of the OIG Settlement, which covered allegations
dating back to 1986, a subsidiary of Caremark pled guilty to two counts of mail
fraud -- one each in Minnesota and Ohio. The basis of these guilty pleas was
Caremark's failure to provide certain information to CHAMPUS and FEHBP,
federally funded healthcare benefit programs, concerning financial relationships
between Caremark and a physician in each of Minnesota and Ohio. The OIG
Settlement allows Caremark to continue participating in Medicare, Medicaid and
other government healthcare programs. In its agreement with the OIG and the DOJ,
Caremark agreed to continue to maintain certain compliance-related oversight
procedures. Should these oversight procedures reveal credible evidence of legal
or regulatory violations, Caremark is required to report such violations to the
OIG and DOJ. Caremark is, therefore, subject to increased regulatory scrutiny
and, in the event it commits legal or regulatory violations, Caremark may be
subject to an increased risk of sanctions or penalties, including
disqualification as a provider of Medicare or Medicaid services, which would
have a material adverse effect on the operating results and financial condition
of MedPartners. Caremark took an after-tax charge to discontinued operations of
$154.8 million in 1995 for these settlement payments, costs to defend ongoing
derivative, security and related lawsuits and other associated costs.
In connection with the matters described above relating to the OIG
Settlement, Caremark is the subject of various non-government claims and may in
the future become subject to additional OIG-related claims. Caremark is the
subject of, and may be in the future subjected to, various private suits and
claims being asserted in connection with matters relating to the OIG Settlement
by Caremark's stockholders, patients who received healthcare services from
Caremark and such patients' insurers. The Company does not believe that the
above-referenced settlements or suits will materially affect its ability to
pursue its long-term business strategy. There can be no assurance, however, that
additional costs, claims and damages will not occur or that the ultimate costs
related to the settlements will not exceed estimates in the preceding
paragraphs. MedPartners cannot determine at this time what costs or liabilities
may be incurred in connection with future disposition of non-governmental claims
or litigation. Such additional costs or liabilities, if incurred, could have a
material adverse effect on the operating results and financial condition of
MedPartners.
In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, Inc., Caremark
International Inc., and two other corporations in the United States District
Court for the District of Hawaii alleging violations of the federal antitrust
laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the
federal antitrust laws and California's unfair business practices statute. The
complaint seeks unspecified treble damages, attorneys' fees and expenses. The
Company intends to defend this case vigorously. Although management believes,
based on information currently available, that the ultimate resolution is not
likely to have a material adverse effect on the operating results and financial
condition of the Company, there can be no assurance that the ultimate resolution
of the matter, if adversely determined would not have a material adverse effect
on the operating results and financial condition of the Company.
In March 1998, a group of 22 private payors filed an action against
Caremark Inc. and Caremark International Inc. seeking recovery for losses
allegedly suffered by the plaintiffs during the period 1986-1995 as a result of
an allegedly fraudulent scheme conceived and implemented by Caremark Inc. and
Caremark International Inc. to submit and cause other providers to submit
fraudulent claims for payment of healthcare benefits by the plaintiffs related
to Caremark's home infusion business. Caremark sold its home infusion business
in 1995. The plaintiffs allege that Caremark failed to disclose to the
plaintiffs the existence and
58
<PAGE> 61
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nature of certain relationships that Caremark had with various physicians and
the fact that certain funds were paid to such physicians without the plaintiffs'
knowledge or approval. The action prays for an unspecified amount in damages and
for trebled damages under RICO and other related fraud claims. Caremark intends
to defend this lawsuit vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of MedPartners, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of MedPartners.
In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of a health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. The complaint alleged violations of the federal mail and wire fraud
statutes, RICO and the state consumer fraud statute, as well as conspiracy to
breach a fiduciary duty, negligence and fraud. The complaint sought unspecified
treble damages, and attorneys' fees and expenses. In July 1996, these plaintiffs
also filed a separate purported class action lawsuit in the Minnesota State
Court in the County of Hennepin against a subsidiary of Caremark alleging all of
the claims contained in the federal complaint and sought unspecified damages,
attorneys' fees and expenses and an award of punitive damages. In November 1996,
in response to a motion by the plaintiffs, the Court dismissed the United States
District Court cases without prejudice. On March 28, 1997, the Minnesota state
court lawsuit was dismissed with prejudice, which decision was affirmed by the
Minnesota Court of Appeals on November 4, 1997. On December 31, 1997, the
Minnesota Supreme Court denied plaintiffs' petition for further reconsideration.
This action is concluded because plaintiffs have no further avenue of appeal. In
July 1995, another patient of the same physician filed a separate complaint in
the District of South Dakota against the physician, Caremark and another
corporation alleging violations of the federal laws prohibiting payment of
remuneration to induce referral of Medicare and Medicaid beneficiaries, the
federal mail fraud statutes and RICO. The complaint also alleges the intentional
infliction of emotional distress and seeks trebling of at least $15.9 million in
general damages, attorneys' fees and costs, and an award of punitive damages. In
August 1995, the parties agreed to a stay of all proceedings until final
judgment was entered in a criminal case that was then pending against this
physician. All charges against the physician have been dismissed. Caremark has
moved for the dismissal of the South Dakota case or transfer of the case to
Minnesota. Management believes, based on information currently available, that
the ultimate resolution of this matter is not likely to have a material adverse
effect on the operating results and financial condition of MedPartners.
In December 1997, a class action was filed in the United States District
Court for the Central District of California. The action purports to be a class
action on behalf of all of the shareholders of Talbert which was acquired by
MedPartners in a cash tender offer transaction closed in September 1997 pursuant
to which each outstanding share of Talbert was acquired for $63 cash per share.
The action alleges that MedPartners violated Rule 14d-10 under the Securities
Exchange Act of 1934, the so-called "all holder, best price" rule, by reason of
provisions in the employment agreements of two senior officers of Talbert, which
provided for a certain contingent payment under certain circumstances. The
complaint requests a class certification and claims damages and interest. The
defendants have filed a Motion to Dismiss this action on a number of grounds,
asserting that the complaint fails to state a claim upon which relief can be
granted. Although management believes, based on information currently available,
that the ultimate resolution of this matter is not likely to have a material
adverse effect on the operating results and financial condition of MedPartners,
there can be no assurance that the ultimate resolution of the matter, if
adversely determined, would not have a material adverse effect on the operating
results and financial condition of MedPartners.
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, which have since been revised downward. On
59
<PAGE> 62
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. To
date, there are two state court actions and 14 federal court actions, all filed
in Birmingham, Alabama. In each of these lawsuits, the plaintiff purports to
represent a class and generally alleges 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. Four of the lawsuits, one filed in
the Circuit Court of Jefferson County, Alabama, and three filed in the United
States Federal Court for the Northern District of Alabama, were 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. The
state complaint also asserts claims under Sections 11 and 15 of the Securities
Act of 1933, as well as Sections 8-6-17(a)(2) and 8-6-19 of the Alabama Code.
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 intend to defend each of these
cases vigorously. All of these cases are in the 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.
Beginning in September 1994, Caremark was named as a defendant in a series
of lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The lawsuits, filed in federal district
courts in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers, in violation of the Robinson-Patman Act. Each complaint seeks
unspecified treble damages, declaratory and equitable relief, and attorneys'
fees and expenses. All of these actions have been transferred by the Judicial
Panel for Multidistrict Litigation to the United States District Court for the
Northern District of Illinois for coordinated pretrial procedures. Caremark was
not named in the class action. In April 1995, the Court entered a stay of
pretrial proceedings as to certain Robinson-Patman Act claims in this
litigation, including the Robinson-Patman Act claims brought against Caremark,
pending the conclusion of a first trial of certain of such claims brought by a
limited number of plaintiffs against five defendants not including Caremark. On
July 1, 1996, the district court directed entry of a partial final order in the
class action approving an amended settlement with certain of the pharmaceutical
manufacturers. The amended settlement provides for a cash payment by the
defendants in the class action (which does not include Caremark) of
approximately $351.0 million to class members in settlement of conspiracy claims
as well as a commitment from the settling manufacturers to abide by certain
injunctive provisions. All class action claims against non-settling
manufacturers as well as all opt out and other claims generally, including all
Robinson-Patman Act claims against Caremark, remain unaffected by the
settlement. The district court has scheduled a trial of the remaining class
action claims for the fall of 1998. It is expected that trials of the remaining
individual conspiracy claims will also precede the trial of any Robinson-Patman
Act claims. The Company intends to defend these cases vigorously. Although
management believes, based on information currently available, that the ultimate
resolution of this matter is not likely to have a material adverse effect on the
operating results and financial condition of the Company, there can be no
assurance that the ultimate resolution of this matter, if adversely determined,
would not have a material adverse effect on the operating results and financial
condition of the Company.
60
<PAGE> 63
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although the Company cannot predict with certainty the outcome of
proceedings described above, based on information currently available,
management believes that the ultimate resolution of such proceedings,
individually and in the aggregate, is not likely to have a material adverse
effect on the Company.
The Company is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Management does not
believe that the result of such commitments, claims and litigation, individually
or in the aggregate, will have a material adverse effect on the Company's
business or its results of operations, cash flows or financial condition.
14. REQUIREMENTS OF REGULATORY AUTHORITIES
MedPartners Provider Network, Inc. ("MPN"), a wholly-owned subsidiary of
the Company, as a licensed Health Care Service Plan is required to comply with
the provisions of the Knox-Keene Act and the rules of the Department of
Corporations within the State of California. In accordance with the Knox-Keene
Act, MPN is required to maintain a minimum amount of depository cash and
tangible net equity. Tangible net equity is computed as the greater of: (i) one
million dollars; (ii) the sum of two percent of the first $150 million of
annualized premium revenues plus one percent of annualized premium revenues in
excess of $150 million; or (iii) an amount equal to four percent of annualized
hospital expenditures paid on a managed hospital payment basis. As of December
31, 1997, MPN was in compliance with all applicable requirements of the
Knox-Keene Act.
15. RESTRUCTURING AND IMPAIRMENT CHARGES
The Company recorded a pretax charge during the fourth quarter of 1997 of
$646.7 million related primarily to the restructuring and impairment of selected
assets of certain of its clinic operations within the PPM division. Of the total
charge, $39.2 million relates to cash charges including employee and physician
severance ($17.1 million), leases ($19.0 million) and other exits costs ($3.1
million), $552.4 million relates to the impairment of goodwill, primarily in the
Southern California and Southwestern markets, and $55.1 million relates to the
write down of various assets. The impairment of goodwill and write down of other
assets are non-cash charges.
The Company has closed or is in the process of closing or disassociating
with 84 clinics. The total number of physicians affected by the closings is 238,
leaving the Company with 13,531 affiliated physicians at December 31, 1997. Many
of the closed locations are the result of combinations of adjacent or nearby
clinic locations, primarily in the Southern California market. Others are the
result of agreements with a number of MedPartners' smaller affiliated groups,
primarily in Eastern United States markets, where the economics of going forward
under the existing practice management agreements were determined to be not in
the best interest of MedPartners or the affected groups. The total number of
employees included in the severance and restructuring approximates 800.
Significant adverse changes in the Company's business climate and
operations, primarily the substantial operating loss in the fourth quarter of
1997 in the Southern California and Southwestern markets, became apparent at the
end of 1997 and continued to be evidenced by factors subsequent to year end. The
substantial operating losses and other factors led to the conclusion that there
was a permanent impairment in the recorded value of goodwill. Accordingly, the
Company wrote off $552.4 million of goodwill during the fourth quarter of 1997,
primarily related to the Southern California and Southwestern markets.
Management estimated the impairment based on an analysis of discounted cash
flows and projected operating earnings.
16. CORPORATE LIABILITY AND INSURANCE
The Company maintains professional liability insurance, general liability
and other customary insurance on a claims-made and modified occurrence basis, in
amounts deemed appropriate by management based upon
61
<PAGE> 64
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
historical claims and the nature and risks of the business, for many of the
affiliated physicians, practices and operations. The Company has accrued for or
purchased "tail" coverage for claims against the Company's affiliated medical
organizations to cover incidents which were or are incurred but not reported
during the periods for which the related risk was covered by "claims made"
insurance. There can be no assurance that a future claim will not exceed the
limits of available insurance coverage or related accrual or that such coverage
will continue to be available.
Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability insurance coverage.
Such insurance would provide coverage, subject to policy limits, in the event
the Company were held liable as a co-defendant in a lawsuit for professional
malpractice against a physician. In addition, generally, the Company is
indemnified under the practice management agreements by the affiliated physician
groups for liabilities resulting from the performance of medical services.
However, there can be no assurance that any future claim or claims will not
exceed the limits of these available insurance coverages or that indemnification
will be available for all such claims.
17. SUBSEQUENT EVENTS
On October 29, 1997, the Boards of Directors of the Company and PhyCor,
Inc. unanimously approved a definitive agreement under which PhyCor would
acquire the Company, with the Company's stockholders receiving 1.18 shares of
PhyCor common stock for each share of the Company's common stock. Extensive due
diligence was conducted on and by both companies, and after a lengthy review and
planning process, both boards determined that effective integration of the two
companies would have been extremely difficult due to significant operational and
strategic differences. The termination of the merger was approved by the Boards
of Directors of both companies on January 7, 1998.
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 customary
non-competition and non-solicitation provisions and provides that certain
expenses and costs be paid by the Company.
62
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not changed independent accountants within the twenty-four
months prior to December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
1. Financial Statements.
The Consolidated Financial Statements of the Company and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of the
Annual Report on Form 10-K, which listing is hereby incorporated herein by
reference.
2. Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Commission have been omitted because they are not required
under the related instructions, or are inapplicable, or because the information
has been provided in the consolidated financial statements or the Notes thereto.
3. Exhibits.
The Exhibits filed as a part of this Annual Report are listed in Item 14(c)
of this Annual Report on Form 10-K, which is hereby incorporated herein by
reference.
(B) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed during the fourth quarter of
1997:
(a) Current Report on Form 8-K (Item 5) filed November 3, 1997,
reporting the agreement with PhyCor, Inc. related to a proposed merger,
since terminated.
63
<PAGE> 66
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
(3)-1 -- MedPartners, Inc. Third Restated Certificate of
Incorporation, filed as Exhibit (3)-1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is hereby incorporated herein by
reference.
(3)-2 -- MedPartners, Inc. Second Amended and Restated Bylaws, filed
as Exhibit (3)-2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-12465), is hereby
incorporated herein by reference.
(4)-1 -- MedPartners, Inc. Rights Plan, filed as Exhibit (4)-1 to the
Company's Registration Statement on Form S-4 (Registration
No. 33-00774), is hereby incorporated herein by reference.
(4)-2 -- Amendment No. 1 to the Rights Plan of MedPartners, Inc.,
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 Rights Plan of MedPartners, Inc.,
filed as Exhibit (4)-2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-17339), is
hereby incorporated herein by reference.
(10)-1 -- Consulting Agreement, dated as of August 7, 1996, by and
among Caremark International Inc., MedPartners, Inc. and
C.A. Lance Piccolo, filed as Exhibit (10)-1 to the Company's
Registration Statement on Form S-4 (Registration No.
333-09767), is hereby incorporated herein by reference.
(10)-2 -- Consulting Agreement, dated as of November 29, 1995, by and
between MedPartners, Inc. and Walter T. Mullikin, M.D.,
filed as Exhibit (10)-1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-3 -- Termination Agreement, dated as of November 29, 1995, by and
between MedPartners/Mullikin, Inc. and Walter T. Mullikin,
M.D., filed as Exhibit (10)-2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-4 -- Consulting Agreement, dated as of November 29, 1995, by and
between MedPartners/Mullikin, Inc. and John S. McDonald,
filed as Exhibit (10)-3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-5 -- Termination Agreement, dated as of November 29, 1995, by and
between MedPartners/Mullikin, Inc. and John S. McDonald,
filed as Exhibit (10)-4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-1130), is hereby
incorporated herein by reference.
(10)-6 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Larry R. House, filed as Exhibit
(10)-7 to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
(10)-7 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Mark L. Wagar, filed as Exhibit (10)-8
to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
(10)-8 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Harold O. Knight, Jr., filed as
Exhibit (10)-9 to the Company's Registration Statement on
Form S-1 (Registration No. 333-12465), is hereby
incorporated herein by reference.
(10)-9 -- Employment Agreement, dated July 24, 1996, by and between
MedPartners, Inc. and Tracy P. Thrasher, filed as Exhibit
(10)-10 to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
(10)-10 -- Credit Agreement, dated September 5, 1996, by and among
MedPartners, Inc., NationsBank, National Association
(South), as administrative agent for the Lenders, The First
National Bank of Chicago, as Documentation Agent for the
Lenders, and the Lenders thereto, filed as Exhibit (10)-17
to the Company's Registration Statement on Form S-1
(Registration No. 333-12465), is hereby incorporated herein
by reference.
(10)-11 -- Amendment No. 1 to Credit Agreement and Consent, dated
September 5, 1996, by and among MedPartners, Inc.,
NationsBank, National Association (South), as Administrative
agent for the Lenders, The First National Bank of Chicago,
as Documentation Agent for the Lenders, and the Lenders
thereto, filed as Exhibit (10)-18 to the Company's
Registration Statement on Form S-1 (Registration No.
333-12465), is hereby incorporated herein by reference.
(10)-12 -- Amendment No. 2 to Credit Agreement, dated July 22, 1997 by
and between MedPartners, Inc., NationsBank, National
Association (successor by merger of NationsBank, National
Association (South)), as Administrative Agent for Lenders,
The First National Bank of Chicago, as Documentation Agent
for Lenders, and the Lenders thereto filed as Exhibit (10)-1
to the Company's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1997, is hereby incorporated
herein by reference.
(10)-13 -- Amended and Restated MedPartners, Inc. Incentive
Compensation Plan.
(10)-14 -- MedPartners, Inc. 1994 Non-Employee Director Stock Option
Plan.
(10)-15 -- MedPartners, Inc. 1994 Stock Incentive Plan.
(10)-16 -- Amended and Restated MedPartners, Inc. 1993 Stock Option
Plan.
(10)-17 -- Amended and Restated MedPartners, Inc. 1995 Stock Option
Plan.
(10)-18 -- MedPartners, Inc. 1997 Long Term Incentive Compensation
Plan.
(10)-19 -- Consent to Waiver of Sections 8.1 and 8.4(h)(1) of Credit
Agreement dated March 27, 1998, by and between MedPartners,
Inc and NationsBank, National Association, as Administrative
Agent for the Lenders.
(21) -- Subsidiaries of MedPartners, Inc.
(23) -- Consent of Ernst & Young LLP.
(27) -- Financial Data Schedule.
(99)-1 -- Schedule of Class Action Lawsuits against the Company.
</TABLE>
65
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDPARTNERS, INC.
By /s/ HAROLD O. KNIGHT, JR.
------------------------------------
Harold O. Knight, Jr.
Executive Vice President
and Chief Financial Officer
Date: March 31, 1997
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ RICHARD M. SCRUSHY Chairman of the Board March 31, 1998
- -----------------------------------------------------
Richard M. Scrushy
/s/ EDWIN M. CRAWFORD President, Chief Executive March 31, 1998
- ----------------------------------------------------- Officer and Director
Edwin M. Crawford
/s/ HAROLD O. KNIGHT, JR. Chief Financial Officer March 31, 1998
- -----------------------------------------------------
Harold O. Knight, Jr.
/s/ LARRY D. STRIPLIN, JR. Director March 31, 1998
- -----------------------------------------------------
Larry D. Striplin, Jr.
/s/ CHARLES W. NEWHALL III Director March 31, 1998
- -----------------------------------------------------
Charles W. Newhall III
/s/ TED H. MCCOURTNEY Director March 31, 1998
- -----------------------------------------------------
Ted H. McCourtney
/s/ WALTER T. MULLIKIN, M.D. Director March 31, 1998
- -----------------------------------------------------
Walter T. Mullikin, M.D.
/s/ JOHN S. MCDONALD, J.D. Director March 31, 1998
- -----------------------------------------------------
John S. McDonald, J.D.
/s/ MICHAEL D. MARTIN Director March 31, 1998
- -----------------------------------------------------
Michael D. Martin
/s/ ROSALIO J. LOPEZ, M.D. Director March 31, 1998
- -----------------------------------------------------
Rosalio J. Lopez, M.D.
/s/ C.A. LANCE PICCOLO Director March 31, 1998
- -----------------------------------------------------
C.A. Lance Piccolo
</TABLE>
66
<PAGE> 69
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ ROGER L. HEADRICK Director March 31, 1998
- -----------------------------------------------------
Roger L. Headrick
/s/ HARRY M. JANSEN KRAEMER, JR. Director March 31, 1998
- -----------------------------------------------------
Harry M. Jansen Kraemer, Jr.
</TABLE>
67
<PAGE> 1
EXHIBIT (10)-13
AMENDED AND RESTATED
MEDPARTNERS, INC. INCENTIVE COMPENSATION PLAN
The Amended and Restated MedPartners, Inc. Incentive Compensation Plan (the
"Incentive Compensation Plan") is the result of the assumption and adoption by
MedPartners, Inc., a Delaware corporation, of the Caremark International Inc.
1992 Incentive Compensation Plan (the "Caremark Plan"), pursuant to the
provisions of that certain Plan and Agreement of Merger, dated as of May 13,
1996, by and among MedPartners, Inc., PPM Merger Corporation and Caremark
International Inc.
1. PURPOSE
The purpose of this Incentive Compensation Plan is to increase stockholder value
and to advance the interests of MedPartners, Inc. and its subsidiaries
(collectively, "MedPartners" or the "Company") by awarding equity and
performance based incentives designed to attract, retain and motivate employees.
As used in this Incentive Compensation Plan, the term "subsidiary" means any
business, whether or not incorporated, in which MedPartners has an ownership
interest.
2. ADMINISTRATION
2.1 ADMINISTRATION BY THE COMMITTEE.
The Incentive Compensation Plan shall be administered by the Compensation
Committee of the Board of Directors of MedPartners or by any other committee
appointed by the Board of Directors of MedPartners (the "Committee"), which
Committee shall consist solely of two or more Non- Employee Directors
("Non-Employee Directors") as such are defined in Rule 16b-3 promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any successor provision.
2.2 AUTHORITY.
Subject to the provisions of this Incentive Compensation Plan, the Committee
shall have the authority to:
(a) manage and control the operation of this Incentive
Compensation Plan;
(b) interpret and construe the provisions of this Incentive
Compensation Plan, and prescribe, amend and rescind rules and regulations
relating to this Incentive Compensation Plan;
<PAGE> 2
(c) make awards under this Incentive Compensation Plan, in such
forms and amounts and subject to such restrictions, limitations and conditions
as it deems appropriate, including, without limitation, awards which are made in
combination with or in tandem with other awards (whether or not
contemporaneously granted) or compensation in lieu of current or deferred
compensation;
(d) modify the terms of, cancel and reissue, or repurchase
outstanding awards;
(e) prescribe the form of agreement, certificate, or other
instrument evidencing any award under this Incentive Compensation Plan;
(f) correct any defect or omission and reconcile any inconsistency
in this Incentive Compensation Plan or in any award hereunder; and
(g) make all other determinations and take all other actions as it
deems necessary or desirable for the implementation and administration of this
Incentive Compensation Plan.
The determination of the Committee on matters within its authority shall be
conclusive and binding on MedPartners and all other persons.
3. PARTICIPATION
Subject to the terms and conditions of this Incentive Compensation Plan, the
Committee shall determine and designate from time to time the employees,
directors and consultants of MedPartners who shall receive awards under this
Incentive Compensation Plan ("Participants").
4. SHARES SUBJECT TO THE INCENTIVE COMPENSATION PLAN
4.1 NUMBER OF SHARES RESERVED.
Shares of common stock, $.001 par value per share, of MedPartners ("Common
Stock") shall be available for awards under this Incentive Compensation Plan. To
the extent provided by resolution of the Committee, such shares may be
uncertificated. Subject to adjustment in accordance with Sections 4.2 and 4.3,
the aggregate number of shares of Common Stock available for awards under this
Incentive Compensation Plan shall be 13,771,964 shares.
4.2 REUSAGE OF SHARES.
(a) In the event of the exercise or termination (by reason of
forfeiture, expiration, cancellation, surrender or otherwise) of any award under
this Incentive Compensation Plan, that
- 2 -
<PAGE> 3
number of shares of Common Stock that was subject to the award but not delivered
to the Participant shall again be available for awards under this Incentive
Compensation Plan.
(b) In the event that shares of Common Stock are delivered under
this Incentive Compensation Plan as Restricted Stock, as described in Section 6
hereof, or pursuant to a stock award and are thereafter forfeited or reacquired
by the Company pursuant to rights reserved upon the award thereof, such
forfeited or reacquired shares shall again be available for awards under this
Incentive Compensation Plan.
(c) Notwithstanding the provisions of paragraphs (a) or (b) of
this Section 4.2, the following shares shall not be available for reissuance
under this Incentive Compensation Plan: (i) shares with respect to which the
Participant has received the benefits of ownership (other than voting rights),
either in the form of dividends or otherwise; (ii) shares which are withheld
from any award or payment under this Incentive Compensation Plan to satisfy tax
withholding obligations (as described in Section 7.5(e)); (iii) shares which are
surrendered to fulfill tax obligations (as described in Section 7.5(e)); and
(iv) shares which are surrendered in payment of the Option Price (as defined in
Section 5.2) upon the exercise of a Stock Option, as described in Section 5
hereof.
4.3 ADJUSTMENTS TO SHARES RESERVED.
In the event of any merger, consolidation, reorganization, recapitalization,
spin-off, stock divi dend, stock split, reverse stock split, exchange or other
distribution with respect to shares of Common Stock or other change in the
corporate structure or capitalization affecting the Common Stock, the type and
number of shares of stock which are or may be subject to awards under this
Incentive Compensation Plan and the terms of any outstanding awards (including
the price at which shares of stock may be issued pursuant to an outstanding
award) shall be equitably adjusted by the Committee, in its sole discretion, to
preserve the value of benefits awarded or to be awarded to Participants under
this Incentive Compensation Plan.
5. STOCK OPTIONS
5.1 AWARDS.
Subject to the terms and conditions of this Incentive Compensation Plan, the
Committee shall designate the employees to whom options to purchase shares of
Common Stock ("Stock Options") are to be awarded under this Incentive
Compensation Plan and shall determine the number, type and terms of the Stock
Options to be awarded to each of them; provided, however, that each Stock Option
designated as an "Incentive Stock Option" (as defined below) shall expire on the
earlier of the date provided by the option terms or the date which is ten years
after the date of grant. In addition, each Stock Option awarded to any person
who owns, directly or indirectly (or is treated as owning by reason of
attribution rules, currently set forth in Section 424 of the Internal Revenue
Code of 1986, as amended (the "Code")), stock of the Company constituting more
than 10% of
- 3 -
<PAGE> 4
the total combined voting power of the Company's outstanding stock, or the stock
of any of its corporate subsidiaries, shall expire on the earlier of the date
provided by the option terms or the date which is five years after the date of
the grant. Each Stock Option awarded under this Incentive Compensation Plan
shall be a "nonqualified stock option" for tax purposes, unless the Stock Option
satisfies all of the requirements of Section 422 of the Code and the Committee
designates such Stock Option as an "Incentive Stock Option".
5.2 MANNER OF EXERCISE.
A Stock Option may be exercised, in whole or in part, by giving proper
notification to the Corporate Secretary of MedPartners prior to the date on
which the Stock Option expires; provided, however, that a Stock Option may only
be exercised with respect to whole shares of Common Stock. Such notice shall
specify the number of shares of Common Stock to be purchased and shall be
accompanied by payment of the Option Price for such shares (the "Option Price").
The Option Price of a Stock Option shall be determined in accordance with the
applicable provisions of the Code and shall in no event be less than the Fair
Market Value (as defined in Section 7.11) of the stock covered by the Stock
Option at the date of the grant; provided, however, that the Option Price of a
Stock Option granted to any person who owns, directly or indirectly (or is
treated as owning by reason of attribution rules, currently set forth in Section
424 of the Code), stock of the Company constituting more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or of
any affiliate of the Company, shall in no event be less than 110% of such Fair
Market Value.
5.3 PAYMENT OF OPTION PRICE.
No shares of Common Stock shall be issued on the exercise of a Stock Option
unless paid for in full at the time of exercise. Payment of the Option Price
shall be made in cash, which may be paid by check 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
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 a Stock Option by use of proceeds to be received from the sale of
Common Stock issuable pursuant to the Stock Option being exercised.
6. RESTRICTED STOCK
6.1 AWARDS.
Subject to the terms and conditions of this Incentive Compensation Plan, the
Committee shall designate the Participants to whom shares of "Restricted Stock"
shall be awarded under this Incentive Compensation Plan and determine the number
of shares and the terms and conditions of
- 4 -
<PAGE> 5
each such award; provided, however, that newly issued shares shall be issued as
Restricted Stock only to the extent that the Committee determines that past
services of the Participant constitute adequate consideration for at least the
par value thereof. Each Restricted Stock award shall entitle the Participant to
receive shares of Common Stock upon the terms and conditions specified by the
Committee and subject to the following provisions of this Section 6.
6.2 RESTRICTIONS.
All shares of Restricted Stock transferred or sold hereunder shall be subject to
such restrictions as the Committee may determine, including, without limitation,
any or all of the following:
(a) a required period of employment with the Company, as
determined by the Committee, prior to the vesting of the shares of Restricted
Stock;
(b) a prohibition against the sale, assignment, transfer, pledge,
hypothecation or other encumbrance of the shares of Restricted Stock for a
specified period as determined by the Committee;
(c) a requirement that the holder of shares of Restricted Stock
forfeit (or in the case of shares sold to a Participant, resell back to the
Company at his cost) all or a part of such shares in the event of termination
of his employment during any period in which such shares are subject to
restrictions; and
(d) a prohibition against employment of the holder of such
Restricted Stock by any competitor of the Company or against such holder's
dissemination of any secret or confidential information belonging to the
Company.
All restrictions on shares of Restricted Stock awarded pursuant to this
Incentive Compensation Plan shall expire at such time or times as the Committee
shall specify.
6.3 REGISTRATION OF SHARES.
Shares of Restricted Stock awarded pursuant to this Incentive Compensation Plan
shall be registered in the name of the Participant and, if such shares are
certificated, at the discretion of the Committee, may be deposited in a bank
designated by the Committee or with MedPartners. The Committee may require a
stock power endorsed in blank with respect to shares of Restricted Stock whether
or not certificated.
6.4 STOCKHOLDER RIGHTS.
Subject to the terms and conditions of this Incentive Compensation Plan, during
any period in which shares of Restricted Stock are subject to forfeiture or
restrictions on transfer, each Participant who has been awarded shares of
Restricted Stock shall have such rights of a
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stockholder with respect to such shares as the Committee may designate at the
time of the award, including the right to vote such shares and the right to
receive all dividends paid on such shares. Unless otherwise provided by the
Committee, stock dividends or dividends in kind and, except as otherwise
provided by Section 7.10, any other securities distributed with respect to
Restricted Stock shall be restricted to the same extent and subject to the same
terms and conditions as the Restricted Stock to which they are attributable.
6.5 LAPSE OF RESTRICTIONS.
Subject to the terms and conditions of this Incentive Compensation Plan, at the
end of any time period during which the shares of Restricted Stock are subject
to forfeiture or restrictions on transfer, such shares will be delivered free of
all restrictions to the Participant (or to the Participant's legal
representative, beneficiary or heir).
6.6 SUBSTITUTION OF CASH.
The Committee may, in its sole discretion, substitute cash equal to the Fair
Market Value (as described in Section 7.11) (determined as of the date of the
distribution) of shares of Common Stock otherwise required to be distributed to
a Participant in accordance with this Section 6.
7. GENERAL
7.1 EFFECTIVE DATE.
This Incentive Compensation Plan became effective the date that the Caremark
Plan was adopted by the Board of Directors of the former parent corporation of
Caremark International Inc.
7.2 DURATION.
This Incentive Compensation Plan shall remain in force and effect until all
awards made under this Incentive Compensation Plan have either been satisfied by
the issuance of shares of Common Stock or the payment of cash or been terminated
in accordance with the terms of this Incentive Compensation Plan or the award
and until all restrictions imposed on shares of Common Stock issued under this
Incentive Compensation Plan have lapsed. No Incentive Stock Option award may be
made under this Incentive Compensation Plan after the tenth anniversary of the
date that the Caremark Plan was adopted by the Board of Directors of the former
parent corporation of Caremark International Inc.
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7.3 NON-TRANSFERABILITY OF INCENTIVES.
(a) No share of Restricted Stock under this Incentive Compensation
Plan may be transferred, pledged or assigned by the holder thereof (except, in
the event of the holder's death, by will or the laws of descent and
distribution), and the Company shall not be required to recognize any attempted
assignment of such rights by any Participant. During a Participant's lifetime,
awards may be exercised only by him or by his guardian or legal representative.
(b) (1) Incentive Stock Options. No Incentive Stock Option
granted under the Plan may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than by will or by the laws of descent and
distribution. Further, all Incentive Stock Options granted to a Participant
under the Plan shall be exercisable during his or her lifetime only by such
Participant.
(2) Nonqualified Stock Options. The Committee may, in its
discretion, authorize all or a portion of nonqualified stock options granted to
a Participant to be on terms which permit transfer by such Participant to (i)
the spouse, children or grandchildren of the Participant ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, provided that (x) there may be no consideration for any
such transfer, (y) the award agreement pursuant to which such nonqualified stock
options are granted must be approved by the Committee, and must expressly
provide for transferability in a manner consistent with this Section, and (z)
subsequent transfers of transferred nonqualified stock options shall be
prohibited except those by will or the laws of descent and distribution.
Following transfer, any such nonqualified stock 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 at Section 7.4. Notwithstanding the foregoing, should
the Committee provide that nonqualified stock 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 nonqualified stock 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 nonqualified stock options.
7.4 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.
(a) If Participant's association with the Company as an officer,
director, consultant or employee is terminated with cause during the term of any
Stock Option granted pursuant to this Incentive Compensation Plan, such Stock
Option shall cease to be exercisable on the date of such termination.
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(b) If Participant's association with the Company as an officer,
director, consultant or employee is terminated without cause during the term of
any Stock Option granted pursuant to this Incentive Compensation such Stock
Option shall expire ninety days after the date of such termination.
(c) Notwithstanding the foregoing, if termination is due to the
permanent disability or death of Participant, Participant's personal
representative or any other person who acquires option rights from Participant
by will or the applicable laws of descent and distribution, may, within twelve
(12) months after the date of termination, but in no event later than the
expiration date specified pursuant to Section 2, exercise such option rights to
the extent they were exercisable on the date of termination.
7.5 COMPLIANCE WITH APPLICABLE LAW AND WITHHOLDING.
(a) Notwithstanding any other provision of this Incentive
Compensation Plan, MedPartners shall have no obligation to issue any shares of
Common Stock under this Incentive Compensation Plan if such issuance would
violate any applicable law or any applicable regulation or requirement of any
securities exchange or similar entity.
(b) Prior to the issuance of any shares of Common Stock under this
Incentive Compensation Plan, MedPartners or the Company may require a written
statement that the recipient is acquiring the shares for investment and not for
the purpose or with the intention of distributing the shares and will not
dispose of them in violation of the registration requirements of the Securities
Act of 1933.
(c) With respect to any person who is subject to Section 16(a) of
the Exchange Act, the Committee may, at any time, add such conditions and
limitations to any award under this Incentive Compensation Plan that it deems
necessary or desirable to comply with the requirements of Rule 16b-3.
(d) If, at any time, MedPartners, in its sole discretion,
determines that the listing, registration or qualification (or any updating of
any such document) of any type of award, or the shares of Common Stock issuable
pursuant thereto, is necessary on any securities exchange or under any federal
or state securities or blue sky law, or that the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, any award, the issuance of shares of Common Stock pursuant to
any award, or the removal of any restrictions imposed on shares subject to an
award, such award shall not be made and the shares of Common Stock shall not be
issued or such restrictions shall not be removed, as the case may be, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to MedPartners.
(e) All awards and payments under this Incentive Compensation Plan
are subject to withholding of all applicable taxes and the Company shall have
the right to withhold from any
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<PAGE> 9
award under this Incentive Compensation Plan or to collect as a condition of any
payment under this Incentive Compensation Plan, as applicable, any taxes
required by law to be withheld. To the extent provided by the Committee, a
Participant may elect to have any distribution otherwise required to be made
under this Incentive Compensation 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.
7.6 NO CONTINUED EMPLOYMENT.
The Incentive Compensation Plan does not constitute a contract of employment or
continued service, and participation in this Incentive Compensation Plan will
not give any employee or Participant the right to be retained in the employ of
the Company or the right to continue as a director of the Company or any right
or claim to any benefit under this Incentive Compensation Plan unless such right
or claim has specifically accrued under the terms of this Incentive Compensation
Plan or the terms of any award under this Incentive Compensation Plan.
7.7 TREATMENT AS A STOCKHOLDER.
Any award to a Participant under this Incentive Compensation Plan shall not
create any rights in such Participant as a stockholder of MedPartners until
shares of Common Stock are registered in the name of the Participant.
7.8 DEFERRAL PERMITTED.
Payment of cash to a Participant or distribution of any shares of Common Stock
to which a Participant is entitled under any award shall be made as provided in
the terms of the award. Payment may be deferred at the option of the Participant
to the extent provided in the award.
7.9 AMENDMENT OF THE INCENTIVE COMPENSATION PLAN.
The Committee may, at any time and in any manner, amend, suspend, or terminate
this Incentive Compensation Plan or any award outstanding under this Incentive
Compensation Plan; provided, however, that no such amendment or discontinuance
shall:
(a) be made without stockholder approval: (1) to the extent such
approval is required by law, agreement or the rules of any exchange or automated
quotation system upon which the Common Stock is listed or quoted or (2) to the
extent that any outstanding Stock Option is canceled and regranted or repriced;
(b) adversely alter or impair the rights of Participants with
respect to awards previously made under this Incentive Compensation Plan without
the consent of the holder thereof; or
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<PAGE> 10
(c) make any change that would disqualify any provision of this
Incentive Compensation Plan, intended to be so qualified, from the exemption
provided by Rule 16b-3.
7.10 IMMEDIATE ACCELERATION OF INCENTIVES.
Notwithstanding any provision in this Incentive Compensation Plan to the
contrary or the normal terms of vesting under any award:
(a) the restrictions on all shares of Restricted Stock awarded
shall lapse immediately;
(b) all outstanding Stock Options will become exercisable
immediately if a Change in Control (as defined below) occurs. For purposes of
this Incentive Compensation Plan, a "Change in Control" shall have occurred if:
(1) any "Person," as such term is used in Section 13(d)
and 14(d) of the Exchange Act (other than MedPartners, any corporation owned,
directly or indirectly, by the stockholders of MedPartners in substantially the
same proportions as their ownership of stock of MedPartners, and any trustee or
other fiduciary holding securities under an employee benefit plan of MedPartners
or such proportionately owned corporation), is or becomes the "beneficial owner"
(as defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of MedPartners representing 15% or more of the
combined voting power of MedPartners's then outstanding securities having the
right to vote for the election of directors;
(2) during any 24-month period, individuals who at the
beginning of such period constitute the Board of Directors, and any new director
(other than a director designated by a Person who has entered into an agreement
with MedPartners to effect a transaction described in paragraph (1), (3) or (4)
of this Section 7.10) whose election by the Board of Directors or nomination for
election by MedPartners's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
thereof;
(3) the stockholders of MedPartners approve a merger or
consolidation of MedPartners with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of MedPartners
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 60% of the combined voting power of the voting
securities of MedPartners or such surviving entity outstanding immediately after
such merger or consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of MedPartners (or similar transaction) in which no
Person acquires more than 15% of MedPartners's then outstanding securities
having the right to vote for the election of directors; or
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(4) the stockholders of MedPartners approve a plan of
complete liquidation of MedPartners or an agreement for the sale or disposition
by MedPartners of all or substantially all of MedPartners's assets (or any
transaction having a similar effect).
7.11 DEFINITION OF 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).
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EXHIBIT (10)-14
MEDPARTNERS, INC.
1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The MedPartners, Inc. 1994 Non-Employee Director Stock Option Plan is the result
of the assumption and adoption by MedPartners, Inc., a Delaware corporation, of
the InPhyNet Medical Management Inc. 1994 Non-Employee Director Stock Option
Plan, pursuant to the provisions of that certain Plan and Agreement of Merger,
dated as of June 26, 1997, by and among MedPartners Inc. and InPhyNet Medical
Management Inc.
1. Purpose. The MedPartners, Inc. 1994 Non-Employee Director Stock Option
Plan (the "Plan") is intended to promote the interests of MedPartners, Inc. (the
"Company") by providing an inducement to obtain and retain the services of
qualified persons who are neither employees nor officers of the Company or any
affiliate to serve as members of the Board of Directors of the Company (the
"Board") and to provide for a portion of their annual compensation to be tied
directly to shareholder return.
2. Rights to be Granted. Under the Plan, options are granted that give an
optionee the right for a specified time period to purchase a specified number of
shares of common stock, par value $.001, of the Company (the "Common Stock").
The option price is determined in each instance in accordance with the terms of
the Plan. Options granted under the Plan are not intended to be "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
3. Available Shares. The total number of shares of Common Stock for which
options may be granted shall not exceed 236,000, subject to adjustment in
accordance with Section 13 hereof. Shares subject to the Plan are authorized but
unissued shares or shares that were once issued and subsequently reacquired by
the Company. If any options granted under the Plan are surrendered before
exercise or lapse without exercise, in whole or in part, the shares reserved
therefor revert to the option pool and continue to be available for grant under
the Plan.
4. Administration. The Plan shall be administered by the Compensation
Committee of the Board or by any other Committee appointed by the Board (the
"Committee"). The Committee shall, subject to the provisions of the Plan, have
the power to construe the Plan, to determine all questions thereunder, and to
adopt and amend such rules and regulations for the administration of the Plan as
it may deem desirable.
5. Option Agreement. Each option granted under the provisions of the Plan
shall be evidenced by an Option Agreement, in such form as may be approved by
the Board or Committee, which Agreement shall be duly executed and delivered on
behalf of the Company and by the individual to whom such option is granted. The
Agreement shall contain such terms, provisions, and conditions not inconsistent
with the Plan as may be determined by the Committee.
<PAGE> 2
6. Eligibility and Limitations. Options may be granted pursuant to the
Plan only to members of the Board who are not employees of the Company or an
affiliate at the time of grant ("Non-Employee Directors").
7. Option Price. The purchase price of the Common Stock under each option
shall be the "Fair Market Value" of the Common Stock on the date of grant.
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).
8. Automatic Grant of Options. When any person first becomes a
Non-Employee Director, such person shall be granted an option to purchase 10,000
shares of Common Stock during the first quarter of the calendar year following
the date such person becomes a Non-Employee Director. Thereafter, for the
remainder of the term of the Plan and provided he or she remains a director of
the Company, during the first quarter of each successive calendar year, each
Non-Employee Director shall be granted an option to purchase 2,500 shares of
Common Stock of the Company.
9. Term of Plan and Options. The options granted hereunder shall expire on
a date which is ten years after the date of grant of the options and the Plan
shall terminate on May 7, 2004.
10. Exercise of Option. Options shall be exercised by the delivery to the
Company at its principal office or at such other address as may be established
by the Committee (Attention: Corporate Secretary) of proper notification of the
number of shares of Common Stock with respect to which the option is being
exercised accompanied by payment in full of the purchase price of such shares.
Unless otherwise determined by the Committee at the time of grant, payment for
such shares may be made (i) in cash, (ii) by certified check or bank cashier's
check payable to the order of the Company in the amount of such purchase price,
(iii) by delivery to the Company of Common Stock having a Fair Market Value
equal to such purchase price, (iv) by irrevocable instruction to a broker to
deliver promptly to the Company the amount of sale or loan proceeds necessary to
pay such purchase price and to sell the Common Stock to be issued upon exercise
of the Option and deliver the cash proceeds less commissions and brokerage fees
to the optionee or to deliver the remaining shares of the Common Stock to the
optionee, or (v) by any combination of the methods of payment described in (i)
through (iv) above. Except as provided in Section 12 hereof, no option may be
exercised unless the holder thereof is then a director of the Company. An option
holder shall have none of the rights of a stockholder with respect to the
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<PAGE> 3
Common Stock subject to the option until such Common Stock shall be transferred
to the holder upon the exercise of his option.
11. Non-Transferability of Options.
(a) Legend on Certificates. The certificates representing shares of Common
Stock acquired under the Plan shall carry such appropriate legend, and such
written instructions shall be given to the Company's transfer agent, as may be
deemed necessary or advisable by counsel to the Company in order to comply with
the requirements of the Securities Act of 1933 or any state securities laws.
(b) Non-Transferability. Options granted pursuant to the Plan shall not be
assignable or transferable other than by will or the laws of descent and
distribution, and shall be exercisable during an optionee's lifetime only by
him.
12. Termination of Option Rights.
(a) If the optionee's association with the Company as director is
terminated with cause during the term of any option granted pursuant to this
Plan, such Option shall cease to be exercisable on the date of such termination.
(b) If the optionee's association with the Company as director is
terminated without cause during the term of any option granted pursuant to this
Plan, such option shall expire ninety days after the date of such termination.
(c) Notwithstanding the foregoing, if termination is due to the permanent
disability or death of optionee, optionee's personal representative or any other
person who acquires option first from optionee by will or the applicable laws of
descent and distribution, may, within twelve months after the date of
termination, but in no event later than the expiration date specified pursuant
to Section 9, exercise such option rights to the extent they were exercisable on
the date of termination.
13. Adjustments Upon Changes in Capitalization and Other Matters. Options
and any agreements evidencing such options shall be subject to adjustment or
substitution, as determined by the Committee in its sole discretion, as to the
number, price or kind of a share of Common Stock or other consideration subject
to such options or as otherwise determined by the Committee to be equitable (i)
in the event of changes in the outstanding Common Stock or in the capital
structure of the Company, by reason of stock dividends, stock splits,
recapitalization, reorganizations, mergers, consolidations, combinations,
exchanges, or other relevant changes in capitalization occurring after the date
of grant of any such option or (ii) in the event of any change in applicable
laws or any change in circumstances which results in or would result in any
substantial dilution or enlargement of the rights granted to, or available for,
Non-Employee Directors, or which otherwise warrants equitable adjustment because
it interferes with the intended
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<PAGE> 4
operation of the Plan. In addition, in the event of any such adjustments or
substitution, the aggregate number of shares of Common Stock available under the
Plan shall be appropriately adjusted by the Committee, whose determination shall
be conclusive. Any adjustment under this Section 13 shall be made in a manner
which does not adversely affect the exemption provided pursuant to Rule 16b-3
under the Exchange Act. The Company shall give each Non-Employee Director notice
of an adjustment hereunder and, upon notice, such adjustment shall be conclusive
and binding for all purposes.
14. Effect of Change in Control.
(a) In the event of a Change in Control (as defined below), notwithstanding
any vesting schedule provided for hereunder or by the Committee with respect to
an award of options, such options shall become immediately exercisable with
respect to 100% of the shares subject to such option.
(b) "Change in Control" shall, unless the Board otherwise directs by
resolution adopted prior thereto, be deemed to occur if (i) any "person" (as
that term is used in Sections 13 and 14(d)(2) of the Securities Exchange Act of
1934, as amended ("Exchange Act")), is or becomes the beneficial owner (as that
term is used in Section 13(d) of the Exchange Act), directly or indirectly, of
50% or more of the voting Stock or (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board
cease for any reason to constitute at least a majority thereof, unless the
election or the nomination for election by the Company's stockholders of each
new director was approved by a vote of at least one-half of the directors still
in office who were directors at the beginning of the period. Any merger,
consolidation or corporate reorganization in which the owners of the Company's
capital stock entitled to vote in the election of directors ("Voting Stock")
prior to said combination, own 50% or more of the resulting entity's Voting
Stock shall not, by itself, be considered a Change in Control.
(c) The obligations of the Company under the Plan shall be binding upon any
successor corporation or organization resulting from the merger, consolidation
or other reorganization of the Company, or upon any successor corporation or
organization succeeding to substantially all of the assets and business of the
Company. The Company agrees that it will make appropriate provisions for the
preservation of Participant's rights under the Plan in any agreement or plan
which it may enter into or adopt to effect any such merger, consolidation,
reorganization or transfer of assets.
15. Restrictions on Issuance of Shares. Notwithstanding the provisions of
Section 10 hereof, the Company shall have no obligation to deliver any
certificate or certificates upon exercise of an option until the following
conditions shall be satisfied:
(a) The shares with respect to which the option has been exercised are at
the time of the issue of such shares effectively registered under applicable
federal and state securities acts as now in force or hereafter amended; or
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<PAGE> 5
(b) Counsel for the Company shall have given an opinion that such shares
are exempt from registration under federal and state securities acts as now in
force or hereafter amended;
and the Company has complied with all applicable laws and regulations, including
without limitation all regulations required by any stock exchange upon which the
Common Stock are then listed.
The Company shall use its best efforts to bring about compliance with the above
conditions within a reasonable time, except that the Company shall be under no
obligation to cause a registration statement or a post-effective amendment to
any registration statement to be prepared at its expense solely for the purpose
of covering the issue of shares in respect of which any option may be exercised.
16. Representation of Optionee. The Company may require the optionee to
deliver written warranties and representations upon exercise of the option that
are necessary to show compliance with federal and state securities laws
including to the effect that a purchase of shares under the option is made for
investment and not with a view to their distribution (as that term is used in
the Securities Act of 1933).
17. Withholding and Employment Taxes. At the time of exercise of an Option,
the optionee shall remit to the Company in cash all applicable federal and state
withholding and employment taxes. If and to the extent authorized and approved
by the Committee in its sole discretion, an optionee may elect, by means of a
form of election to be prescribed by the Committee, to have shares which are
acquired upon exercise of an Option withheld by the Company or tender other
shares of Common Stock or other securities of the Company owned by the optionee
to the Company at the time the amount of such taxes is determined in order to
pay the amount of such tax obligations, subject to the following limitations:
(a) such election shall be irrevocable;
(b) such election shall be subject to the disapproval of the Committee at
any time.
Any Common Stock or other securities so withheld or tendered will be valued by
the Company as of the date they are withheld or tendered. Unless the Committee
otherwise determines, the optionee shall pay to the Company in cash, promptly
when the amount of such obligations become determinable, all applicable federal
and state withholding taxes resulting from the lapse of restrictions imposed on
exercise of an Option, from a transfer or other disposition of shares acquired
upon exercise of an Option or otherwise related to the Option or the shares
acquired upon exercise of the Option.
18. Termination and Amendment of Plan. The Committee may at any time
terminate the Plan or make such modification or amendment thereof as it deems
advisable, provided, however, that (i) the Committee may not, without approval
by the affirmative vote of the holders of a majority
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of the shares present in person or by proxy and entitled to vote at the meeting,
(a) increase the maximum number of shares for which options may be granted under
the Plan or the number of shares for which an option may be granted to any
Non-Employee Director hereunder; (b) change the provisions of the Plan regarding
the termination of the options or the time when they may be exercised; (c)
change the period during which any options may be granted or remain outstanding
or the date on which the Plan shall terminate; (d) change the designation of the
class of persons eligible to receive options; (e) change the price at which
options are to be granted; or (f) materially increase benefits accruing to
option holders under the Plan. Termination or any modification or amendment of
the Plan shall not, without consent of a Non-Employee Director, affect his
rights under an option previously granted to him.
* * *
As adopted by the Committee
by unanimous written
consent as of June 27, 1997
6
<PAGE> 1
EXHIBIT (10)-15
MEDPARTNERS, INC.
1994 STOCK INCENTIVE PLAN
The MedPartners, Inc. 1994 Stock Incentive Plan is the result of the assumption
and adoption by MedPartners, Inc., a Delaware corporation, of the 1994 Stock
Incentive Plan of InPhyNet Medical Management Inc., pursuant to the provisions
of that certain Plan and Agreement of Merger, dated as of June 26, 1997, by and
among MedPartners Inc. and InPhyNet Medical Management Inc.
1. PURPOSE.
The purpose of the MedPartners, Inc. 1994 Stock Incentive Plan (the "Plan") is
to provide a means through which the Company and its Subsidiaries and Affiliates
may attract able persons to enter and remain in the employ of the Company and
its Subsidiaries and Affiliates, and to provide a means whereby those key
persons upon whom the responsibilities of the successful administration and
management of the Company rest, and whose present and potential contributions to
the welfare of the Company are of importance, can acquire and maintain stock
ownership, thereby strengthening their commitment to the welfare of the Company
and promoting an identity of interest between stockholders and these key
persons.
A further purpose of the Plan is to provide such key persons with additional
incentive and reward opportunities designed to enhance the profitable growth of
the Company. So that the appropriate incentive can be provided, the Plan
provides for granting Incentive Stock Options, Nonqualified Stock Options,
Restricted Stock Awards, or any combination of the foregoing.
2. DEFINITIONS.
The following definitions shall be applicable throughout the Plan.
"Affiliate" means any affiliate of the Company within the meaning of 17
CFR ss. 230.405.
"Award" means, individually or collectively, any Incentive Stock
Option, Nonqualified Stock Option or Restricted Stock Award.
"Board" means the Board of Directors of the Company.
"Cause" means the Company, a Subsidiary or an Affiliate having cause to
terminate a Participant's employment under any existing employment agreement
between the Participant and the Company, a Subsidiary or an Affiliate or, in the
absence of such an employment agreement, upon (i) the determination by the
Committee that the Participant has ceased to perform his duties to the Company,
or a Subsidiary or an Affiliate (other than as a result of his incapacity due to
physical or mental illness or injury), which failure amounts to an intentional
and extended neglect of his duties to such party, (ii) the Committee's
determination that the Participant has engaged or
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is about to engage in conduct materially injurious to the Company, or a
Subsidiary or an Affiliate, or (iii) the Participant having been convicted of a
felony.
"Change in Control" shall, unless the Board otherwise directs by
resolution adopted prior thereto, be deemed to occur if (i) any "person" (as
that term is used in Sections 13 and 14(d)(2) of the Securities and Exchange Act
of 1934 ("Exchange Act")) is or becomes the beneficial owner (as that term is
used in Section 13(d) of the Exchange Act), directly or indirectly, of 25% or
more of the voting Stock or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election or the
nomination for election by the Company's stockholders of each new director was
approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period. Any merger,
consolidation or corporate reorganization in which the owners of the Company's
capital stock entitled to vote in the election of directors ("Voting Stock")
prior to said combination, own 50% or more of the resulting entity's Voting
Stock shall not, by itself, be considered a Change in Control.
"Code" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to such section and any regulations under such section.
"Committee" means the Compensation Committee of the Board or such other
committee as the Board may appoint to administer the Plan.
"Common Stock" means the common stock, par value $.001 per share, of
the Company.
"Company" means MedPartners, Inc.
"Date of Grant" means the date on which the granting of an Award is
authorized or such other date as may be specified in such authorization.
"Disability" means the complete and permanent inability by reason of
illness or accident to perform the duties of the occupation at which a
Participant was employed when such disability commenced or, if the Participant
was retired when such disability commenced, the inability to engage in any
substantial gainful activity, as determined by the Committee based upon medical
evidence acceptable to it.
"Eligible Employee" means any person regularly employed by the Company
or a Subsidiary or Affiliate on a full-time salaried basis, and any independent
contractor of the Company or a Subsidiary or Affiliate, who satisfies all of
the requirements of Section 6.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Fair Market Value" means, except as otherwise determined by the
Committee, an amount 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).
"Holder" means a Participant who has been granted an Option or a
Restricted Stock Award.
"Incentive Stock Option" means an Option granted by the Committee to a
Participant under the Plan which is designated by the Committee as an Incentive
Stock Option pursuant to Section 422 of the Code.
"Non-Employee Director" means a Director of the Company who (i) is not
currently an officer or employee of the Company or any Subsidiary of the
Company; (ii) does not directly or indirectly receive any compensation from the
Company or any Subsidiary for services rendered as a consultant or in any other
non-director capacity that would exceed the $60,000 threshold for which
disclosure would be required under Item 404(a) of Regulation S-K; (iii) does not
possess an interest in any other transaction for which disclosure would be
required under Item 404(a) of Regulation S-K; and (iv) is not engaged in a
business relationship with the Company which would be disclosable under Item
404(b) of Regulation S-K.
"Nonqualified Stock Option" means an Option granted by the Committee to
a Participant under the Plan which is not designated by the Committee as an
Incentive Stock Option.
"Normal Termination" means termination:
(i) with respect to the Company or a Subsidiary, at
retirement (excluding early retirement) pursuant to the Company retirement plan
then in effect;
(ii) with respect to an Affiliate, at retirement
(excluding early retirement) pursuant to the retirement plan of such Affiliate
then in effect or, if the Affiliate has no such plan, at retirement upon or
after the attainment of age 65;
(iii) on account of Disability;
(iv) with the written approval of the Committee; or
(v) by the Company, a Subsidiary or Affiliate without
Cause.
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"Option" means an Award granted under Section 7 of the Plan.
"Option Period" means the period described in Section 7(c).
"Participant" means an Eligible Employee who has been selected to
participate in the Plan and to receive an Award pursuant to Section 6.
"Plan" means the MedPartners, Inc. 1994 Stock Incentive Plan.
"Reporting Company" means the Company.
"Restricted Period" means, with respect to any share of Restricted
Stock, the period of time determined by the Committee during which such share of
Restricted Stock is subject to the restrictions set forth in Section 8.
"Restricted Stock" means shares of Common Stock issued or transferred
to a Participant subject to the restrictions set forth in Section 8 and any new,
additional or different securities a Participant may become entitled to receive
as a result of adjustments made pursuant to Section 10.
"Restricted Stock Award" means an Award granted under Section 8 of the
Plan.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock" means the Common Stock or such other authorized shares of stock
the Company as the Committee may from time to time authorize for use under the
Plan.
"Subsidiary" means any subsidiary of the Company as defined in Section
424(f) of the Code.
3. EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL.
The Plan became effective on May 7, 1994, and no further Awards may be made
after May 7, 2004.
The Plan shall continue in effect until all matters relating to the payment of
Awards and administration of the Plan have been settled.
4. ADMINISTRATION.
The Committee shall administer the Plan. Each member of the Committee shall, at
the time he takes any action with respect to an Award under the Plan, be a
Non-Employee Director. The acts of a majority of the members present at any
meeting at which a quorum is present or acts approved in writing by a majority
of the Committee shall be deemed the acts of the Committee.
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Subject to the provisions of the Plan, the Committee shall have exclusive power
to:
(a) Select the Eligible Employees to participate in the Plan;
(b) Determine the nature and extent of the Awards to be made to each
Participant;
(c) Determine the time or times when Awards will be made;
(d) Determine the conditions to which the payment of Awards may be subject;
(e) Prescribe the form or forms evidencing Awards; and
(f) Cause records to be established in which there shall be entered, from
time to time, as Awards are made to Participants, the date of each Award, the
number of Incentive Stock Options, Nonqualified Stock Options, and shares of
Restricted Stock awarded by the Committee to each Participant, the expiration
date, and the duration of any applicable Restricted Period.
The Committee shall have the authority, subject to the provisions of the Plan,
to establish, adopt, or revise such rules and regulations and to make all such
determinations relating to the Plan as it may deem necessary or advisable for
the administration of the Plan. The Committee's interpretation of the Plan or
any Awards granted pursuant thereto and all decisions and determinations by the
Committee with respect to the Plan shall be final, binding, and conclusive on
all parties unless otherwise determined by the Board.
5. GRANT OF OPTIONS AND RESTRICTED STOCK AWARDS; SHARES SUBJECT TO THE
PLAN.
The Committee may, from time to time, grant Awards of Options and/or Restricted
Stock to one or more Participants; provided, however, that:
(a) Subject to Section 10, the aggregate number of shares of Stock made
subject to Awards may not exceed 2,950,000;
(b) Such shares shall be deemed to have been used in payment of Awards
whether they are actually delivered or the Fair Market Value equivalent of such
shares is paid in cash. In the event any Option or Restricted Stock shall be
surrendered, terminate, expire, or be forfeited, the number of shares of Stock
no longer subject thereto shall thereupon be released and shall thereafter be
available for new Awards under the Plan to the fullest extent permitted by Rule
16b-3 under the Exchange Act (if applicable at the time); and
(c) Stock delivered by the Company in settlement of Awards under the Plan
may be authorized and unissued Stock or Stock held in the treasury of the
Company or may be purchased on the open market or by private purchase at prices
no higher than the Fair Market Value at the time of purchase.
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<PAGE> 6
6. ELIGIBILITY.
Participants shall be limited to officers, key employees and independent
contractors of the Company and its Subsidiaries and Affiliates who have received
written notification from the Committee or from a person designated by the
Committee, that they have been selected to participate in the Plan.
7. STOCK OPTIONS.
One or more Incentive Stock Options or Nonqualified Stock Options may be granted
to any Participant; provided, however, that Incentive Stock Options may be
granted only to employees of the Company or a Subsidiary. Each Option so granted
shall be subject to the following conditions:
(a) Option Price. The Option Price ("Option Price") per share of Common
Stock shall be set by the Committee at the time of grant but shall not be less
than (i) in the case of an Incentive Stock Option, the Fair Market Value of a
share of Stock at the Date of Grant, and (ii) in the case of a Nonqualified
Stock Option, the par value per share of Stock.
(b) Manner of Exercise and Form of Payment. Options which have become
exercisable may be exercised by delivery of proper notification of exercise to
the Committee. No shares of Common Stock shall be issued on the exercise of an
Option unless the Option Price is paid in full at the time of the exercise.
Payment shall be made in cash, which may be paid by check 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 of the Option Price in shares of Common
Stock of the Company which are already owned by the Holder, valued at the Fair
Market Value thereof on the date of exercise. The Committee may also allow a
Holder to exercise an Option by the use of proceeds to be received from the sale
of Common Stock issuable pursuant to the Option being exercised.
(c) Other Terms and Conditions. If the Holder has not died or terminated,
the Option shall become exercisable in such manner and within such period or
periods ("Option Period"), not to exceed 10 years from its Date of Grant, as set
forth in the Stock Option Agreement (as defined below) to be entered into in
connection therewith:
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(i) Each Option shall lapse in the following situations:
-- ten years after it is granted;
-- three months after Normal Termination, except as
otherwise provided by the Committee, or
-- any earlier time set forth in the Stock Option
Agreement.
(ii) If the Holder ceases to be an employee, officer or consultant
or otherwise affiliated with the Company for Cause, the Option shall lapse at
the time of termination.
(iii) If the Holder dies within the Option Period or within 3 months
after Normal Termination (or such other period as may have been established by
the Committee), the Option shall lapse unless it is exercised within the Option
Period and in no event later than 12 months after the date of Holder's death by
the Holder's legal representative or representatives or by the person or persons
entitled to do so under the Holder's last will and testament or, if the Holder
shall fail to make testamentary disposition of such Option or shall die
intestate, by the person entitled to receive said Option under the applicable
laws of descent and distribution.
(d) Stock Option Agreement. Each Option granted under the Plan shall be
evidenced by a "Stock Option Agreement" between the Company and the Holder of
the Option containing such provisions as may be determined by the Committee, but
shall be subject to the following terms and conditions:
(i) Each Option or portion thereof that is exercisable shall be
exercisable for the full amount or for any part thereof, except as otherwise
determined by the terms of the Stock Option Agreement.
(ii) Each share of Stock purchased through the exercise of an
Option shall be paid for in full at the time of the exercise. Each Option shall
cease to be exercisable, as to any share of Stock, when the Holder purchases the
share or when the Option lapses.
(iii) Options shall not be transferable by the Holder except by will
or the laws of descent and distribution and shall be exercisable during the
Holder's lifetime only by him.
(iv) Each Option shall become exercisable by the Holder in
accordance with the vesting schedule established by the Committee for the Award.
(v) Each Stock Option Agreement may contain an agreement that,
upon demand by the Committee for such a representation, the Holder shall deliver
to the Committee at the time of any exercise of an Option a written
representation that the shares to be acquired upon such exercise are to be
acquired for investment and not for resale or with a view to the distribution
thereof.
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Upon such demand, delivery of such representation prior to the delivery of any
shares issued upon exercise of an Option shall be a condition precedent to the
right of the Holder or such other person to purchase any shares. In the event
certificates for Stock are delivered under the Plan with respect to which such
investment representation has been obtained, the Committee may cause a legend or
legends to be placed on such certificates to make appropriate reference to such
representation and to restrict transfers in the absence of compliance with
applicable federal or state securities laws.
(e) Grants to 10% Holders of Company Voting Stock. Notwithstanding Section
7(a), if an Incentive Stock Option is granted to a Holder who owns stock
representing more than 10% of the voting power of all classes of stock of the
Company or of the Company and its Subsidiaries, the period specified in the
Stock Option Agreement for which the Option thereunder is granted and at the end
of which such Option shall expire shall not exceed five years from the Date of
Grant of such Option and the Option Price shall be at least 110%of the Fair
Market Value (on the Date of Grant) of the Stock subject to the Option.
(f) Limitation. To the extent the aggregate Fair Market Value (as
determined as of the Date of Grant) of Stock for which Incentive Stock Options
are exercisable for the first time by any Participant during any calendar year
(under all plans of the Company and its Subsidiaries) exceeds $100,000, such
excess Incentive Stock Options shall be treated as Nonqualified Stock Options.
(g) Order of Exercise. Options granted under the Plan may be exercised in
any order, regardless of the Date of Grant or the existence of any other
outstanding Option.
8. RESTRICTED STOCK AWARDS.
(a) Award of Restricted Stock.
(i) The Committee shall have the authority (1) to grant Restricted
Stock, (2) to issue or transfer Restricted Stock to Participants, and (3) to
establish terms, conditions and restrictions applicable to such Restricted
Stock, including the Restricted Period, which may differ with respect to each
grantee, the time or times at which Restricted Stock shall be granted or become
vested and the number of shares or units to be covered by each grant.
(ii) The Holder of a Restricted Stock Award shall execute and
deliver to the Corporate Secretary of the Company an agreement with respect to
Restricted Stock and escrow agreement satisfactory to the Committee and the
appropriate blank stock powers with respect to the Restricted Stock covered by
such agreements. If a Participant shall fail to execute the agreement, escrow
agreement and stock powers within such period, the Award shall be null and void.
Subject to the restrictions set forth in Section 8(b), the Holder shall
generally have the rights and privileges of a stockholder as to such Restricted
Stock, including the right to vote such Restricted Stock. At the discretion of
the Committee, cash and stock dividends with respect to the Restricted Stock may
be either currently paid or withheld by the Company for the Holder's account,
and interest may
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<PAGE> 9
be paid on the amount of cash dividends withheld at a rate and subject to such
terms as determined by the Committee. Cash or stock dividends so withheld by the
Committee shall not be subject to forfeiture.
(iii) In the case of a Restricted Stock Award, the Committee shall
then cause stock certificates registered in the name of the Holder to be issued
and deposited together with the stock powers with an escrow agent to be
designated by the Committee. The Committee shall cause the escrow agent to issue
to the Holder a receipt evidencing any stock certificate held by it registered
in the name of the Holder.
(b) Restrictions.
(i) Restricted Stock awarded to a Participant shall be subject to
the following restrictions until the expiration of the Restricted Period: (1)
the Holder shall not be entitled to delivery of the stock certificate; (2) the
shares shall be subject to the restrictions on transferability set forth in the
grant; (3) the shares shall be subject to forfeiture to the extent provided in
subpara graph (d) and, to the extent such shares are forfeited, the stock
certificates shall be returned to the Company, and all rights of the Holder to
such shares and as a stockholder shall terminate without further obligation on
the part of the Company.
(ii) The Committee shall have the authority to remove any or all of
the restrictions on the Restricted Stock whenever it may determine that, by
reasons of changes in applicable law or other changes in circumstances arising
after the date of the Restricted Stock Award such action is appropriate.
(c) Restricted Period. The Restricted Period of Restricted Stock shall
commence on the Date of Grant and shall expire from time to time as to that part
of the Restricted Stock indicated in a schedule established by the Committee in
the Award agreement.
(d) Forfeiture Provisions. In the event a Holder terminates employment
during a Restricted Period, that portion of the Award with respect to which
restrictions have not expired ("Non-Vested Portion") shall be treated as
follows:
(i) Resignation or discharge: The Non-Vested Portion of the Award
shall be completely forfeited.
(ii) Normal Termination: The Non-Vested Portion of the Award shall
be prorated for service during the Restricted Period and shall be received as
soon as practicable following termination.
(iii) Death: The Non-Vested Portion of the Award shall be prorated
for service during the Restricted Period and paid to the Participant's
beneficiary as soon as practicable following death.
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(e) Delivery of Restricted Stock. Upon the expiration of the Restricted
Period with respect to any shares of Stock covered by a Restricted Stock Award,
a stock certificate evidencing the shares of Restricted Stock which have not
then been forfeited and with respect to which the Restricted Period has expired
(to the nearest full share) shall be delivered without charge to the Holder, or
his beneficiary, free of all restrictions under the Plan.
(f) SEC Restrictions. Each certificate representing Restricted Stock
awarded under the Plan shall bear the following legend:
"Transfer of this certificate and the shares represented hereby is
restricted pursuant to the terms of a Restricted Stock Agreement, dated as of
__________, between MedPartners, Inc. and __________. A copy of such Agreement
is on file at the offices of the Company in Birmingham, Alabama."
Stop transfer orders shall be entered with the Company's transfer agent and
registrar against the transfer of legend securities except in compliance with
the Securities Act.
9. GENERAL.
(a) Additional Provisions of an Award. The award of any benefit under the
Plan may also be subject to such other provisions (whether or not applicable to
the benefit awarded to any other Participant) as the Committee determines
appropriate.
(b) Privileges of Stock Ownership. Except as otherwise specifically
provided in the Plan, no person shall be entitled to the privileges of stock
ownership in respect of shares of Stock which are subject to Options or
Restricted Stock Awards, hereunder until such shares have been issued to that
person upon exercise of an Option according to its terms or upon sale or grant
of those shares in accordance with a Restricted Stock Award.
(c) Government and Other Regulations. The obligation of the Company to make
payment of Awards or otherwise shall be subject to all applicable laws, rules,
and regulations, and to such approvals by governmental agencies as may be
required. The Company shall be under no obligation to register under the
Securities Act any of the shares of Stock paid under the Plan. If the shares
paid under the Plan may in certain circumstances be exempt from registration
under the Securities Act, the Company may restrict the transfer of such shares
in such manner as it deems advisable to ensure the availability of any such
exemption.
(d) Withholding and Employment Taxes. At the time of exercise of an Option,
the optionee shall remit to the Company in cash all applicable federal and state
withholding and employment taxes. If and to the extent authorized and approved
by the Committee in its sole discretion, an optionee may elect, by means of a
form of election to be prescribed by the Committee, to have shares which are
acquired upon exercise of an Option withheld by the Company or tender other
shares of Common Stock or other securities of the Company owned by the optionee
to the
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Company at the time the amount of such taxes is determined in order to pay the
amount of such tax obligations, subject to the following limitations:
(1) each election shall be irrevocable; and
(2) such election shall be subject to the disapproval of the
Committee at any time;
Any Common Stock or other securities so withheld or tendered will be valued by
the Company as of the date they are withheld or tendered. Unless the Committee
otherwise determines, the optionee shall pay to the Company in cash, promptly
when the amount of such obligations become determinable, all applicable federal
and state withholding taxes resulting from the lapse of restrictions imposed on
exercise of an Option, from a transfer or other disposition of shares acquired
upon exercise of an Option or otherwise related to the Option or the shares
acquired upon exercise of the Option.
(e) Claim to Awards and Employment Rights. No employee or other person
shall have any claim or right to be granted an Award under the Plan nor, having
been selected for the grant of an Award, to be selected for a grant of any other
Award. Neither this Plan nor any action taken hereunder shall be construed as
giving any Participant any right to be retained in the employ of the Company or
a Subsidiary or Affiliate.
(f) Designation and Change of Beneficiary. Each Participant shall file with
the Committee a written designation of one or more persons as the beneficiary
who shall be entitled to receive the amounts payable with respect to an Award of
Restricted Stock, if any, due under the Plan upon his death. A Participant may,
from time to time, revoke or change his beneficiary designation without the
consent of any prior beneficiary by filing a new designation with the Committee.
The last such designation received by the Committee shall be controlling;
provided, however, that no designation, or change or revocation thereof, shall
be effective unless received by the Committee prior to the Participant's death,
and in no event shall it be effective as of a date prior to such receipt.
(g) Payments to Persons Other Than Participants. If the Committee shall
find that any person to whom any amount is payable under the Plan is unable to
care for his affairs because of illness or accident, or is a minor, or has died,
then any payment due to such person or his estate (unless a prior claim therefor
has been made by a duly appointed legal representative), may, if the Committee
so directs the Company, be paid to his spouse, child, relative, an institution
maintaining or having custody of such person, or any other person deemed by the
Committee to be a proper recipient on behalf of such person otherwise entitled
to payment. Any such payment shall be a complete discharge of the liability of
the Committee and the Company therefor.
(h) No Liability of Committee Members. No member of the Committee shall be
personally liable by reason of any contract or other instrument executed by such
member or on his behalf in his capacity as a member of the Committee nor for any
mistake of judgment made in good faith,
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and the Company shall indemnify and hold harmless each member of the Committee
and each other employee, officer or director of the Company to whom any duty or
power relating to the administration or interpretation of the Plan may be
allocated or delegated, against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim) arising out of any
act or omission to act in connection with the Plan unless arising out of such
person's own fraud or bad faith; provided, however, that approval of the Board
shall be required for the payment of any amount in settlement of a claim against
any such person. 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 amended, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
(i) Governing Law. The Plan shall be governed by and construed in
accordance with the internal laws of the State of Delaware without reference to
the principles of conflicts of law thereof.
(j) Funding. Except as provided under Section 8, no provision of the Plan
shall require the Company, for the purpose of satisfying any obligations under
the Plan, to purchase assets or place any assets in a trust or other entity to
which contributions are made or otherwise to segregate any assets, nor shall the
Company maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for such
purposes. Holders shall have no rights under the Plan other than as unsecured
general creditors of the Company, except that insofar as they may become
entitled to payment of additional compensation by performance of services, they
shall have the same rights as other employees under general law.
(k) Transferability.
(1) Incentive Stock Options. No Incentive Stock Option granted
under the Plan may be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, other than by will or by the laws of descent and
distribution. Further, all Incentive Stock Options granted to an Eligible
Employee under the Plan shall be exercisable during his or her lifetime only by
such Eligible Employee.
(2) Non-Qualified Stock Options. The Committee may, in its
discretion, authorize all or a portion of Non-Qualified Stock Options granted to
an Eligible Employee to be on terms which permit transfer by such Eligible
Employee to (i) Immediate Family Members, (ii) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (iii) a partnership in
which such Immediate Family Members are the only partners, provided that (x)
there may be no consideration for any such transfer, (y) the Stock Option
Agreement pursuant to which such Options are granted must be approved by the
Committee, and must expressly provide for transferability in a manner consistent
with this Section, and (z) subsequent transfers of transferred Options shall be
prohibited except those by will or the laws of descent and distribution.
Following transfer, any such Options shall continue to be subject to the same
terms and conditions as were applicable immediately prior
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to transfer, provided that for purposes of this Plan, the term "Eligible
Employee" shall be deemed to refer to the transferee. The events of termination
of employment shall continue to be applied with respect to the original Eligible
Employee following which the Options shall be exercisable by the transferee only
to the extent, and for the periods specified in this Section 9(k).
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 Eligible Employee is
and will remain subject to and responsible for any applicable withholding taxes
upon the exercise of such Options.
(l) Reliance on Reports. Each member of the Committee and each member of
the Board shall be fully justified in relying, acting or failing to act, and
shall not be liable for having so relied, acted or failed to act in good faith,
upon any report made by the independent public accountant of the Company and its
Subsidiaries or Affiliates and upon any other information furnished in
connection with the Plan by any person or persons other than himself.
(m) Relationship to Other Benefits. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
profit sharing, group insurance or other benefit plan of the Company or any
Subsidiary or Affiliate except as otherwise specifically provided.
(n) Expenses. The expenses of administering the Plan shall be borne by the
Company and its Subsidiaries and Affiliates.
(o) Pronouns. Masculine pronouns and other words of masculine gender shall
refer to both men and women.
(p) Titles and Headings. The titles and headings of the sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles or headings shall control.
10. CHANGES IN CAPITAL STRUCTURE.
Options and Restricted Stock Awards and any agreements evidencing such Awards
shall be subject to adjustment or substitution, as determined by the Committee
in its sole discretion, as to the number, price or kind of a share of Stock or
other consideration subject to such Awards or as otherwise determined by the
Committee to be equitable (i) in the event of changes in the outstanding Stock
or in the capital structure of the Company by reason of stock dividends, stock
splits, recapitalizations, reorganizations, mergers, consolidations,
combinations, exchanges, or other relevant changes in capitalization occurring
after the Date of Grant of any such Award or (ii) in the event of any change in
applicable laws or any change in circumstances which results in or would result
in any substantial dilution or enlargement of the rights granted to, or
available for, Participants in the Plan, or which otherwise warrants equitable
adjustment because it interferes
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with the intended operation of the Plan. In addition, in the event of any such
adjustments or substitution, the aggregate number of shares of Stock available
under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any adjustment in Incentive Stock Options
under this Section 10 shall be made only to the extent not constituting a
"modification" within the meaning of Section 424(h)(3) of the Code, and any
adjustments under this Section 10 shall be made in a manner which does not
adversely affect the exemption provided pursuant to Rule 16b-3 under the
Exchange Act. The Company shall give each Participant notice of an adjustment
hereunder and, upon notice, such adjustment shall be conclusive and binding for
all purposes.
11. EFFECT OF CHANGE IN CONTROL.
(a) In the event of a Change in Control, notwithstanding any vesting
schedule provided for hereunder or by the Committee with respect to an Award of
Options or Restricted Stock, such Option shall become immediately exercisable
with respect to 100% of the shares subject to such Option and the Restricted
Period shall expire immediately with respect to 100% of the Restricted Stock
subject to Restrictions; provided, however, to the extent that so accelerating
the time an Incentive Stock Option may first be exercised would cause the
limitation provided in Section 7(f) to be exceeded, such Options shall instead
first become exercisable in so many of the next following years as is necessary
to comply with such limitation.
(b) The obligations of the Company under the Plan shall be binding upon any
successor corporation or organization resulting from the merger, consolidation
or other reorganization of the Company, or upon any successor corporation or
organization succeeding to substantially all of the assets and business of the
Company. The Company agrees that it will make appropriate provisions for the
preservation of Participant's rights under the Plan in any agreement or plan
which it may enter into or adopt to effect any such merger, consolidation,
reorganization or transfer of assets.
12. NONEXCLUSIVITY OF THE PLAN.
Neither the adoption of this Plan by the Board nor the submission of this Plan
to the stockholders of the Company for approval shall be construed as creating
any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under this Plan, and such arrangements
may be either applicable generally or only in specific cases.
13. AMENDMENTS AND TERMINATION.
The Committee may at any time terminate the Plan. With the express written
consent of an individual Participant, the Board may cancel or reduce or
otherwise alter the outstanding Awards thereunder if, in its judgment, the tax,
accounting, or other effects of the Plan or potential payouts thereunder would
not be in the best interest of the Company. The Committee may, at any time,
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or from time to time, amend or suspend and, if suspended, reinstate, the Plan in
whole or in part; provided, however, that without further stockholder approval,
the Committee shall not:
(a) Increase the maximum number of shares of Stock which may be issued on
exercise of Options or pursuant to Restricted Stock Awards, except as provided
in Section 10;
(b) Change the maximum Option Price;
(c) Extend the maximum Option term;
(d) Extend the termination date of the Plan;
(e) Cancel and regrant or reprice any outstanding Option, except as
provided in Section 10; or
(f) Change the class of persons eligible to receive Awards under the Plan.
* * *
As adopted, as amended, by the Committee
as of June 27, 1997 by
unanimous written consent.
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EXHIBIT (10)-16
AMENDED AND RESTATED
MEDPARTNERS, INC.
1993 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purposes of this Amended and Restated MedPartners, Inc. ("MedPartners" or
the "Company") 1993 Stock Option Plan (the "Plan") are to:
1.1 furnish incentives to individuals or entities chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
1.2 encourage selected employees to accept or continue employment with the
Company or its Affiliates; and
1.3 increase the interest of selected employees, officers, directors and
consultants in the Company's welfare through their participation in the growth
in value of the common stock, $.001 par value, of the Company ("Common Stock").
To accomplish the foregoing objectives, this Plan provides a means whereby
individuals and entities may receive options to purchase Common Stock. Options
granted under this Plan ("Options") will be either nonqualified options ("NQOs")
or incentive stock options ("ISOs").
2. ELIGIBLE PERSONS
2.1 General. Every person who at the date on which an Option granted to
such person becomes effective (the "Grant Date") is a full-time employee,
officer, director or consultant of the Company or of any Affiliate or any
individual or entity subject to an acquisition or management agreement with the
Company is eligible to receive Options under this Plan.
2.2 Definition of Affiliate. The term "Affiliate," as used in this Plan,
means a "parent corporation" or "subsidiary corporation," as defined in Section
424 of the Internal Revenue Code of 1986 (as amended, the "Code"). The term
"employee" shall have the meaning ascribed for purposes of Section 3401(c) of
the Code and the Treasury Regulations promulgated thereunder and shall include
an officer or a director who is also an employee.
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3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the exercise of
Options is 1,555,000 shares of Common Stock, divided into 500,000 shares of
Common Stock reserved for issuance upon the exercise of options that may be
granted in connection with the acquisition of the assets of or management of
physician practices (hereinafter referred to as "Acquisition Options") and
1,055,000 shares of Common Stock reserved for issuance upon the exercise of
options granted to employees, officers, consultants and members of the Board of
Directors of the Company (hereinafter referred to as "Management Options"). The
shares covered by the portion of any grant that expires unexercised under this
Plan shall become available again for grants under this Plan; provided, however,
that no Management Options may be granted as Acquisition Options and vice versa.
The number of shares reserved for issuance under this Plan is subject to
adjustment in accordance with the provisions for adjustment in this Plan.
4. ADMINISTRATION
4.1 General. This Plan shall be administered by the Compensation Committee
of the Board of Directors or by any other committee appointed by the Board of
Directors (the "Committee"), which Committee shall consist solely of two or more
Non-Employee Directors ("Non-Employee Directors") as such are defined in Rule
16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any successor provision. The Committee shall have the
authority to select the persons to receive Options under this Plan, to fix the
number of shares that each optionee may purchase, to set the terms and
conditions of each Option, and to determine all other matters relating to this
Plan. Any act approved in writing by a majority of the members of the Committee
shall be a valid act of the Committee. All questions of interpretation,
implementation and application of this Plan shall be determined by the
Committee. Such determinations shall be final and binding on all persons. No
member of the Board of Directors or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Option
granted under the Plan.
5. GRANTING OF RIGHTS
5.1 Ten Year Limitation on Grants of ISOs. No ISOs shall be granted under
this Plan after ten years from the date the Board of Directors first adopts the
Plan.
5.2 Written Agreement; Effect. Each Option shall be evidenced by a written
agreement (the "Option Agreement"), in form satisfactory to the Committee,
executed by the Company and by the person to whom such Option is granted. The
Option Agreement shall specify whether each Option it evidences is a NQO or an
ISO. Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of an Option; the Option may not be exercised, however,
until the Option Agreement is executed.
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5.3 Annual $100,000 Limitation on ISOs. To the extent required by Section
422(d) of the Code, the aggregate fair market value of shares of the Common
Stock with respect to which incentive stock options are exercisable for the
first time by any individual during any calendar year shall not exceed $100,000.
For this purpose, fair market value shall be the fair market value of the shares
covered by the ISOs when the ISOs were granted. If by their terms, such ISOs
taken together would first become exercisable at a faster rate, this $100,000
limitation shall be applied by deferring the exercisability of those ISOs or
portions of ISOs which have the highest per share exercise prices. The ISOs or
portions of ISOs, the exercisability of which are so deferred, shall become
exercisable on the first day of the first subsequent calendar year during which
they may be exercised, as determined by applying these same principles of this
Section and all other provisions of this Section and all other provisions of
this Plan, including those relating to the expiration and termination of ISOs.
5.4 Advance Approvals. The Committee may approve the grant of Options to
persons who are expected to become employees, consultants or members of the
Board of Directors, of the Company, but are not employees, consultants or
members of the Board of Directors at the date of approval. In such cases, the
Option shall be deemed granted, without further approval, on the date the
grantee becomes an employee, and must satisfy all requirements of this Plan for
Options granted on that date.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be designated as an ISO or a NQO and shall be subject to the
terms and conditions set forth in Section 6.1. NQOs shall also be subject to the
terms and conditions set forth in Section 6.2, but not those set forth in
Section 6.3. ISOs shall also be subject to the terms and conditions set forth in
Section 6.3, but not those set forth in Section 6.2.
6.1 Terms and Conditions to Which All Options Are Subject. All Options
shall be subject to the following terms and conditions:
(a) Changes in Capital Structure. Subject to Section 6.1(b), if
the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged for
other securities as a result of a merger, consolidation, or reorganization,
appropriate adjustments shall be made in (1) the number and class of shares of
stock subject to this Plan and each outstanding Option, and (2) the exercise
price of each outstanding Option; provided, however, that the Company shall not
be required to issue fractional shares as a result of any such adjustment. Each
such adjustment shall be determined by the Committee in its sole discretion,
which determination shall be final and binding on all persons.
(b) Corporate Transactions. New option rights may be substituted
for Options granted, or the Company's obligations as to outstanding Options may
be assumed, by an employer corporation other than the Company, or an Affiliate
thereof, in connection with any merger, consolidation, acquisition, separation,
reorganization, dissolution, liquidation, sale, or like
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occurrence in which the Company is involved and which the Committee determines,
in its absolute discretion, would materially alter the structure. Substitution
shall be done in such manner that the then outstanding Options which are ISOs
will continue to be "incentive stock options" within the meaning of Section 422
of the Code to the full extent permitted thereby. Notwithstanding the foregoing
or the provisions of Section 6.1(a), if such an event occurs and if such
employer corporation, or an Affiliate thereof, does not substitute new option
rights for, and substantially equivalent to, the outstanding Options granted
hereunder, or assume the outstanding Options granted hereunder, or if there is
no employer corporation, or if the Committee determines, in its sole discretion,
that outstanding Options should not then continue to be outstanding, the
Committee may upon ten days prior written notice to optionees in its absolute
discretion (1) shorten the period during which Options are exercisable (provided
they remain exercisable, to the extent otherwise exercisable, for at least ten
days after the date the notice is given), or (2) cancel Options upon payment to
the optionee in cash, with respect to each Option to the extent then
exercisable, of an amount which, in the absolute discretion of the Committee, is
determined to be equivalent to any excess of the fair market value (at the
effective time of the dissolution, liquidation, merger, consolidation,
acquisition, separation, reorganization, sale or other event) of the
consideration that the optionee would have received if the Option had been
exercised before the effective time, over the exercise price of the Option;
provided, however, if there is a successor corporation and replacement options
are not granted by the successor corporation, all outstanding Options shall
become exercisable prior to the consummation of the transaction such that the
optionees shall have not less than ten days to exercise their Options and become
stockholders of record entitled to receive the consideration paid to the other
stockholders of the Company. If an optionee fails to exercise his Option within
any exercise period described in this paragraph and the dissolution,
liquidation, merger, consolidation, sale or other event is consummated, his
Option shall no longer be exercisable. Any unexercised Option shall be canceled
and terminated. Notwithstanding anything herein to the contrary, nothing shall
extend an optionee's right to exercise an ISO after the expiration of ten years
from the date it is granted. The actions described in this Section may be taken
without regard to any resulting tax consequences to the optionee.
(c) Option Grant Date. Each Option Agreement shall specify the
date as of which it shall be effective, which date shall be the Grant Date
(determined pursuant to Section 5.4 in the case of advance approvals).
(d) 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).
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<PAGE> 5
(e) Transfer of Option Rights.
(1) Incentive Stock Options. No ISO granted under the
Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all ISOs granted to an optionee under the Plan shall be exercisable
during his or her lifetime only by such optionee.
(2) Nonqualified Stock Options. The Committee may, in its
discretion, authorize all or a portion of NQOs granted to an optionee to be on
terms which permit transfer by such optionee to (i) the spouse, children or
grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or (iii) a
partnership in which such Immediate Family Members are the only partners,
provided that (x) there may be no consideration for any such transfer, (y) the
Option Agreement pursuant to which such NQOs are granted must be approved by the
Committee, and must expressly provide for transferability in a manner consistent
with this Section, and (z) subsequent transfers of transferred NQOs shall be
prohibited except those by will or the laws of descent and distribution.
Following transfer, any such NQOs 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 "optionee" shall be deemed to refer to the
transferee. The events of termination of employment shall continue to be applied
with respect to the original optionee, following which the NQOs shall be
exercisable by the transferee only to the extent, and for the periods specified
in Section 6.1(g). Notwithstanding the foregoing, should the Committee provide
that NQOs 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 NQO. In the event of a transfer, as set forth above, the
original optionee is and will remain subject to and responsible for any
applicable withholding taxes upon the exercise of such NQOs.
(f) Payment. No shares of Common Stock shall be issued on the
exercise of an Option unless paid for in full at the time of exercise. Payment
shall be made in cash, which may be paid by check 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 which are
already owned by the optionee, valued at the Fair Market Value thereof on the
date of exercise. The Committee may also allow an optionee to exercise an option
by use of proceeds to be received from the sale of Common Stock issuable
pursuant to the Option being exercised.
(g) Termination.
(1) Any Option or portion thereof which has not expired
or been exercised on or before the date on which an optionee ceases to be an
employee, officer, consultant or member of the Board of Directors or otherwise
affiliated with the Company ("Termination") for cause, shall expire upon
Termination.
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(2) Any Option or portion thereof which has not expired
or been exercised on or before the date of Termination without cause, shall
expire ninety days after the date of Termination. A leave of absence duly
authorized by the Company, shall not be deemed a Termination or a break in
continuous employment.
(3) Notwithstanding the foregoing, if Termination is due
to the permanent disability or death of the optionee, the optionee, the
optionee's personal representative or any other person who acquires option
rights from the optionee by will or the applicable laws of descent and
distribution, may, within twelve months after the date of Termination, exercise
such option rights to the extent they were exercisable on the date of
Termination.
(h) Other Provisions. Each Option Agreement may contain such other
terms, provisions, and conditions not inconsistent with this Plan, including
rights of repurchase, as may be determined by the Committee, and each ISO
granted under this Plan shall include such provisions and conditions as are
necessary to qualify such option as an "incentive stock option" within the
meaning of Section 422 of the Code.
(i) Withholding and Employment Taxes. At the time of exercise of
an Option, the optionee shall remit to the Company in cash all applicable
federal and state withholding and employment taxes. If and to the extent
authorized and approved by the Committee in its sole discretion, an optionee may
elect, by means of a form of election to be prescribed by the Committee, to have
shares which are acquired upon exercise of an Option withheld by the Company or
tender other shares of Common Stock or other securities of the Company owned by
the optionee to the Company at the time the amount of such taxes is determined
in order to pay the amount of such tax obligations, subject to the following
limitations:
(1) such election shall be irrevocable; and
(2) such election shall be subject to the disapproval of
the Committee at any time.
Any Common Stock or other securities so withheld or tendered will be valued by
the Company as of the date they are withheld or tendered. Unless the Committee
otherwise determines, the optionee shall pay to the Company in cash, promptly
when the amount of such obligations become determinable, all applicable federal
and state withholding taxes resulting from the lapse of restrictions imposed on
exercise of an Option, from a transfer or other disposition of shares acquired
upon exercise of an Option or otherwise related to the Option or the shares
acquired upon exercise of the Option.
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
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(a) Option Term. Unless a different expiration date is specified
by the Committee at the Grant Date in the Option Agreement, each NQO shall
expire ten years from its Grant Date.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted under
this Plan which are designated as ISOs shall be subject to the following terms
and conditions:
(a) Exercise Price. The exercise price of an ISO shall be
determined in accordance with the applicable provisions of the Code and shall in
no event be less than the fair market value of the stock covered by the ISO at
the Grant Date; provided, however, that the exercise price of an ISO granted to
any person who owns, directly or indirectly (or is treated as owning by reason
of attribution rules, currently set forth in Section 424 of the Code), stock of
the Company constituting more than 10% of the total combined voting power of all
classes of outstanding stock of the Company or of any Affiliate of the Company,
shall in no event be less than 110% of such fair market value.
(b) Option Term. Unless an earlier expiration date is specified by
the Committee at the Grant Date in the Option Agreement, each ISO shall expire
ten years from its Grant Date; except that an ISO granted to any person who
owns, directly or indirectly (or is treated as owning by reason of applicable
attribution rules currently set forth in Section 424 of the Code) stock of the
Company constituting more than 10% of the total combined voting power of the
Company's outstanding stock, or the stock of any Affiliate of the Company, shall
expire five years from its Grant Date.
(c) Disqualifying Dispositions. If stock acquired by exercise of
an ISO is disposed of within two years from the Grant Date or within one year
after the transfer of the stock to the optionee, the holder of the stock
immediately prior to the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the disposition as the Company may reasonably require.
Such holder shall pay to the Company any withholding and employment taxes which
the Company in its sole discretion deems applicable. The Company may instruct
its stock transfer agent by appropriate means, including placement of legends on
stock certificates, not to transfer stock acquired by exercise of an ISO unless
it has been advised by the Company that the requirements of this Section have
been satisfied.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give proper notification to the
Company at its principal executive office, to the attention of the Corporate
Secretary, accompanied by a notice of exercise in form and substance
satisfactory to the Company, by payment of the exercise price for such shares in
a form and manner as the Committee may from time to time approve and by such
other documents as the Committee may request. The date the Company receives
proper notification of an exercise hereunder accompanied by payment of the
exercise price and all such other documents will be considered the date the
Option was exercised. Promptly after receipt of proper notification of exercise
of an Option, the Company shall, without stock issue or transfer taxes to the
optionee or any other person entitled to exercise the Option, deliver to the
optionee or such other person a
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certificate or certificates for the requisite number of shares of stock. An
optionee or transferee of an Option shall not have any privileges as stockholder
with respect to any stock covered by the Option until the date of issuance of a
stock certificate.
8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere with or
limit in any way the right of the Company to terminate any optionee's
employment, affiliation or other relationship with the Company at any time, nor
confer upon any optionee any right to continue in the employ of, as a consultant
to, as a director of, or otherwise affiliated in any way with, the Company.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Committee may, at any time and in any manner, amend, suspend, or termination
this Plan or any award outstanding under this Plan; provided, however, that no
such amendment or discontinuance shall:
(a) be made without stockholder approval: (1) to the extent such
approval is required by law, agreement or the rules of any exchange or automated
quotation system upon which the Common Stock is listed or quoted or (2) to the
extent that any outstanding Option is canceled and regranted or repriced;
(b) adversely alter or impair the rights of Participants with
respect to awards previously made under this Plan without the consent of the
holder thereof; or
(c) make any change that would disqualify any provision of this
Plan intended to be so qualified, from the exemption provided by Rule 16b-3.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on such
member's own part, including but not limited to the exercise of any power or
discretion given to such member under this Plan, except for those acts or
omissions resulting from such member's own gross negligence or willful
misconduct. The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company for, all expenses
(including attorneys' fees and the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by such
person in connection with or arising out of any action, suit, or proceeding to
which the Committee or any member of the Committee may be a party by reason of
any action taken or failure to act under or in connection with the Plan or any
option granted or not granted under the Plan to the full extent permitted by law
and by the Certificate of Incorporation and Bylaws of the Company, as amended.
The right of indemnity described in this Section 10 shall be in addition to such
other rights of
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indemnification as the members of the Committee shall otherwise be entitled
because of their serving on the Board of Directors of the Company or as an
employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan first became effective upon adoption by the Board of Directors on
December 16, 1993. This Amended and Restated MedPartners, Inc. 1993 Stock Option
Plan is an amendment and restatement of that Plan and was adopted by the
Committee on May 12, 1997.
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EXHIBIT (10)-17
AMENDED AND RESTATED
MEDPARTNERS, INC.
1995 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purposes of this Amended and Restated MedPartners, Inc. ("MedPartners" or
the "Company") 1995 Stock Option Plan (the "Plan") are to:
1.1 furnish incentives to individuals or entities chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
1.2 encourage selected employees to accept or continue employment with the
Company or its Affiliates; and
1.3 increase the interest of selected employees, officers, directors and
consultants in the Company's welfare through their participation in the growth
in value of the common stock, $.001 par value, of the Company ("Common Stock").
To accomplish the foregoing objectives, this Plan provides a means whereby
individuals and entities may receive options to purchase Common Stock. Options
granted under this Plan ("Options") will be either nonqualified options ("NQOs")
or incentive stock options ("ISOs").
2. ELIGIBLE PERSONS
2.1 General. Every person who at the date on which an Option granted to
such person becomes effective (the "Grant Date") is a full-time employee,
officer, director or consultant of the Company or of any Affiliate or any
individual or entity subject to an acquisition or management agreement with the
Company is eligible to receive Options under this Plan.
2.2 Definition of Affiliate. The term "Affiliate," as used in this Plan,
means a "parent corporation" or "subsidiary corporation," as defined in Section
424 of the Internal Revenue Code of 1986 (as amended, the "Code"). The term
"employee" shall have the meaning ascribed for purposes of Section 3401(c) of
the Code and the Treasury Regulations promulgated thereunder and shall include
an officer or a director who is also an employee.
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3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the exercise of
Options as of December 31, 1997 is 8,687,941 shares of Common Stock. The shares
covered by the portion of any grant that expires unexercised under this Plan
shall become available again for grants under this Plan. The number of shares
reserved for issuance under this Plan is subject to adjustment in accordance
with the provisions for adjustment in this Plan.
4. ADMINISTRATION
4.1 General. This Plan shall be administered by the Compensation Committee
of the Board of Directors or by any other committee appointed by the Board of
Directors (the "Committee"), which Committee shall consist solely of two or more
Non-Employee Directors ("Non-Employee Directors") as such are defined in Rule
16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any successor provision. The Committee shall have the
authority to select the persons to receive Options under this Plan, to fix the
number of shares that each optionee may purchase, to set the terms and
conditions of each Option, and to determine all other matters relating to this
Plan; provided, however, that any Options granted to management of the Company,
the Board of Directors or other insiders shall comply with Rule 16b-3 of the
Exchange Act. Any act approved in writing by a majority of the members of the
Committee shall be a valid act of the Committee. All questions of
interpretation, implementation and application of this Plan shall be determined
by the Committee. Such determinations shall be final and binding on all persons.
No member of the Board of Directors or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
option granted under the Plan.
5. GRANTING OF RIGHTS
5.1 Ten Year Limitation on Grants of ISOs. No ISOs shall be granted under
this Plan after ten years from the date the Board of Directors first adopts the
Plan.
5.2 Written Agreement; Effect. Each Option shall be evidenced by a written
agreement (the "Option Agreement"), in form satisfactory to the Committee,
executed by the Company and by the person to whom such Option is granted. The
Option Agreement shall specify whether each Option it evidences is a NQO or an
ISO. Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of an Option; the Option may not be exercised, however,
until the Option Agreement is executed.
5.3 Annual $100,000 Limitation on ISOs. To the extent required by Section
422(d) of the Code, the aggregate fair market value of shares of the Common
Stock with respect to which incentive stock options are exercisable for the
first time by any individual during any calendar year shall not exceed $100,000.
For this purpose, fair market value shall be the fair market value of the shares
covered by the ISOs when the ISOs were granted. If by their terms, such ISOs
taken together would first become exercisable at a faster rate, this $100,000
limitation shall be applied by deferring the
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exercisability of those ISOs or portions of ISOs which have the highest per
share exercise prices. The ISOs or portions of ISOs, the exercisability of which
are so deferred, shall become exercisable on the first day of the first
subsequent calendar year during which they may be exercised, as determined by
applying these same principles of this Section and all other provisions of this
Section and all other provisions of this Plan, including those relating to the
expiration and termination of ISOs.
5.4 Advance Approvals. The Committee may approve the grant of Options to
persons who are expected to become employees, consultants or members of the
Board of Directors, of the Company, but are not employees, consultants or
members of the Board of Directors at the date of approval. In such cases, the
Option shall be deemed granted, without further approval, on the date the
grantee becomes an employee, and must satisfy all requirements of this Plan for
Options granted on that date.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be designated as an ISO or a NQO and shall be subject to the
terms and conditions set forth in Section 6.1. NQOs shall also be subject to the
terms and conditions set forth in Section 6.2, but not those set forth in
Section 6.3. ISOs shall also be subject to the terms and conditions set forth in
Section 6.3, but not those set forth in Section 6.2.
6.1 Terms and Conditions to Which All Options Are Subject. All Options
shall be subject to the following terms and conditions:
(a) Changes in Capital Structure. Subject to Section 6.1(b), if
the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged for
other securities as a result of a merger, consolidation, or reorganization,
appropriate adjustments shall be made in (1) the number and class of shares of
stock subject to this Plan and each outstanding Option, and (2) the exercise
price of each outstanding Option; provided, however, that the Company shall not
be required to issue fractional shares as a result of any such adjustment. Each
such adjustment shall be determined by the Committee in its sole discretion,
which determination shall be final and binding on all persons.
(b) Corporate Transactions. New option rights may be substituted
for Options granted, or the Company's obligations as to outstanding Options may
be assumed, by an employer corporation other than the Company, or an Affiliate
thereof, in connection with any merger, consolidation, acquisition, separation,
reorganization, dissolution, liquidation, sale, or like occurrence in which the
Company is involved and which the Committee determines, in its absolute
discretion, would materially alter the structure. Substitution shall be done in
such manner that the then outstanding Options which are ISOs will continue to be
"incentive stock options" within the meaning of Section 422 of the Code to the
full extent permitted thereby. Notwithstanding the foregoing or the provisions
of Section 6.1(a), if such an event occurs and if such employer corporation, or
an Affiliate thereof, does not substitute new option rights for, and
substantially equivalent to, the outstanding Options granted hereunder, or
assume the outstanding Options granted hereunder, or if there is no employer
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corporation, or if the Committee determines, in its sole discretion, that
outstanding Options should not then continue to be outstanding, the Committee
may upon ten days prior written notice to optionees in its absolute discretion
(1) shorten the period during which Options are exercisable (provided they
remain exercisable, to the extent otherwise exercisable, for at least ten days
after the date the notice is given), or (2) cancel Options upon payment to the
optionee in cash, with respect to each Option to the extent then exercisable, of
an amount which, in the absolute discretion of the Committee, is determined to
be equivalent to any excess of the fair market value (at the effective time of
the dissolution, liquidation, merger, consolidation, acquisition, separation,
reorganization, sale or other event) of the consideration that the optionee
would have received if the Option had been exercised before the effective time,
over the exercise price of the Option; provided, however, if there is a
successor corporation and replacement options are not granted by the successor
corporation, all outstanding Options shall become exercisable prior to the
consummation of the transaction such that the optionees shall have not less than
ten days to exercise their Options and become stockholders of record entitled to
receive the consideration paid to the other stockholders of the Company. If an
optionee fails to exercise his Option within any exercise period described in
this paragraph and the dissolution, liquidation, merger, consolidation, sale or
other event is consummated, his Option shall no longer be exercisable. Any
unexercised Option shall be canceled and terminated. Notwithstanding anything
herein to the contrary, nothing shall extend an optionee's right to exercise an
ISO after the expiration of ten years from the date it is granted. The actions
described in this Section may be taken without regard to any resulting tax
consequences to the optionee.
(c) Option Grant Date. Each Option Agreement shall specify the
date as of which it shall be effective, which date shall be the Grant Date
(determined pursuant to Section 5.4 in the case of advance approvals).
(d) 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).
(e) Transfer of Option Rights.
(1) Incentive Stock Options. No ISO granted under the
Plan may be sold, trans ferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all ISOs granted to an optionee under the Plan shall be exercisable
during his or her lifetime only by such optionee.
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(2) Nonqualified Stock Options. The Committee may, in its
discretion, authorize all or a portion of NQOs granted to an optionee to be on
terms which permit transfer by such optionee to (i) the spouse, children or
grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or (iii) a
partnership in which such Immediate Family Members are the only partners,
provided that (x) there may be no consideration for any such transfer, (y) the
Option Agreement pursuant to which such NQOs are granted must be approved by the
Committee, and must expressly provide for transferability in a manner consistent
with this Section, and (z) subsequent transfers of transferred NQOs shall be
prohibited except those by will or the laws of descent and distribution.
Following transfer, any such NQOs 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 "optionee" shall be deemed to refer to the
transferee. The events of termination of employment shall continue to be applied
with respect to the original optionee, following which the NQOs shall be
exercisable by the transferee only to the extent, and for the periods specified
in Section 6.1(g). Notwithstanding the foregoing, should the Committee provide
that NQOs 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 NQO. In the event of a transfer, as set forth above, the
original optionee is and will remain subject to and responsible for any
applicable withholding taxes upon the exercise of such NQOs.
(f) Payment. No shares of Common Stock shall be issued on the
exercise of an Option unless paid for in full at the time of exercise. Payment
shall be made in cash, which may be paid by check 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 which are
already owned by the optionee, valued at the Fair Market Value thereof on the
date of exercise. The Committee may also allow an optionee to exercise an Option
by use of proceeds to be received from the sale of Common Stock issuable
pursuant to the Option being exercised.
(g) Termination.
(1) Any Option or portion thereof which has not expired
or been exercised on or before the date on which an optionee ceases to be an
employee, officer, consultant or member of the Board of Directors or otherwise
affiliated with the Company ("Termination") for cause, shall expire upon
Termination.
(2) Any Option or portion thereof which has not expired
or been exercised on or before the date of Termination without cause, shall
expire ninety days after the date of Termination. A leave of absence duly
authorized by the Company, shall not be deemed a Termination or a break in
continuous employment.
(3) Notwithstanding the foregoing, if Termination is due
to the permanent disability or death of the optionee, the optionee, the
optionee's personal representative or any other
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person who acquires option rights from the optionee by will or the applicable
laws of descent and distribution, may, within twelve months after the date of
Termination, exercise such Option rights to the extent they were exercisable on
the date of Termination.
(h) Other Provisions. Each Option Agreement may contain such other
terms, provisions, and conditions not inconsistent with this Plan, including
rights of repurchase, as may be determined by the Committee, and each ISO
granted under this Plan shall include such provisions and conditions as are
necessary to qualify such option as an "incentive stock option" within the
meaning of Section 422 of the Code.
(i) Withholding and Employment Taxes. At the time of exercise of
an Option, the optionee shall remit to the Company in cash all applicable
federal and state withholding and employment taxes. If and to the extent
authorized and approved by the Committee in its sole discretion, an optionee may
elect, by means of a form of election to be prescribed by the Committee, to have
shares which are acquired upon exercise of an Option withheld by the Company or
tender other shares of Common Stock or other securities of the Company owned by
the optionee to the Company at the time the amount of such taxes is determined
in order to pay the amount of such tax obligations, subject to the following
limitations:
(1) such election shall be irrevocable; and
(2) such election shall be subject to the disapproval of
the Committee at any time.
Any Common Stock or other securities so withheld or tendered will be valued by
the Company as of the date they are withheld or tendered. Unless the Committee
otherwise determines, the optionee shall pay to the Company in cash, promptly
when the amount of such obligations become determinable, all applicable federal
and state withholding taxes resulting from the lapse of restrictions imposed on
exercise of an Option, from a transfer or other disposition of shares acquired
upon exercise of an Option or otherwise related to the Option or the shares
acquired upon exercise of the Option.
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
(a) Option Term. Unless a different expiration date is specified
by the Committee at the Grant Date in the Option Agreement, each NQO shall
expire ten years from its Grant Date.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
(a) Exercise Price. The exercise price of an ISO shall be
determined in accordance with the applicable provisions of the Code and shall in
no event be less than the fair market value of the
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stock covered by the ISO at the Grant Date; provided, however, that the exercise
price of an ISO granted to any person who owns, directly or indirectly (or is
treated as owning by reason of attribution rules, currently set forth in Section
424 of the Code), stock of the Company constituting more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or of
any Affiliate of the Company, shall in no event be less than 110% of such fair
market value.
(b) Option Term. Unless an earlier expiration date is specified by
the Committee at the Grant Date in the Option Agreement, each ISO shall expire
ten years from its Grant Date; except that an ISO granted to any person who
owns, directly or indirectly (or is treated as owning by reason of applicable
attribution rules currently set forth in Section 424 of the Code) stock of the
Company constituting more than 10% of the total combined voting power of the
Company's outstanding stock, or the stock of any Affiliate of the Company, shall
expire five years from its Grant Date.
(c) Disqualifying Dispositions. If stock acquired by exercise of
an ISO is disposed of within two years from the Grant Date or within one year
after the transfer of the stock to the optionee, the holder of the stock
immediately prior to the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the disposition as the Company may reasonably require.
Such holder shall pay to the Company any withholding and employment taxes which
the Company in its sole discretion deems applicable. The Company may instruct
its stock transfer agent by appropriate means, including placement of legends on
stock certificates, not to transfer stock acquired by exercise of an ISO unless
it has been advised by the Company that the requirements of this Section have
been satisfied.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give proper notification to the
Company at its principal executive office, to the attention of the Corporate
Secretary, accompanied by a notice of exercise in form and substance
satisfactory to the Company, by payment of the exercise price for such shares in
a form and manner as the Committee may from time to time approve and by such
other documents as the Committee may request. The date the Company receives
proper notification of an exercise hereunder accompanied by payment of the
exercise price and all such other documents will be considered the date the
Option was exercised. Promptly after receipt of proper notification of exercise
of an Option, the Company shall, without stock issue or transfer taxes to the
optionee or any other person entitled to exercise the Option, deliver to the
optionee or such other person a certificate or certificates for the requisite
number of shares of stock. An optionee or transferee of an Option shall not have
any privileges as stockholder with respect to any stock covered by the Option
until the date of issuance of a stock certificate.
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8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere with or
limit in any way the right of the Company to terminate any optionee's
employment, affiliation or other relationship with the Company at any time, nor
confer upon any optionee any right to continue in the employ of, as a consultant
to, as a director of, or otherwise affiliated in any way with, the Company.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Committee may, at any time and in any manner, amend, suspend, or terminate
this Plan or any award outstanding under this Plan; provided, however, that no
such amendment or discontinuance shall:
(a) be made without stockholder approval; (1) to the extent such
approval is required by law, agreement or the rules of any exchange or automated
quotation system upon which the Common Stock is listed or quoted or (2) to the
extent that any outstanding Option is canceled and regranted or repriced;
(b) adversely alter or impair the rights of Participants with
respect to awards previously made under this Plan without the consent of the
holder thereof; or
(c) make any change that would disqualify any provision of this Plan
intended to be so qualified, from the exemption provided by Rule 16b-3.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on such
member's own part, including but not limited to the exercise of any power or
discretion given to such member under this Plan, except for those acts or
omissions resulting from such member's own gross negligence or willful
misconduct. The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company for, all expenses
(including attorneys' fees and the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by such
person in connection with or arising out of any action, suit, or proceeding to
which the Committee or any member of the Committee may be a party by reason of
any action taken or failure to act under or in connection with the Plan or any
option granted or not granted under the Plan to the full extent permitted by law
and by the Certificate of Incorporation and Bylaws of the Company, as amended.
The right of indemnity described in this Section 10 shall be in addition to such
other rights of indemnification as the members of the Committee shall otherwise
be entitled because of their serving on the Board of Directors of the Company or
as an employee of the Company.
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11. EFFECTIVE DATE OF THIS PLAN
This Plan first became effective upon adoption by the Board of Directors on
February 1, 1995. This Amended and Restated MedPartners, Inc. 1995 Stock Option
Plan is an amendment and restatement of that Plan and was adopted by the
Committee on May 12, 1997.
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EXHIBIT (10)-18
MEDPARTNERS, INC.
1997 LONG TERM INCENTIVE COMPENSATION PLAN
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1. Establishment, Objectives and Duration.................... 5
1.1 Establishment of the Plan................................. 5
1.2 Objectives of the Plan.................................... 5
1.3 Duration of the Plan...................................... 5
Article 2. Definitions............................................... 5
2.1 "Affiliate"............................................... 5
2.2 "Award"................................................... 6
2.3 "Award Agreement"......................................... 6
2.4 "Beneficial Owner" or "Beneficial Ownership".............. 6
2.5 "Board" or "Board of Directors"........................... 6
2.6 "Cause"................................................... 6
2.7 "Change in Control"....................................... 6
2.8 "Code".................................................... 7
2.9 "Committee"............................................... 7
2.10 "Company"................................................. 8
2.11 "Director"................................................ 8
2.12 "Disability".............................................. 8
2.13 "Effective Date".......................................... 8
2.14 "Eligible Person"......................................... 8
2.15 "Employee"................................................ 8
2.16 "Exchange Act"............................................ 8
2.17 "Fair Market Value"....................................... 8
2.18 "Immediate Family Members"................................ 8
2.19 "Incentive Stock Option" or "ISO"......................... 9
2.20 "Insider"................................................. 9
2.21 "Nonemployee Director".................................... 9
2.22 "Nonqualified Stock Option" or "NQSO"..................... 9
2.23 "Option".................................................. 9
2.24 "Option Price"............................................ 9
2.25 "Participant"............................................. 9
2.26 "Period of Restriction"................................... 9
2.27 "Person".................................................. 9
2.28 "Plan".................................................... 9
2.29 "Restricted Stock"........................................ 9
2.30 "Retirement".............................................. 9
2.31 "Shares".................................................. 10
2.32 "Subsidiary".............................................. 10
Article 3. Administration............................................ 10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
3.1 The Committee............................................. 10
3.2 Authority of the Committee................................ 10
3.3 Decisions Binding......................................... 10
3.4 Costs of Plan............................................. 10
Article 4. Shares Subject to the Plan and Maximum Awards............. 11
4.1 Number of Shares Available for Grants..................... 11
4.2 Adjustments in Authorized Shares.......................... 11
Article 5. Eligibility and Participation............................. 12
5.1 Eligibility............................................... 12
5.2 Actual Participation...................................... 12
Article 6. Stock Options............................................. 12
6.1 Grant of Options.......................................... 12
6.2 Award Agreement........................................... 12
6.3 Option Price.............................................. 12
6.4 Duration of Options....................................... 12
6.5 Exercise of Options....................................... 12
6.6 Payment................................................... 13
6.7 Restrictions on Share Transferability..................... 13
6.8 Termination of Employment................................. 13
6.9 Nontransferability of Options............................. 13
(a) Incentive Stock Options.......................... 13
(b) Nonqualified Stock Options....................... 14
Article 7. Restricted Stock.......................................... 14
7.1 Grant of Restricted Stock................................. 14
7.2 Restricted Stock Agreement................................ 14
7.3 Transferability........................................... 14
7.4 Other Restrictions........................................ 15
7.5 Voting Rights............................................. 15
7.6 Dividends and Other Distributions......................... 15
7.7 Termination of Employment................................. 15
Article 8. Beneficiary Designation................................... 16
Article 9. Deferrals................................................. 16
Article 10. Rights of Employees....................................... 16
10.1 Employment................................................ 16
10.2 Participation............................................. 16
Article 11. Change in Control......................................... 16
11.1 Treatment of Outstanding Awards........................... 16
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
11.2 Termination, Amendment, and Modifications of
Change-in-Control Provisions.............................. 17
Article 12. Amendment, Modification, and Termination.................. 17
12.1 Amendment, Modification, and Termination.................. 17
12.2 Adjustment of Awards Upon the Occurrence of Certain
Unusual or Nonrecurring Events............................ 17
12.3 Awards Previously Granted................................. 17
Article 13. Withholding............................................... 17
13.1 Tax Withholding........................................... 17
13.2 Share Withholding......................................... 18
Article 14. Indemnification........................................... 18
Article 15. Successors................................................ 18
Article 16. Legal Construction........................................ 18
16.1 Gender and Number......................................... 18
16.2 Severability.............................................. 18
16.3 Requirements of Law....................................... 19
16.4 Securities Law Compliance................................. 19
16.5 Governing Law............................................. 19
</TABLE>
<PAGE> 5
MEDPARTNERS, INC.
1997 LONG TERM INCENTIVE COMPENSATION 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 an incentive
compensation plan to be known as the "MedPartners, Inc. 1997 Long Term Incentive
Compensation Plan" (hereinafter referred to as the "Plan"), as set forth in this
document. The Plan permits the grant of Incentive Stock Options, Nonqualified
Stock Options and Restricted Stock.
The Plan shall become effective as of February 25, 1997 (the "Effective Date")
and shall remain in effect as provided in Section 1.3 hereof.
1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the
profitability and growth of the Company through the use of incentives which are
consistent with the Company's objectives and which link the interests of
Participants to those of the Company's stockholders; to provide Participants
with an incentive for excellence in individual performance; and to promote
teamwork among Participants.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants to
share in the success of the Company.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as
described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Board of Directors or the Committee to amend or terminate the Plan
at any time pursuant to Article 12 hereof, until all Shares subject to it shall
have been purchased or acquired according to the Plan's provisions. However, in
no event may an Incentive Stock Option be granted under the Plan on or after
February 25, 2007.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set forth
below, and when the meaning is intended, the initial letter of the word shall be
capitalized:
2.1 "AFFILIATE" means a "parent corporation" or "subsidiary corporation" as
defined in Section 424 of the Code.
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2.2 "AWARD" means, individually or collectively, a grant under this Plan of
Incentive Stock Options, Nonqualified Stock Options or Restricted Stock.
2.3 "AWARD AGREEMENT" means an agreement entered into by the Company and
each Participant setting forth the terms and provisions applicable to Awards
granted under this Plan.
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 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;
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(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; or
(d) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
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.
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2.10 "COMPANY" means MedPartners, Inc., and also means any corporation of
which a majority of the voting capital stock is owned directly or indirectly by
MedPartners, Inc. or by any of its Subsidiaries, and any other corporation
designated by the Committee as being a Company hereunder (but only during the
period of such ownership or designation).
2.11 "DIRECTOR" means any individual who is a member of the Board of
Directors of the Company.
2.12 "DISABILITY", as applied to a Participant, means that the Participant
(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.
2.13 "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Section 1.1 hereof.
2.14 "ELIGIBLE PERSON" shall mean all Employees, Directors or consultants of
the Company or any Affiliate; provided, however, that no Award may be granted to
anyone who is not an "employee" as that term is defined in General Instruction
A.(1)(a) of Form S-8, as such definition may be amended from time to time,
without first receiving advice and guidance from the Company's outside counsel
as to the effect of such grant.
2.15 "EMPLOYEE" means any officer or employee of the Company.
2.16 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
2.17 "FAIR MARKET VALUE" 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).
2.18 "IMMEDIATE FAMILY MEMBERS" means the spouse, children and grandchildren
of a Participant.
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<PAGE> 9
2.19 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares
granted under Article 6 herein and which is designated as an Incentive Stock
Option and which is intended to meet the requirements of Code Section 422.
2.20 "INSIDER" shall mean an individual who is, on the relevant date, a
Director, a 10% Beneficial Owner of any class of the Company's equity securities
that is registered pursuant to Section 12 of the Exchange Act or an officer of
the Company, as defined under Section 16 of the Exchange Act and as determined
by the Board of Directors from time to time.
2.21 "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 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase
Shares granted under Article 6 herein and which is not intended to meet the
requirements of Code Section 422.
2.23 "OPTION" means an Incentive Stock Option or a Nonqualified Stock
Option, as described in Article 6 herein.
2.24 "OPTION PRICE" means the price at which a Share may be purchased by a
Participant pursuant to an Option.
2.25 "PARTICIPANT" means an Eligible Person who has outstanding an Award
granted under the Plan.
2.26 "PERIOD OF RESTRICTION" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance objectives, or upon the occurrence of other
events as determined by the Committee, at its discretion), and the Shares of
Restricted Stock are subject to a substantial risk of forfeiture, as provided in
Article 7 herein.
2.27 "PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) thereof.
2.28 "PLAN" means the MedPartners, Inc. 1997 Long Term Incentive
Compensation Plan.
2.29 "RESTRICTED STOCK" means an Award granted to a Participant pursuant to
Article 7 herein.
2.30 "RETIREMENT" as applied to a Participant, means the Participant's
termination of employment in a manner which qualifies the Participant to receive
immediately payable retirement benefits under the applicable retirement plan
maintained by the Company (the "Retirement Plan"), under the successor or
replacement of such Retirement Plan if it is then no longer in effect, or under
any other retirement plan maintained or adopted by the Company which is
determined by
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the Committee to be the functional equivalent of such Retirement Plan; or, with
respect to a Participant who may not or has not participated in a retirement
plan maintained by the Company or an Affiliate, "Retirement" shall have the
meaning determined by the Committee from time to time.
2.31 "SHARES" means Common Stock of MedPartners, Inc., par value $.001 per
share.
2.32 "SUBSIDIARY" means any corporation, partnership, joint venture or other
entity in which the Company has a majority voting interest.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Committee, or by
any other committee appointed by the Board, which Committee shall consist solely
of two or more "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 Employees who
shall participate in the Plan; determine the sizes and types of Awards;
determine the terms and conditions of Awards in a manner consistent with the
Plan; construe and interpret the Plan and any agreement or instrument entered
into under the Plan as they apply to Employees; establish, amend, or waive rules
and regulations for the Plan's administration as they apply to Employees; alter,
amend, suspend or terminate the Plan in whole or in part; and (subject to the
provisions of Article 12 herein) amend the terms and conditions of any
outstanding Award to the extent such terms and conditions are within the
discretion of the Committee as provided in the Plan. Further, the Committee
shall make all other determinations which may be necessary or advisable for the
administration of the Plan, as the Plan applies to Employees. As permitted by
law, the Committee may delegate its authority as identified herein.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its stockholders, Employees, Participants and their
estates and beneficiaries.
3.4 COSTS OF PLAN. The costs and expenses incurred in the operation and
administration of the Plan shall be borne by the Company.
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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 6,725,000.
The number of Shares reserved for issuance under the Plan shall automatically
increase on the first day of each calendar year during the term of this Plan,
beginning with the 1998 calendar year, by an amount equal to 1% of the Shares
outstanding on December 31 of the immediately preceding year. However, such
additional Shares shall not be available for grants of Incentive Stock Options,
unless and until the increase in the number of Shares provided for herein is
subsequently approved by the stockholders of the Company in accordance with
Section 422 of the Code.
Shares issued upon exercise of Options or Awards of Restricted Stock under the
Plan may be either authorized but unissued Shares or Shares re-acquired 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 of Common Stock
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.
Notwithstanding the foregoing, the maximum number of Shares of Restricted Stock
granted pursuant to Article 7 herein shall be an amount equal to one-fifth of
the total number of Shares reserved for issuance under the Plan.
4.2 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under
Section 4.1, in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, and in the Award limits set forth in
Section 4.1, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of rights;
provided, however, that the number of Shares subject to any Award shall always
be a whole number.
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ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. All Eligible Persons are eligible to participate in this
Plan.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all Eligible Persons, those to
whom Awards shall be granted and shall determine the nature and amount of each
Award.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Participants in such number, and upon such terms, and
at any time and from time to time as shall be determined by the Committee.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine. The Award Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Code Section 422, or an
NQSO whose grant is intended not to fall under the provisions of Code Section
422.
6.3 OPTION PRICE. The Option Price for each grant of an Option under this
Plan shall be at least equal to 100% of the Fair Market Value of a Share on the
date the Option is granted; provided, however, that the exercise price of an ISO
granted to any person who owns, directly or indirectly, (or is treated as owning
by reason of attribution rules, currently set forth in Code Section 424), stock
of the Company constituting more than 10% of the total combined voting power of
the Company's outstanding stock, or the stock of any of its corporate
subsidiaries, shall in no event be less than 110% of the Fair Market Value of
such shares.
6.4 DURATION OF OPTIONS. Each Option granted to an Employee shall expire at
such time as the Committee shall determine at the time of grant; provided,
however, that no Incentive Stock Option shall be exercisable later than the
tenth anniversary date of its grant. Furthermore, each Stock Option granted to
any person who owns, directly or indirectly (or is treated as owning by reason
of attribution rules, currently set forth in Internal Revenue Code Section 424),
stock of the Company constituting more than 10% of the total combined voting
power of the Company's outstanding stock, or the stock of any of its corporate
subsidiaries, is not exerciseable after the expiration of five years from the
date such option is granted.
6.5 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Participant. Notwithstanding any contrary provisions
contained in this Plan, the aggregate Fair Market Value (determined as of the
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time each ISO is granted) of the shares of Common Stock with respect to which
ISO's issued to any one person thereunder are exercisable for the first time
during any calendar year shall not exceed $100,000.
6.6 PAYMENT. Options granted under this Article 6 shall be exercised 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, which may be paid by check 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 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.
As soon as practicable after receipt of proper notification of exercise and full
payment, the Company shall deliver to the Participant, in the Participant's
name, Share certificates in an appropriate amount based upon the number of
Shares purchased under the Option(s).
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
6.8 TERMINATION OF EMPLOYMENT. Each Option, to the extent it has not been
previously exercised, shall terminate upon the earliest to occur of: (a) the
expiration of the Option period set forth in the Option Award Agreement; (b) for
ISOs, the expiration of three months following the Participant's Retirement
(following the Participant's Retirement, NQSOs shall terminate upon the
expiration of the Option period set forth in the Option Award Agreement); (c)
the expiration of 12 months following the Participant's death or Disability; (d)
immediately upon termination for Cause; or (e) the expiration of 90 days
following the Participant's termination of employment for any reason other than
Cause, Change in Control, death, Disability, or Retirement. Upon a termination
of employment related to a Change in Control, Options shall be treated in the
manner set forth in Article 11.
6.9 NONTRANSFERABILITY OF OPTIONS.
(a) INCENTIVE STOCK OPTIONS. No ISO granted under the Plan may be
sold, transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of
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descent and distribution. Further, all ISOs granted to a Participant under the
Plan shall be exercisable during his or her lifetime only by such Participant.
(b) NONQUALIFIED STOCK OPTIONS. The Committee may, in its
discretion, authorize all or a portion of NQSOs granted to a Participant to be
on terms which permit transfer by such Participant to (i) Immediate Family
Members, (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, provided that (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. RESTRICTED STOCK
7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to Participants in such amounts as the Committee shall
determine. Without limiting the generality of the foregoing, Restricted Shares
may be granted in connection with payouts under other compensation programs of
the Company.
7.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Award Agreement that shall specify the Period(s)
of Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the Committee shall determine.
7.3 TRANSFERABILITY. Except as provided in this Article 7, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Restricted Stock
Award Agreement, or upon earlier satisfaction of any other conditions, as
specified by the Committee in its sole discretion and set forth in the
Restricted Stock Award Agreement. All rights with respect to the Restricted
Stock granted to a Participant under the Plan shall be available during his or
her lifetime only to such Participant.
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7.4 OTHER RESTRICTIONS. Subject to Article 8 herein, the Committee shall
impose such other conditions and/or restrictions on any Shares of Restricted
Stock granted pursuant to the Plan as it may deem advisable including, without
limitation, a requirement that Participants pay a stipulated purchase price for
each Share of Restricted Stock, restrictions based upon the achievement of
specific performance objectives (Company-wide, business unit, and/or
individual), time-based restrictions on vesting following the attainment of the
performance objectives, and/or restrictions under applicable federal or state
securities laws.
At the discretion of the Committee, the Company may retain the certificates
representing Shares of Restricted Stock in the Company's possession until such
time as all conditions and/or restrictions applicable to such Shares have been
satisfied.
Except as otherwise provided in this Article 7, Shares of Restricted Stock
covered by each Restricted Stock grant made under the Plan shall become freely
transferable by the Participant after the last day of the applicable Period of
Restriction.
7.5 VOTING RIGHTS. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.6 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder may be
credited with regular cash dividends paid with respect to the underlying Shares
while they are so held. Such dividends may be paid currently, accrued as
contingent cash obligations, or converted into additional shares of Restricted
Stock, upon such terms as the Committee establishes.
The Committee may apply any restrictions to the dividends that the Committee
deems appropriate.
In the event that any dividend constitutes a "derivative security" or an "equity
security" pursuant to Rule 16(a) under the Exchange Act, such dividend shall be
subject to a vesting period equal to the remaining vesting period of the Shares
of Restricted Stock with respect to which the dividend is paid.
7.7 TERMINATION OF EMPLOYMENT. Upon a Participant's death, Disability, or
Retirement, all Restricted Shares shall vest immediately. Each Restricted Stock
Award Agreement shall set forth the extent to which the Participant shall have
the right to retain unvested Restricted Shares following termination of the
Participant's employment with the Company in all other circumstances. Such
provisions shall be determined in the sole discretion of the Committee, shall be
included in the Award Agreement entered into with each Participant, need not be
uniform among all Shares of Restricted Stock issued pursuant to the Plan, and
may reflect distinctions based on the reasons for termination of employment.
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ARTICLE 8. BENEFICIARY DESIGNATION
A Participant under the Plan may make written designation of a beneficiary on
forms prescribed by and filed with the Corporate Secretary 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.
ARTICLE 9. DEFERRALS
The Committee may permit or require a Participant to defer such Participant's
receipt of the payment of cash or the delivery of Shares that would otherwise be
due to such Participant by virtue of the exercise of an Option, the lapse or
waiver of restrictions with respect to Restricted Stock, or the satisfaction of
any requirements or objectives with respect to performance measures, if any. If
any such deferral election is required or permitted, the Committee shall, in its
sole discretion, establish rules and procedures for such payment deferrals.
ARTICLE 10. RIGHTS OF EMPLOYEES
10.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
10.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
ARTICLE 11. CHANGE IN CONTROL
11.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:
(a) Any and all Options granted hereunder shall become immediately
exercisable, and shall remain exercisable throughout their entire term; and
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<PAGE> 17
(b) Any restriction periods and restrictions imposed on Shares of
Restricted Stock shall lapse; provided, however, that the degree of vesting
associated with Restricted Stock which has been conditioned upon the achievement
of performance conditions pursuant to Section 7.4 herein shall be determined in
the manner set forth in Section 7.7 herein.
11.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL
PROVISIONS. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 11 may not be terminated,
amended, or modified on or after the date of a Change in Control to affect
adversely any Award theretofore granted under the Plan without the prior written
consent of the Participant with respect to said Participant's outstanding
Awards.
ARTICLE 12. AMENDMENT, MODIFICATION, AND TERMINATION
12.1 AMENDMENT, MODIFICATION, AND TERMINATION. Subject to Section 11.2
herein, the Board or the Committee may at any time and from time to time, alter,
amend, suspend or terminate the Plan in whole or in part, except that, without
approval of the stockholders of the Company, no such revision or amendment shall
increase the number of shares available for grants of ISOs under the Plan or
alter the class of participants in the Plan.
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 or reduce the exercise price of any outstanding Options
without stockholder approval.
12.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in
Section 4.2 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.
12.3 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.
ARTICLE 13. WITHHOLDING
13.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state, and
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<PAGE> 18
local taxes, domestic or foreign, required by law or regulation to be withheld
with respect to any taxable event arising as a result of this Plan.
13.2 SHARE WITHHOLDING. 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 14. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit, or proceeding against him or her, provided he
or she shall give the Company an opportunity, at its own expense, to handle and
defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled under
the Company's Certificate of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
ARTICLE 15. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase, of
all or substantially all of the business and/or assets of the Company, or a
merger, consolidation or otherwise.
ARTICLE 16. LEGAL CONSTRUCTION
16.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular; and, the singular shall include the plural.
16.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
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<PAGE> 19
16.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
16.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under
this Plan are intended to comply with all applicable conditions of Rule 16b-3 or
its successors under the Exchange Act. To the extent any provision of the Plan
or action by the Committee fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
16.5 GOVERNING LAW. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the state of Delaware.
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[NATIONSBANK LETTERHEAD]
EXHIBIT (10)-19
March 27, 1998
To: MedPartners, Inc.
From: NationsBank, N.A., as Agent
Re: Consent to waiver of Section 8.1 and Section 8.4(h)(1) of the Credit
Agreement
Dear MedPartners, Inc.:
Effective March 27, 1998, the Required Lenders consented to the extension of the
waiver of Section 8.1 and 8.4 (h)(1) of the Credit Agreement through
May 29, 1998.
Thank you again for all your efforts.
Regards,
/s/ William D. Duke
- ---------------------
William D. Duke
Vice President
cc: P. Clemens, MedPartners, Inc.
<PAGE> 1
EXHIBIT (21)
CORPORATION SUBSIDIARIES
MedGP, Inc. - Delaware corporation
MedPartners Acquisition Corporation - Delaware corporation
MedPartners Aviation, Inc. - Delaware corporation
Bay Area Practice Management Group, Inc. - California corporation
CHS Management, Inc. - Delaware corporation
Caremark International Inc. - Delaware corporation
Caremark Inc. - California corporation
Caremark Physician Services of Texas Inc. - Delaware corporation
MCS Holdings Corporation - Delaware corporation
Prescription Health Services, Inc. - California corporation
Strategic Healthcare Management, Inc. - California corporation
MP Indemnity Ltd. - Bermuda corporation
Caremark International Holdings Inc. - Delaware corporation
Caremark Holdings N.V. - The Netherlands corporation
Caremark S.A. - France corporation
Caremark Distribution S.A. - France corporation
Caremark Ltd. - Japan corporation
Caremark Limited - New Zealand corporation
Caremark Limited - England and Wales, United Kingdom corporation
Caremark Services Limited - England and Wales, United Kingdom corporation
CPSL Limited - England and Wales, United Kingdom corporation
Caremark Pty. Ltd. - New South Wales, Australia corporation
MedPartners Physician Services Inc. - Delaware corporation
Caremark Nephrology Services Inc. - Delaware corporation
Caremark Resources Corporation - Delaware corporation
Friendly Hills Healthcare Network Inc. - Delaware corporation
North Suburban Clinic Ltd. - Illinois corporation
Greeley Clinic, Inc. - Oregon corporation
LFMG, Inc. - California corporation
Pacific Medical Group, Inc. - Oregon corporation
Pacific Physician Services, Inc. - Delaware corporation
PPS East, Inc. - Delaware corporation
PPS North Carolina Medical Management, Inc. - North Carolina corporation
PPS Riverside Division Acquisition and Management Corp. I - Delaware corporation
PPS Valley Management, Inc. - California corporation
Pacific Indemnity, Ltd. - British Virgin Islands corporation
Pacific Physician Services Arizona, Inc. - Delaware corporation
Pacific Physician Services Nevada, Inc. - Delaware corporation
Physicians' Hospital Management Corporation - Delaware corporation
Reliant Healthcare Systems, Inc. - California corporation
Team Health, Inc. - Tennessee corporation
Clinic Management Services, Inc. - Tennessee corporation
Daniel & Yeager, Inc. - Alabama corporation
Drs. Sheer, Ahearn & Associates, Inc. - Florida corporation
The Emergency Associates for Medicine, Inc. - Florida corporation
Emergency Coverage Corporation - Tennessee corporation
Emergency Physician Associates, Inc. - New Jersey corporation
Emergency Professional Services, Inc. - Ohio corporation
Hospital Based Physician Services, Inc. - Tennessee corporation
Med: Assure Systems, Inc. - Tennessee corporation
Northwest Emergency Physicians, Inc. - Washington corporation
Southeastern Emergency Physicians, Inc. - Tennessee corporation
Southeastern Emergency Physicians of Memphis, Inc. - Tennessee corporation
Emergicare Management Incorporated - Tennessee corporation
Team Radiology, Inc. - North Carolina corporation
MedPartners Provider Network, Inc. - California corporation
St. Johns Clinic, Inc. - Oregon corporation
The Tigard Clinic, Inc. - Oregon corporation
MedPartners East, Inc. - Delaware corporation
MedPartners Integrated Network-Chandler, Inc. - Arizona corporation
Reich, Seidelmann & Janicki Co. - Ohio corporation
Charles L. Springfield, Inc. - California corporation
Karl G. Mangold, Inc. - California corporation
Herschel Fischer, Inc. - California corporation
Georgia MedPartners Management, Inc. - Georgia corporation
MedPartners of New Mexico, Inc. - Delaware corporation
MedPartners-Texas, Inc. - Texas non-profit corporation
Aetna Professional Management Corporation - Connecticut corporation
ADS Health Management, Inc. - California corporation
Healthways, Inc. - Illinois corporation
HealthSpring, Inc. - Delaware corporation
HealthSpring of Illinois, Inc. - Delaware corporation
HealthSpring of Pennsylvania, Inc. - Delaware corporation
InPhyNet Medical Management, Inc. - Delaware corporation
InPhyNet Administrative Services, Inc. - Florida corporation
InPhyNet Managed Care, Inc. - Florida corporation
Acute Care Medical Management, Inc. - Ohio corporation
BGS Healthcare, Inc. - Florida corporation
Health Services of Pembroke Lakes, Inc. - Florida corporation
Home Health Agency of Greater Miami, Inc. - Florida corporation
InPhyNet Managed Care Contracting Services, Inc. - Florida corporation
InPhyNet Managed Care Contracting Services of Century Village, Inc. - Florida
corporation
InPhyNet Managed Care of South Broward, Inc. - Florida corporation
InPhyNet Medical Management of Ohio, Inc. - Florida corporation
Sachs, Morris & Sklaver, Inc. - Florida corporation
EMSA South Broward, Inc. - Florida corporation
InPhyNet Hospital Services, Inc. - Florida corporation
EMSA Contracting Services, Inc. - Florida corporation
EMSA Louisiana, Inc. - Florida corporation
InPhyNet Anesthesia of West Virginia, Inc. - West Virginia corporation
Metroamerican Radiology, Inc. - North Carolina corporation
Neo-Med, Inc. - Florida corporation
Paragon Anesthesia, Inc. - Florida corporation
Paragon Contracting Services, Inc. - Florida corporation
Paragon Imaging Consultants, Inc. - Florida corporation
Rosendorf, Margulies, Borushok, Schoenbaum Radiology Associates of Hollywood,
Inc. - Florida corporation
Virginia Emergency Physicians, Inc. - Virginia corporation
InPhyNet Government Services, Inc. - Florida corporation
EMSA Correctional Care, Inc. - Florida corporation
EMSA Military Services, Inc. - Florida corporation
IMBS, Inc. - Florida corporation
InPhyNet Medical Management Institute, Inc. - Delaware corporation
Acute Care Specialists, Co. - Pennsylvania corporation
Occucare, Inc. - Ohio corporation
PPS Indemnity, Inc. - Hawaii corporation
Quantum Plus, Inc. - California corporation
MedPartners/Talbert Medical Management Corporation - Delaware corporation
Talbert Medical Management Corporation - Delaware corporation
Talbert Health Services Corporation - Delaware corporation
NON-CORPORATE SUBSIDIARIES
MedOhio, L.P. - Delaware limited partnership
MedTen, L.P. - Delaware limited partnership
MedTex, L.P. - Delaware limited partnership
MedPartners Physician Services of Illinois L.L.C. - Illinois limited liability
company
Cerritos Investment Group - California general partnership
Cerritos Investment Group II - California general partnership
Family Medical Center - Oregon general partnership
5000 Airport Plaza, L.P. - California limited partnership
KS-PSI of Texas L.P. - Delaware general partnership
MPI/Memorial IPA, LLC - California limited liability company
PPS Medical Management and Consulting, L.L.C. - Delaware limited liability
company
Sierra Meadows Associates, Ltd. - Nevada limited partnership
Fischer Mangold - California general partnership
MedPartners Administration, L.P. - Delaware limited partnership
MedPartners Physician Management, L.P. - Delaware limited partnership
EMSA Limited Partnership - Florida limited partnership
Paragon Healthcare Limited Partnership - Florida limited partnership
<PAGE> 1
EXHIBIT (23)
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of MedPartners, Inc. and in the related Prospectus of our report dated March 13,
1998, with respect to the Consolidated Financial Statements of MedPartners, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 1997
as follows:
Form S-8 No. 033-86806 pertaining to the 1993 Stock Option Plan;
Form S-8 No. 333-11875 pertaining to MedPartners' Incentive Compensation
Plan;
Form S-8 No. 333-11127 pertaining to the 1995 Stock Option Plan;
Form S-8 No. 333-05703 pertaining to MedPartners' Employee Savings Plan;
Form S-8 No. 333-14159 pertaining to Caremark's Employee Savings Plan;
Form S-8 No. 333-14163 pertaining to Caremark's Non-Employee/Director Stock
Option Plan and
Caremark's Stock Purchase Plan;
Form S-8 No. 333-38835 pertaining to MedPartners' 1997 Long Term Incentive
Compensation Plan;
Form S-8 No. 333-16863 pertaining to MedPartner's Employee Stock Purchase
Plan;
Form S-3 No. 333-17339 pertaining to the resale of common stock by certain
selling stockholders;
Form S-8 No. 333-30145 pertaining to MedPartner's 1994 Non-Employee
Director Stock Option Plan and 1994 Stock Incentive Plan; and
Form S-8 No. 333-42967 pertaining to the Amended and Restated 1995 Stock
Option Plan.
ERNST & YOUNG LLP
March 31, 1998
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 215,801
<SECURITIES> 0
<RECEIVABLES> 967,800
<ALLOWANCES> (204,249)
<INVENTORY> 164,049
<CURRENT-ASSETS> 1,313,041
<PP&E> 530,033
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,890,529
<CURRENT-LIABILITIES> 1,237,294
<BONDS> 1,470,622
0
0
<COMMON> 198
<OTHER-SE> 90,656
<TOTAL-LIABILITY-AND-EQUITY> 2,890,529
<SALES> 0
<TOTAL-REVENUES> 6,331,151
<CGS> 0
<TOTAL-COSTS> 7,047,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,748
<INCOME-PRETAX> (771,782)
<INCOME-TAX> (78,040)
<INCOME-CONTINUING> (693,742)
<DISCONTINUED> (95,988)
<EXTRAORDINARY> 0
<CHANGES> (30,885)
<NET-INCOME> (820,615)
<EPS-PRIMARY> (4.42)
<EPS-DILUTED> (4.42)
</TABLE>
<PAGE> 1
EXHIBIT 99-1
(1) Lauriello v. MedPartners, Inc., et al., No. CV98-98 (Cir. Ct. of Jefferson
County, Ala., filed January 9, 1998);
(2) Rubino v. MedPartners, Inc., et al., No. CV98-B-0067-S (U.S.D.C. Northern
District, Alabama, filed January 13, 1998);
(3) Loomis v. MedPartners, Inc., et al., No. CV98-G-0086-S (U.S.D.C. Northern
District, Alabama, filed January 14, 1998);
(4) Marsh v. MedPartners, Inc., et al., No. CV98-TMP-0096-S (U.S.D.C. Northern
District, Alabama, filed January 15, 1998);
(5) Smith v. House, et al., No. CV98-B-0095-S (U.S.D.C. Northern
District, Alabama, filed January 15, 1998);
(6) Buettler v. MedPartners, Inc., et al., No. CV98-AR-0119-S (U.S.D.C.
Northern District, Alabama, filed January 20, 1998);
(7) Schacter v. MedPartners, Inc., et al., No. CV98-00297, (Cir. Ct. of
Jefferson County, Ala., filed January 16, 1998);
(8) Susser v. MedPartners, Inc., et al., No. CV98-N-0177-S, (U.S.D.C. Northern
District, Alabama, filed January 26, 1998);
(9) ZSA Asset Allocation Fund v. MedPartners, Inc., et al., No. CV98-B-0274-S
(U.S.D.C. Northern District, Alabama, filed February 6, 1998);
(10) Bishop v. House, et al., No. CV98-P-0316-S ((U.S.D.C. Northern
District, Alabama, filed February 10, 1998);
(11) Mizraji v. MedPartners, Inc., et al., No. CV98-P-0351-S (U.S.D.C. Northern
District, Alabama, filed February 13, 1998);
(12) Rudolf v. MedPartners, Inc., et al., No. CV98-B-0409-S (U.S.D.C. Northern
District, Alabama, filed February 20, 1998);
(13) Sorrentino v. MedPartners, Inc., et al., No. CV98-N-0358-S (U.S.D.C.
Northern District, Alabama, filed February 13, 1998);
(14) Steiner v. MedPartners, Inc., et al., No. CV98-P-0317-S (U.S.D.C. Northern
District, Alabama, filed February 10, 1998);
(15) Kosseff v. MedPartners, Inc., et al., No. CV98-G-0558-S (U.S.D.C. Northern
District, Alabama, filed March 10, 1998);
(16) Wisinski v. MedPartners, Inc., et al., No. CV98-P-0528-S (U.S.D.C. Northern
District, Alabama, filed March 5, 1998);
