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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ________
Commission file number: 0-24336
INPHYNET MEDICAL MANAGEMENT INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0501896
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(State or other jurisdiction (I.R.S. Emmployer
of incorporation or organization) Identification No.)
1200 SOUTH PINE ISLAND ROAD, SUITE 600, FORT LAUDERDALE, FLORIDA 33324-4460
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 475-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
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 the 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 the Form 10-K or any amendment to this
Form 10-K.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 24, 1997 was $380,393,735. The aggregate market value was
computed by reference to the closing price as of that date. (For purposes of
calculating this amount only, all directors, executive officers and greater than
10% shareholders of the Registrant are treated as affiliates.)
The number of shares outstanding of the Registrant's common stock as of
March 24, 1997, was 16,365,293.
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TABLE OF CONTENTS
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PART I
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Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 9
Item 3. Legal Proceedings..................................................................... 9
Item 4. Submission of Matters to a Vote of Securities Holders ................................ 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 10
Item 6. Selected Consolidated Financial Data.................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 12
Item 8. Consolidated Financial Statements and Supplementary Data.............................. 17
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.............................................................. 17
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 41
Item 11. Executive Compensation................................................................ 43
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 46
Item 13. Certain Relationships and Related Transactions........................................ 46
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PART I
ITEM 1. BUSINESS
InPhyNet Medical Management Inc. ("InPhyNet" or the "Company") is one
of the largest physician management organizations in the United States and has
over 22 years of experience in managing physicians for a variety of clients,
including hospitals, health maintenance organizations ("HMOs") and governmental
entities. The Company manages approximately 1,900 physicians and 3,300 other
clinical and administrative personnel. At December 31, 1996, the Company had 131
contracts with hospitals and governmental entities in 21 states and was
responsible for the comprehensive health care needs of approximately 117,000
individuals through capitated fee contracts in 14 states with third-party and
governmental payors. During 1996, the Company delivered services for
approximately 2.7 million patient visits. The Company's total revenue has grown
from $196.5 million in 1992 to $408.5 million in 1996.
The Company's business consists primarily of managing physicians and
other medical personnel for its two divisions: (i) Hospital Physician Services,
through which the Company delivers emergency medicine, radiology, primary care
and other hospital-based physician services under contracts primarily with
hospitals; and (ii) Capitated Medical Services, through which the Company
manages the delivery of comprehensive medical services under contracts primarily
with HMOs and various state and local correctional institutions and the delivery
of fee-for-service medical services through primary care practices and home
health agencies. Hospital Physician Services and Capitated Medical Services
accounted for 53% and 47%, respectively, of the Company's total revenue in 1996.
INDUSTRY BACKGROUND
Health care in the United States traditionally has been delivered
through a fragmented system of health care providers, including individual or
small groups of primary care physicians and specialists. According to the
American Medical Association ("AMA"), there are approximately 565,000 practicing
physicians in the United States. A 1993 AMA study estimates that there are over
86,000 physicians practicing in 3,600 multi-specialty group practices (three or
more physicians) and over 82,000 physicians practicing in 12,700 single
specialty group practices in the United States. The majority of the existing
medical groups are small, consisting of 15 physicians or less with 45% having
under five physicians.
The role of the primary care physician is changing dramatically. While
these physicians continue to control the direct delivery of patient care, the
practice environment has shifted due to increasing cost consciousness, trends
toward managed care and growing demand for primary care. Historically, the lack
of coordination in medical care has contributed to over-utilization of health
care services, increasing health care costs at rates significantly higher than
inflation. In response, third-party payors have been implementing measures to
contain costs and improve the availability of medical services. These measures,
which include limits on the utilization of specialized health care services and
alternative methods of reimbursement, have shifted the health care industry
toward models of managed care. In these models, the primary care physician and
physician management organization are playing increasingly important roles.
Growth opportunities for physician management organizations have
increased as a result of increased outsourcing by health care institutions,
including hospitals, HMOs and governmental entities. This outsourcing has
increased as a result of concerns over the accelerating costs of health care and
the burdens associated with providing medical care. These burdens include
significant reimbursement pressures, greater administrative burdens and a more
competitive landscape. Physician management organizations, such as the Company,
have expertise in recruiting, scheduling, retaining and managing qualified
physicians, billing and collecting for their services, recordkeeping, risk
management, quality assurance and controlling medical malpractice and other
costs. Hospitals, HMOs and governmental entities, as well as other third-party
payors and intermediaries, increasingly are turning to these outside providers
of physician services to provide cost-effective care. Although this trend to
outsource has been most apparent in hospital emergency departments, the
principles of physician practice management are increasingly being applied to
other hospital-based physician services, such as radiology, anesthesiology and
pediatrics, as well as to primary group practices.
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In response to the changing practice environment, physicians are
consolidating their practices to increase negotiating leverage and reduce
escalating administrative costs. This trend has led many physicians to affiliate
themselves with organizations such as the Company that provide access to the
capital required to implement information systems and technologies, which often
improve the quality of care and reduce costs. Such organizations also have
practice management expertise as well as the cost accounting and quality
assurance systems necessary to enter into sophisticated risk-sharing contracts
with payors. In addition, larger organizations frequently have ties with other
providers and have an ability to offer a variety of medical services that
smaller organizations do not have.
COMPANY STRATEGY
The Company's strategy is to develop its business by addressing
significant changes in the role and practice patterns of the physician in the
health care services industry. Elements of this strategy include:
EXPAND PRESENCE IN CAPITATED MEDICAL SERVICES. The Company has
extensive experience in providing managed care services under contracts with
HMOs, and comprehensive medical services on a capitated basis to state and local
correctional institutions. In addition, the Company has over twelve years of
experience in managing medical care delivery networks, which combine capitated
primary care clinics with affiliated hospitals and subcapitation of independent
specialty groups to provide integrated care on a 24-hour basis. The Company
capitalizes on its experience to expand services provided to existing clients,
obtain new managed care contracts and contracts with correctional institutions
and build and acquire physician practices in targeted geographic markets.
ENHANCE LEADING FRANCHISE IN HOSPITAL PHYSICIAN SERVICES. The Company
is one of the nation's largest providers of emergency department services. With
the 1995 acquisitions of MetroAmerican Radiology, Inc. ("MetroAmerican") and
Radiology Associates of Hollywood, Inc. ("Radiology Associates"), the Company
believes it has become a leading provider of radiology practice management
services. The Company's existing base of hospital contracts provides
opportunities for internal growth through the cross-selling of services to other
departments. The Company continues to expand its hospital-based services into
other departments such as pediatrics, intensive care, anesthesiology,
neonatology and internal medicine. The Company obtains new hospital clients both
by contracting with hospitals that previously managed their own departments and
by replacing existing practice management companies.
ACQUIRE, INTEGRATE AND MANAGE PHYSICIAN PRACTICES. The Company develops
new markets and expands in its existing markets through acquisitions of
physician practices. The Company increases revenue in acquired practices by
implementing programs that improve documentation of care delivered, centralize
negotiation of third-party payor contracts, increase the scope of services
offered and, in primary care practices, accelerate the transition of patients
from traditional fee-for-service plans to capitated managed care programs. The
Company has developed a strong physician culture, including highly capable
physician managers with the ability to more efficiently manage their practices.
The Company believes that these factors give it a competitive advantage over
hospitals and HMOs in acquiring, recruiting and managing physician practices.
OPERATING DIVISIONS
CAPITATED MEDICAL SERVICES
Capitated Medical Services includes the Company's Managed Care and
Corrections operations. Revenue for Capitated Medical Services division was
approximately $191.7 million, $114.7 million and $93.4 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
MANAGED CARE. The Company sub-contracts with HMOs to manage the
delivery of comprehensive medical services to their enrollees. At December 31,
1996, the Company managed the delivery of such services to approximately 76,000
HMO enrollees and to fee-for-service patients at its 14 clinics in South Florida
and through its agreements with Physician Corporation of America and Kaiser
Permanente (See Item 1. "Recent Developments"). The Company either employs
primary care physicians or contracts for primary care physician services for HMO
enrollees and typically provides for other services with hospitals and medical
specialists on a sub-capitated or discounted fee-for-service basis. Because the
Company is at risk for the cost of providing comprehensive health care services
to its assigned enrollees, it carefully manages utilization of hospital and
medical specialist services.
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The Company believes that it will have significant opportunities to
expand its managed care business primarily as a result of two factors. First,
practice management organizations are better qualified than most third-party
payors to recruit, manage and retain physicians and deliver services on a high
quality, cost-effective basis. Second, the Company believes that the HMO segment
of the managed care industry offers one of the best long-term solutions to
controlling health care costs because of the independence and flexibility it
offers primary care physicians.
Under the Company's HMO contracts, the Company receives a fixed,
prepaid monthly fee for each covered life in exchange for assuming
responsibility for the provision of medical services, subject to certain
limitations. To the extent that enrollees require more frequent or extensive
care than was anticipated by the Company, the revenue to the Company under a
contract may be insufficient to cover the costs of the care provided.
CORRECTIONAL CARE. The Company provides comprehensive medical services,
including mental health and dental services, to inmates in various state and
local correctional institutions. The Company provides primary care physician
services directly and typically subcontracts other services with hospitals and
medical specialists on either a capitated or discounted fee-for-service basis.
At December 31, 1996, the Company had contracts with 40 correctional
institutions and managed the health care services provided to approximately
41,000 inmates at 60 sites. During 1996, the Company acquired substantially all
the assets of NHS National Health Services, Inc. (NHS) including 6 contracts at
13 sites, and was awarded 6 new contracts with correctional institutions
covering 14 sites.
Four factors have created growth opportunities for the Company in
correctional care. First, correctional institutions throughout the country are
increasingly contracting with private companies to manage the provision of
medical services to inmates to control health care costs. Second, difficulties
in recruiting and managing physicians and related support staffs have compelled
governmental agencies to contract with physician management organizations to
deliver on-site health care services to inmates. Third, the outsourcing of such
health care services allows governmental agencies to shift the financial risk
associated with the delivery of medical services to inmates to private physician
management organizations, which have greater experience in managing such risks.
Fourth, physician management companies have experience in meeting federal and
state mandated healthcare requirements. Moreover, the Company has established
itself as a physician management organization that can satisfy the various
criteria that serve as barriers to entry in this field. These criteria include
requirements that physician management organizations have a minimum of five
years experience in the corrections environment, current references in
correctional care, the posting of performance bonds or letters of credit in
order to secure the Company's performance and prior success in obtaining
National Commission of Correctional Health Care accreditation for correctional
institutions.
Under correctional care contracts, the Company is paid monthly on the
basis of each correctional institution's average daily inmate population.
Typically, the Company is also entitled to additional reimbursement for any
health care 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.
HOSPITAL PHYSICIAN SERVICES
Hospital Physician Services includes emergency physician and other
contract staffing services and certain related business services. Revenue for
the Hospital Physician Services division was approximately $216.8 million,
$210.7 million, and $177.0 million for the years ended December 31, 1996, 1995
and 1994, respectively.
EMERGENCY PHYSICIAN AND OTHER CONTRACT STAFFING. The Company contracts
with hospitals throughout the United States to provide physicians and other
medical personnel. The Company provides staffing primarily to emergency and
radiology departments, as well as pediatrics, anesthesiology, intensive care,
neonatology and internal medicine departments. In most cases, the Company is
contractually required to provide physician staffing coverage at a hospital
facility on a 24-hour basis, 365 days a year. At December 31, 1996, the Company
provided management and physician services under 131 contracts with hospitals
and governmental entities in 21 states.
Hospitals turn to organizations such as the Company because the
outsourcing of physician management services relieves hospital administrators of
the burden of providing physician coverage. The Company is better qualified than
most hospitals to recruit, manage and retain physicians, bill and collect for
medical professional services, deliver services on a cost-effective basis and
control medical malpractice costs. As a result, the Company believes that it
offers hospitals an attractive alternative for meeting the medical staffing
needs of hospitals' emergency, radiology and other departments, while
maintaining a consistently high level of quality care. Demand for emergency care
has
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increased as patients who do not have access to a primary care physician turn to
emergency rooms for primary care services as well as for urgent medical
problems. According to the American Hospital Association, the total number of
emergency department visits in 1993 was approximately 97 million, in comparison
to less than 80 million visits in 1984.
Under its Hospital Physician Services contracts, the Company generally
assumes the risk for physician staffing to meet the medical needs of the
hospitals' patients. The Company is paid for its services on either a
fee-for-service or flat-fee basis. As of December 31, 1996, approximately 72% of
Hospital Physician Services' revenue was derived from fee-for-service contracts.
Under its fee-for-service agreements, the Company directly bills and collects
the fee component of the charges for medical services rendered by the Company's
health care professionals. The Company accepts and assumes the financial risks
relating to patient volume and payor mix and delays related to reimbursement
through government sponsored programs or third-party payors. Under certain
contracts, the Company bills hospital patients directly for the medical services
rendered by its health care professionals and also receives a contractual
subsidy from the hospital to supplement revenue from direct billing. Under its
flat-fee contracts, the Company is paid a fixed amount for providing the
required medical staffing services.
The Company has expanded its scope of hospital-based management
services to include radiology services. In July 1995, the Company acquired
MetroAmerican, a hospital-based radiology practice management business
headquartered in the Raleigh-Durham area of North Carolina, with fee-for-service
contracts at hospitals and clinics located in nine states. In September 1995,
the Company acquired Radiology Associates, located in Hollywood, Florida, which
provides radiology and management services to hospitals, outpatient centers,
radiation oncology centers and a regional teleradiology reading facility (see
"Recent Developments").
DEPARTMENT OF DEFENSE AND OTHER SERVICES. The Company provides
physicians, nurse and clerical support services for active duty and retired
military personnel and their dependents in emergency departments, ambulatory
care centers and primary care clinics operated by the Department of Defense.
Under Department of Defense contracts, the Company is generally paid a fixed
amount, per patient visit or per hour of service, without regard to the scope
of professional services provided. Under per patient fixed fee arrangements, the
Company assumes the risk if patient volume is below expectations. At December
31, 1996, the Company's military medical services were provided under 9
contracts with the Department of Defense.
The Company also offers medical record transcription services and
provides professional billing and collection services to physician practice
groups. In addition, the Company provides physicians on a temporary, or locum
tenens, basis to various clients.
RECENT DEVELOPMENTS
On January 21, 1997, the Company and MedPartners, Inc. announced they
have agreed to merge the two companies in a pooling of interests. MedPartners,
Inc. is the largest physician practice management company in the nation and
operates the country's largest independent prescription benefits management
service. The Company expects that the merger will take place although there
can be no assurance that the transaction will be consummated.
On September 5, 1996, the Company entered into a five-year agreement
(the "PCA Agreement"), with an option for an additional five years, with
Physician Corporation of America ("PCA"). Under the agreement, InPhyNet will
manage independent primary care physicians in South Florida and the Tampa Bay
region. At December 31, 1996, physicians provided primary care services to
approximately 50,500 covered lives: 24,500 in South Florida and 26,000 in the
Tampa Bay area. PCA provides comprehensive health care service through its
Health Maintenance Organizations, Life and Property and Casualty Insurance
Carriers and Worker's compensation administrators located throughout the
southeastern United States and the Caribbean.
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On September 21, 1995, the Company entered into an exclusive agreement
with Kaiser Permanente (Kaiser) in Ohio to develop and operate a primary care
and specialty physician network on a capitated basis in Summit and Stark
counties of Northeast Ohio. Kaiser provides comprehensive healthcare services to
approximately 190,000 Northeast Ohio residents. Kaiser Permanente's 12 regions
provide care for more than 6.5 million people in 16 states and the District of
Columbia.
THE COMPANY'S RECENT ACQUISITIONS ARE AS FOLLOWS:
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REVENUE IN
LAST
FULL YEAR
NUMBER PRIOR TO
DATE OF ACQUISITION COMPANY BUSINESS OF SITES ACQUISITION
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(IN MILLIONS)
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January 1997 Emergency Management Physician Staffing 3 $ 5.1
Specialists, Inc.
July 1996 NHS National Health Physician Staffing 13 $ 20.5
Services, Inc.
January 1996 Sachs, Morris & Primary Care 2 $ 1.8
Sklaver, Inc. Practices
September 1995 Radiology Associates of Physician Staffing 16 $ 16.9
Hollywood, Inc.
July 1995 MetroAmerican Radiology, Physician Staffing 21 $ 13.1
Inc.
February-April 1995 Various Five Primary Care 8 $ 20.8
Practices
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Effective January 15, 1997, the Company acquired Emergency Management
Specialists, Inc. As a result of the transaction, the Company acquired contracts
to provide physician staffing, management and consulting services to various
hospitals and clinics. The transaction was accounted for as a pooling of
interests.
Effective July 2, 1996, the Company acquired certain of the assets of
NHS. As a result of this transaction, the Company acquired contracts to provide
medical care to inmates in correctional institutions. The transaction was
accounted for as a purchase.
Effective January 16, 1996, the Company acquired Sachs, Morris &
Sklaver, Inc. ("SMS"). As a result of this transaction, the Company added two
medical centers to its base of primary care practices. The transaction was
accounted for as a purchase.
Effective September 1, 1995, the Company acquired Radiology Associates.
Radiology Associates, provides radiology and management services to hospitals,
outpatient centers, radiation oncology centers and a regional teleradiology
reading facility. The transaction was accounted for as a pooling of interests.
Effective July 1, 1995, the Company acquired MetroAmerican. As a result
of this transactions, the Company acquired contracts to provide radiology
services on a fee-for-service basis at hospitals and clinics located in nine
states. The transaction was accounted for as a pooling of interests.
As a result of the acquisitions of Radiology Associates and
MetroAmerican (the "Poolings"), combined with the Company's existing operations,
the Company believes it has become a leading provider of radiology practice
management services in the United States with approximately 100 radiologists
operating in nine states.
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During 1995, the Company acquired five primary care physician practices
(the "Primary Care Practices"), operating at eight sites. All of such
acquisitions have been accounted for as purchases.
CORPORATE OPERATIONS
PHYSICIAN RECRUITING. The Company maintains an extensive proprietary
database of physician information which enables it to identify and select
qualified candidates for practice opportunities as staffing needs arise.
Candidates are recruited, interviewed and screened by the Company's physicians.
Subsequently, the candidates are assigned to a health care facility, where their
credentials are generally reviewed and verified a second time.
Contracts with physicians generally have a one-year term and
automatically renew, subject to cancellation by either party for any reason and
at any time with 90 or 180 days' notice. In general, physician contracts are not
tied to a specific location and contain two-year noncompete provisions.
UTILIZATION MANAGEMENT. The Company has developed and implemented a
utilization management system that has successfully reduced both inpatient days
and referrals to medical specialists. This program is coordinated and maintained
by a management information system that collects data derived from patient
outcomes, physician case management decisions and practice patterns. The Company
uses this information to provide feedback to physicians in order to increase
their productivity and improve the quality of medical care provided.
RISK MANAGEMENT. The Company has professional liability exposure with
respect to potential negligent acts of its medical professional employees and
contractors. As part of its efforts to reduce such exposure, the Company manages
and monitors the quality and performance of its physicians. Additionally, the
Company maintains a proactive claims management program that employs a dedicated
group of physicians and attorneys who are responsible for handling claims made
against the Company and its agents. A combination of the efficient claims
management program, historical claims experience, shifting business mix from
hospital based emergency medicine to capitated medical services and increased
professional liability insurance buying power (due to the Company's growth) have
enabled the Company to decrease in the Company's cost of malpractice insurance
as a percentage of net revenue from 2.3% in 1992 to 1.6% in 1996.
BILLING AND COLLECTION OPERATIONS. The Company maintains its own
billing and collections operations, in Fort Lauderdale, Florida, and Akron,
Ohio, that were responsible for invoicing approximately 2.8 million patient
visits during 1996. To improve patient care documentation and billing
efficiency, the Company has implemented, where it is commercially feasible,
proprietary voice-activated dictation systems in emergency departments to
enhance the speed and accuracy of the Company's process for filing reimbursement
claims in its fee-for-service operations. In certain other emergency
departments, the Company provides a centralized transcription service to
document, legibly and efficiently, the services rendered. The Company's systems
are designed to enhance its ability to document the providing of physician
services in an environment of increasing scrutiny by third-party payors. The
Company also markets its billing and transcription services to physicians and
administrators employed by outside third parties.
MARKETING
HOSPITAL-BASED CONTRACTS. The Company maintains a staff of marketing
officers, regional directors and telemarketers to direct the marketing of
hospital physician services. Contracting opportunities generally result from
referrals by hospital administrators, information provided by physicians
(including contracted physicians meeting the temporary staffing needs of
hospitals) and requests for proposals received directly from hospitals. After
visiting a prospective hospital client, the Company develops a proposal based on
an analysis of patient volume, the projected cost of obtaining physician
staffing coverage and the probable collection rate of fee-for-service gross
revenue based upon a review of the local usual and customary rates. Following
such analyses, the Company submits a written proposal with contract terms
tailored to the particular hospital's needs. Contracts typically have terms of
one to three years, subject to termination by either party at any time with 90
days' notice.
MANAGED CARE CONTRACTS. Prior to 1996, expansion in the Company's
managed care business resulted primarily from the acquisition of primary care
clinics that have contracts with Humana Medical Plan, Inc. and affiliates
("Humana"). The Company conducts joint marketing programs with Humana which
are designed to increase
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the number of Humana enrollees in a particular area where the Company operates
primary care clinics. The Company's contracts with Humana provide that either
party may terminate a contract upon 60 days' notice.
Through its recent diversification of its managed care business to
other third-party payors, the Company has been able to reduce the portion of
managed care revenue derived from contracts with Humana from 84% in 1995 to 53%
in 1996.
In September 1995, the Company entered into an agreement with Kaiser
to develop and operate a primary care and specialty physician network on a
capitated basis, located in Northeast Ohio. The Company started to provide
services in January 1996. The Company expects that growth in its managed care
business will result from building and acquiring primary care practices
in targeted geographic areas and making arrangements with HMOs in those areas
to provide medical services. The Company maintains frequent contact with
Humana and other HMOs regarding opportunities for the Company to develop
managed care operations in new areas. Additionally, in September 1996, the
Company entered into a five-year agreement with PCA to manage a network of
independent primary care physicians (see Item 1. "Business-Recent
Developments").
CORRECTIONAL CARE AND OTHER GOVERNMENTAL CONTRACTS. The Company obtains
its initial contract with a governmental agency through a competitive bidding
process. Requests for proposals are carefully reviewed to determine which
opportunities are within the Company's capabilities and offer the potential for
an adequate profit margin. The pricing of the bid is based on, among other
things, an analysis of the staffing requirements, projected costs based on the
Company's past experience in providing similar services, salary data from the
specific area and estimates of overhead costs. Contracts are usually awarded for
a period of one year with options to renew for subsequent years. Most contracts
are subject to termination by either party with 60 to 90 days' notice at any
time during the contract.
GOVERNMENT REGULATION
Current federal and state laws regulate the relationships between
providers and suppliers of health care services, on the one hand, and physicians
and other clinicians, on the other. These laws include the fraud and abuse
provisions of the Medicare and Medicaid statutes, which prohibit solicitation,
payment, receipt or offering of any direct or indirect remuneration for the
referral of Medicare or Medicaid patients or for the ordering or providing of
Medicare or Medicaid covered services, items or equipment. These laws also
impose restrictions on physicians' referrals for designated health services to
entities with which they have financial relationships. Violations of these laws
may result in substantial civil or criminal penalties for individuals or
entities, including large civil monetary penalties and exclusion from
participation in the Medicare and Medicaid programs which could adversely affect
the Company's operations.
The laws of many states prohibit physicians from splitting fees with
nonphysicians and prohibit business corporations from providing or holding
themselves out as providers of medical care. While the Company believes it
complies in all material respects with state fee splitting and corporate
practice of medicine laws, there can be no assurance that, given varying and
uncertain interpretations of such laws, the Company would be found to be in
compliance with all restrictions on fee splitting and the corporate practice of
all medicine in all states. The Company currently operates in certain states
through professional corporations, and has formed professional corporations or
qualified foreign professional corporations to do business in several other
states where corporate practice or medicine laws may require the Company to
operate through such a structure. As discussed in Note 1 to the Consolidated
Financial Statements, the Company believes it has unilateral and perpetual
control over the assets and operations of the various affiliated professional
corporations. A determination that the Company is in violation of applicable
restrictions on fee splitting and the corporate practice of medicine in any
state in which it operates could have a material adverse effect on the Company.
Finally, both federal and state laws provide for the award of damages
and the assessment of substantial civil penalties against any person who
knowingly files or causes to be filed or presented a false claim for payment of
services, or the making, using or causing to be made or used a false record in
connection with the filing of a false claim. Violation of the federal False
Claims Act may also result in exclusion from participation in the Medicare and
Medicaid programs. It is not necessary to intend to defraud the government or
have actual knowledge of the falsity of the claim or supporting record for a
violation to occur. It is enough to constitute a "knowing" violation of the
False Claims Act that one acts in "deliberate ignorance" or "reckless disregard"
of the truth or falsity of the information alleged to be false. A violation of
and successful action brought under the False Claims Act or similar state law
against the Company or physicians managed by it could have a material adverse
effect on the Company.
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FEDERAL GOVERNMENT CONTRACTING REQUIREMENTS
The Company's federal governmental contracting activities with
government healthcare facilities are subject to substantial regulation under
federal law and by applicable contracting agencies. Contracts with government
agencies are generally complex in nature and require contractors to comply with
exacting technical specifications and numerous administrative regulations.
Substantial penalties can result from noncompliance with the technical
specifications of a contract. Upon failure to perform or violation of applicable
contractual or statutory provisions, a contractor may be barred or suspended
from obtaining future contracts for specified periods of time and/or be the
subject of criminal investigation and prosecution. The Company is subject to
periodic audits and reviews in the ordinary course of business by federal
government audit and review agencies which can result in reductions in contract
payments. Under the Truth in Negotiations Act, the federal government is
entitled for three years after final payment on any negotiated fixed-price
contract to examine all of the Company's cost records with respect to such
contract to determine whether the Company used complete, accurate and current
cost and pricing information in preparing bids on such contract or any
amendments thereto. In addition, the federal government has the right for up to
six years after final payment to recoup payments based upon such examination.
Section 31 of the Federal Acquisition Regulations governs the allowability of
costs incurred by the Company in the performance of its government contracts to
the extent such costs are allocable to its government contracts.
CLASSIFICATION OF PHYSICIANS AS INDEPENDENT CONTRACTORS
Certain of the Company's affiliates contract with physicians and other
health care professionals as independent contractors. Since these professionals
are regarded as independent contractors, such affiliates do not withhold federal
or state income taxes, make federal or state unemployment tax payments or
provide workers' compensation insurance with respect to such independent
contractors. The payment of applicable taxes is regarded by the Company as the
responsibility of such independent contractors. The Company believes that this
classification of these health care professionals as independent contractors is
proper for federal tax purposes. One such affiliate was audited by the Internal
Revenue Service in 1991 and its classification was not challenged. A contrary
determination by federal taxing authorities either with respect to such
treatment of independent contractors since 1991 or regarding other affiliates'
or such subsidiary's classification of physicians as independent contractors, or
a change in existing law, could have a material adverse effect on the Company's
operating results.
CORPORATE EXPOSURE TO PROFESSIONAL LIABILITIES
Due to the nature of its business, the Company becomes involved as a
defendant in medical malpractice lawsuits, some of which are currently ongoing,
and is subject to the attendant risk of substantial damage awards. The most
significant source of potential liability in this regard is the negligence of
health care professionals employed or contracted by the Company. To the extent
such health care professionals are employees of the Company or were regarded as
agents of the Company in the practice of medicine, the Company could be held
liable for their negligence. In addition, the Company could be found in certain
instances to have been negligent in performing its contract management services
even if no agency relationship with the health care professional exists. The
Company's contracts with hospitals and governmental agencies generally require
the Company to indemnify such other parties for losses resulting from the
negligence of health care professionals managed by the Company. The Company
maintains professional liability insurance on a claims made basis in amounts
deemed appropriate by management, based upon historical claims and the nature
and risks of its business. There can be no assurance, however, that a future
claim or claims will not exceed the limits of available insurance coverage, that
any insurer will remain solvent and able to meet its obligations to provide
coverage for any claim or claims or that such coverage will continue to be
available, or available with sufficient limits and at a reasonable cost, to
adequately and economically insure the Company's operations in the future.
-8-
<PAGE> 11
COMPETITION
The provision of physician management services to hospitals, HMOs and
governmental entities is a highly competitive business in which the Company
competes with several national, regional, and local providers of physician
management services. Furthermore, the Company competes with traditional managers
of health care services, such as hospitals, which directly recruit and manage
physicians. Certain of the Company's competitors have access to substantially
greater financial resources than the Company.
While the bases for competition vary somewhat among business lines,
competition is generally based on quality of care and cost. More specifically,
with respect to nonmilitary hospital physician services, competition is focused
on patient utilization, risk management and service quality. Competition in the
areas of military hospital physician services and correctional institution
services are especially cost sensitive due to the fact that, in each of these
areas, awards of contracts are generally made as a result of a competitive
bidding process. In managed care, the Company believes the market for developing
and providing management of primary care networks which contract with HMOs and
employers will increasingly be based on patient access, quality of care,
outcomes management and cost.
EMPLOYEES
At December 31, 1996, the Company employed or contracted with
approximately 5,200 people on a full and part-time basis. Approximately 1,900 of
these individuals are physicians (including physician managers) and 3,300 are
nonphysician clinical and administrative professionals.
ITEM 2. PROPERTIES
The Company leases its headquarters in Fort Lauderdale, Florida
(approximately 58,200 square feet). In addition, the Company leases space for
its billing and management information services department in Plantation,
Florida (approximately 28,000 square feet) and for its billing operations in
Akron, Ohio (approximately 22,700 square feet).
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to its
business, substantially all of which involve claims related to the alleged
malpractice of employed and contracted medical professionals. In the opinion of
the Company's management, no individual item of litigation or group of similar
items of litigation, taking into account the insurance coverage maintained by
the Company, is likely to have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company did not submit any matter to a vote of security holders
during the fourth quarter of 1996.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The common stock of the Company is traded on the Nasdaq National Market
(Nasdaq) under the symbol "IMMI." The following table sets forth, for the
periods indicated, the high and low bid prices of the Company's common stock as
reported on Nasdaq.
<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1995:
<S> <C> <C>
1st Quarter $ 18.00 $ 11.50
2nd Quarter 19.25 14.75
3rd Quarter 22.25 18.50
4th Quarter 23.75 17.38
YEAR ENDED DECEMBER 31, 1996:
1st Quarter $ 27.00 $ 16.38
2nd Quarter 24.00 16.50
3rd Quarter 19.25 11.00
4th Quarter 19.00 15.00
</TABLE>
On March 24, 1997 the last reported sales price for the Company's
common stock was $28.875 per share. As of March 24, 1997 there were 138
registered stockholders and approximately 1,700 beneficial shareholders of the
Company's common stock.
The Company has not declared cash dividends on its common stock since
prior to its initial public offering effective August 19, 1994 (IPO), and does
not currently anticipate paying any dividends in the foreseeable future. The
Company currently anticipates that it will retain any future earnings for use in
its business. Restrictions contained in the Amended and Restated Revolving
Credit and Reimbursement Agreement (the "Credit Facility"), between the Company
and a bank, limit the payment of cash dividends on its common
stock.
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<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue $ 408,520 $ 325,340 $ 270,370 $ 224,205 $ 196,501
Total operating expenses 379,653 304,013 253,853 211,611 188,535
--------- --------- --------- --------- ---------
Income from operations 28,867 21,327 16,517 12,594 7,966
Total non-operating (income) expense 1,278 1,234 907 231 (257)
--------- --------- --------- --------- ---------
Income before minority interest
and income tax expense 27,589 20,093 15,610 12,363 8,223
Minority interest in net income (2) -- -- 2,711 1,126 73
--------- --------- --------- --------- ---------
Income before income tax expense 27,589 20,093 12,899 11,237 8,150
Income tax expense (4) 10,898 8,805 153 282 338
--------- --------- --------- --------- ---------
Net income $ 16,691(1) $ 12,746(3) $ 12,746 $ 10,955 $ 7,812
========= ========= ========= ========= =========
Net income per share $ 1.04(1) $ 0.75(3)
========= =========
Weighted average shares outstanding 16,021 15,038
========= =========
SUPPLEMENTAL STATEMENT OF
INCOME DATA (UNAUDITED):
Historical income before income
tax expense $ 12,899 $ 11,237 $ 8,150
Pro forma purchase of minority interest 2,711 1,126 73
--------- --------- ---------
Supplemental income before income
tax expense 15,610 12,363 8,223
Pro forma income tax expense (4) 6,244 4,945 3,289
--------- --------- ---------
Supplemental net income (5) $ 9,366 $ 7,418 $ 4,934
========= ========= =========
Supplemental net income per share $ 0.74 $ 0.76
========= =========
Supplemental weighted average shares
outstanding (5) 12,703 9,765
========= =========
BALANCE SHEET DATA:
Working capital $ 54,038 $ 51,536 $ 29,221 $ 11,713 $ 18,992
========= ========= ========= ========= =========
Total assets $ 154,832 $ 123,216 $ 96,702 $ 68,299 $ 55,039
========= ========= ========= ========= =========
Long-term debt, net of current portion $ 339 $ 9,617 $ 9,635 $ 13,246 $ 12,495
========= ========= ========= ========= =========
Total stockholders' equity $ 101,561 $ 82,368 $ 51,192 $ 15,278 $ 13,960
========= ========= ========= ========= =========
</TABLE>
- ---------
(1) Net income has been reduced by one time charges consisting of loss on
sale of physician practices of $682,000 and certain management
restructuring charges of $250,000 recorded during the three months
ended June 30, 1996. The effect of these costs, net of tax, is to
reduce net income per share by $0.04.
(2) See Notes 1 and 3 to the Company's consolidated financial statements
for information regarding minority interests.
(3) Net income has been reduced by transaction costs of $1.7 million
incurred in connection with the Poolings, and employee severance and
other costs of $0.8 million. The effect of these costs, net of tax, in
addition to $0.9 million of tax conversion expenses (see Note 7 to the
Company's consolidated financial statements) is to reduce net income
per share by $0.16.
-11-
<PAGE> 14
(4) Prior to August 19, 1994 the Company had elected to be taxed as a
Subchapter S corporation with respect to federal income taxes, and for
those states that recognize such tax election, state income taxes.
Under this election, in lieu of corporate income taxes, the
stockholders were taxed (rather than the corporation) on the Company's
income in accordance with their respective ownership interests. The pro
forma net income and net income per share amounts have been computed as
if the Company was subject to federal and state income taxes (in those
states recognizing such election) based on the corporate income tax
rates in effect during the respective periods.
(5) Supplemental net income and supplemental weighted average shares
outstanding were derived by giving effect to the 1994 purchases of
minority interests of the Company with common stock as if such
purchases had occurred on January 1, 1992 (see Notes 1 and 3 to the
Company's consolidated financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company commenced operations in 1974 to provide physician practice
management services to hospital emergency departments. Since that time, the
Company has expanded its business to include (i) the Hospital Physician Services
division, through which it delivers emergency medicine, radiology and other
hospital-based physician services, and (ii) the Capitated Medical Services
division, through which it manages the delivery of comprehensive medical
services under contracts with HMOs and correctional institutions and the
delivery of fee-for-service medical services through primary care practices and
home health agencies.
The Company's contracts with its hospital physician services clients
typically provide for payments on either a fee-for-service basis, whereby the
Company bills patients or third-party payors directly for medical professional
services, or a flat-fee basis, whereby the Company is paid a fixed amount by the
hospital based on the number of hours of medical staffing provided or number of
patients treated. Fee-for-service contracts may, in certain instances, involve
the payment of a subsidy to the Company by the client. Under capitated medical
services contracts, the Company receives a fixed monthly fee (global capitation)
for each covered life in exchange for assuming responsibility for the provision
of medical services. Fee-for-service contracts, which usually require the
Company to assume the financial risks relating to patient volume, payor mix and
reimbursement rates, have longer collection periods than flat-fee and capitated
fee contracts and require the Company to bear the credit risk of collecting from
uninsured individuals.
Under the Company's fee-for-service contractual arrangements, the fee
schedules for medical services have historically increased on a periodic basis.
Such fee increases result in additional net revenue, but also result in
increased contractual adjustments due to fixed reimbursements from certain
third-party payors, such as Medicare, Medicaid and worker's compensation. The
higher schedules also result in an increase in charity and other adjustments due
to the increase in uncollected amounts that relate to uninsured or underinsured
private payors. In addition, contracts with a higher percentage of indigent
patients also generally result in an increased percentage of charity and other
adjustments.
On January 21, 1997, the Company and MedPartners, Inc. announced they
have agreed to merge. MedPartners, Inc. is the largest physician practice
management company in the nation and operates the country's largest independent
prescription benefits management service. The Company is hopeful that the merger
will take place although there can be no assurance that the transaction will be
consummated.
Effective January 15, 1997, the Company acquired Emergency Management
Specialists, Inc. As a result of the transaction, the Company acquired contracts
to provide physician staffing, management and consulting services to various
hospitals and clinics. The transaction was accounted for as a pooling of
interests.
On September 17, 1996, the Company was endorsed by the Texas Medical
Association (TMA) to offer the provision of practice management, managed care
and consulting services to its over 34,000 physician members. Practice
management services will include the development of physician networks,
marketing, contract negotiations, capitation management, utilization management,
claims adjudication, quality assurance, financial analysis, and accounts
receivable management. Consulting services will include strategic planning,
business plan creation, network development, payor contracting and fee
reimbursement.
-12-
<PAGE> 15
On September 5, 1996, the Company entered into the PCA Agreement. Under
the agreement, InPhyNet will manage independent primary care physicians in South
Florida and the Tampa Bay region. At December 31, 1996, the physicians provided
primary care services to approximately 50,500 covered lives: 24,500 in South
Florida and 26,000 in the Tampa Bay area. PCA provides comprehensive health care
service through its Health Maintenance Organizations, Life and Property and
Casualty Insurance Carriers and Worker's Compensation administrators located
throughout the southeastern United States and the Caribbean.
Effective July 2, 1996, the Company acquired certain of the assets of
NHS. As a result of this transaction, the Company acquired contracts to provide
medical care to inmates in correctional institutions. The transaction was
accounted for as a purchase.
Effective January 16, 1996, the Company acquired SMS. As a result of
this transaction, the Company added two medical centers to its base of primary
care practices. The transaction was accounted for as a purchase.
The following discussion provides an analysis of the Company's results
of operations, and liquidity and capital resources and should be read in
conjunction with the Company's consolidated financial statements and notes
thereto. The operating results of the periods presented were not significantly
affected by inflation.
RESULTS OF OPERATIONS
The following table sets forth divisional revenue (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
PERCENT PERCENT
1996 INCREASE 1995 INCREASE 1994
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Hospital Physician Services Division $ 216,819 2.9% $210,679 19.1 % $ 176,959
Capitated Medical Services Division:
Managed Care 113,588 61.2% 70,451 64.7 % 42,784
Corrections 78,113 76.7% 44,210 (12.7)% 50,627
--------- -------- ---------
Total Capitated Medical Services Division 191,701 67.2% 114,661 22.8 % 93,411
--------- -------- ---------
Total Revenue $ 408,520 25.6% $325,340 20.3 % $ 270,370
========= ======== =========
</TABLE>
1996 COMPARED TO 1995
TOTAL REVENUE. Total revenue increased by $83.2 million, or 25.6%, to
$408.5 million for the year ended December 31, 1996 from $325.3 million for the
same period in 1995. The increase was primarily due to acquisitions completed
during 1996 (see Item 1 "Business-Recent Developments"), new contract awards
and increased revenue from existing contracts.
Hospital Physician Services revenue increased by $6.1 million, or 2.9%,
to $216.8 million for the year ended December 31, 1996 from $210.7 million for
the same period in 1995. This was a result of an increase of approximately $10.0
million due to the replacement of certain fee for service contracts with new
contracts having higher reimbursement rates per patient visit and to annual fee
schedule increases. This increase was offset by a net loss of 14 Department of
Defense and emergency department contracts representing a net decrease of 50,000
patient visits during 1996 resulting in decreased revenues of approximately $2.7
million.
Capitated Medical Services revenue increased by $77.0 million, or
67.2%, to $191.7 million for the year ended December 31, 1996 from $114.7
million for the same period in 1995. The increase was due partly to an increase
in Managed Care revenue of $43.1 million, or 61.2%, to $113.6 million from $70.5
million primarily due to the PCA Agreement which added $35.6 million in revenue
and growth in revenue of $4.0 million from the agreement with Kaiser.
Additionally, Corrections revenue increased by $33.9 million, or 76.7%, to $78.1
million for the year ended December 31, 1996 from $44.2 million for the same
period in 1995, due primarily to $12.3 million in revenue from the acquisition
of NHS, and a net increase of 6 other new corrections contracts started in
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<PAGE> 16
1996 and a net increase of 6 new contracts started in the last half of 1995
which accounted for the remaining $21.6 million increase in revenue.
TOTAL OPERATING EXPENSES. Operating expenses increased by $75.7
million, or 24.9%, to $379.7 million for the year ended December 31, 1996 from
$304.0 million for the same period in 1995. This was primarily due to higher
compensation expense and related benefits of $26.1 million resulting from an
increase in the number of healthcare and administrative personnel in
correctional care due to the NHS acquisition and the addition of new corrections
contracts from the prior year. Additionally, contracted medical services
expenses were approximately $15.1 million higher due to the increase in
corrections contracts and the acquisition of NHS. This same category of expense
increased by $34.1 million in managed care primarily due to the addition of the
PCA Agreement.
The increase was offset by $1.7 million incurred in 1995 for
transaction expenses associated with the Poolings and $0.8 million of employee
severance and other costs associated with reorganizing certain operations of the
Company. The severance and other charges have been included in compensation and
related benefits, and other operating expense in the Company's consolidated
statements of income.
INCOME BEFORE INCOME TAX EXPENSE. Income before income tax expense
increased by $7.5 million, or 37.3%, to $27.6 million for the year ended
December 31, 1996 from $20.1 million for the same period in 1995 due to the
factors set forth above.
INCOME TAX EXPENSE. Income tax expense increased by $2.1 million, or
23.9%, to $10.9 million for the year ended December 31, 1996 from $8.8 million
for the same period in 1995. The increase was due to the increase in income
before income tax expense of $7.5 million. The increase was partially offset by
a 1995 tax charge of approximately $0.9 million from the conversion of one of
the Company's subsidiaries from an S Corporation to a C Corporation upon it's
acquisition.
NET INCOME. Net income increased by $5.4 million, or 47.8 %, to $16.7
million for the year ended December 31, 1996, from $11.3 million for the same
period in 1995 due to the factors discussed above.
1995 COMPARED TO 1994
TOTAL REVENUE. Total revenue increased by $54.9 million, or 20.3%, to
$325.3 million for the year ended December 31, 1995 from $270.4 million for the
same period in 1994. The increase was primarily due to acquisitions completed
during 1994 and 1995 (see Item 1 "Business-Recent Developments"), new contract
awards and increased revenues from existing contracts.
Hospital Physician Services revenue increased by $33.7 million, or
19.1%, to $210.7 million for the year ended December 31, 1995 from $177.0
million for the same period in 1994. The increase was primarily a result of the
MetroAmerican acquisition, which added $13.8 million of revenue, and an
increase of $16.0 million from annual fee schedule increases offset by a
decrease of $4.5 million due to a decrease in patient volume of approximately
70,000 visits. Contract gains and losses were relatively flat in 1995 and the
last half of 1994.
Capitated Medical Services revenue increased by $21.3 million, or
22.8%, to $114.7 million for the year ended December 31, 1995 from $93.4 million
for the same period in 1994. This was a result of an increase in Managed Care
revenue of $27.7 million, or 64.7%, to $70.5 million from $42.8 million
primarily due to the acquisition of five primary care practices operating at
eight sites, which generated approximately $17.0 million in revenues, with the
remainder of the increase due to having a full year's revenue from other managed
care acquisitions completed during 1994. The increase was offset by reduced
Corrections revenue of $6.4 million due primarily to a net increase of 10 new
Corrections contracts accounting for approximately $12.6 million in revenues,
offset by the loss of the Massachusetts Department of Corrections contracts at
June 30, 1994, which would have generated approximately $19.0 million during the
last half of 1994.
TOTAL OPERATING EXPENSES. Operating expenses increased by $50.1
million, or 19.7%, to $304.0 million for the year ended December 31, 1995 from
$253.9 million for the same period in 1994. The increase was primarily due to an
increase in compensation expense and related benefits of $30.0 million resulting
from an increase in the number of healthcare and administrative personnel
associated with the MetroAmerican acquisition, the acquisition of the five
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<PAGE> 17
primary care practices and new contracts, an increase in contracted medical
services of $16.1 million due primarily to the growth in managed health care
services offset by a decrease in insurance expense of $1.7 million due to a
favorable shift in business mix and a favorable policy renewal for professional
liability insurance.
The increase was also due to $1.7 million in transaction expenses
associated with the Poolings and $0.8 million of employee severance and other
costs associated with reorganizing certain operations of the Company. The
severance and other amounts have been included in compensation and related
benefits, and other operating expense in the Company's consolidated statements
of income.
MINORITY INTEREST IN NET INCOME. There was no minority interest for the
year ended December 31, 1995 versus $2.7 million for the same period in 1994.
This was due to the Company's purchase of minority interests at the time of the
Company's IPO (see Notes 1 and 3 to the Company's consolidated financial
statements).
INCOME BEFORE INCOME TAX EXPENSE. Income before income tax expense
increased by $7.2 million, or 55.8%, to $20.1 million for the year ended
December 31, 1995 from $12.9 million for the same period in 1994 due to the
factors set forth above.
INCOME TAX EXPENSE. Income tax expense increased to $8.8 million for
the year ended December 31, 1995 from $0.2 million for the same period in 1994.
This is due to the fact that the Company had elected to be taxed as a Subchapter
S corporation, and was not subject to federal and state income taxes, until the
time of the IPO, when the Company converted to C corporation status. In the
current year the Company incurred an additional $0.9 million in income tax
expense due to the conversion of MetroAmerican to a C corporation (see Note 7 to
the Company's consolidated financial statements).
NET INCOME. Net income decreased by $1.4 million, or 11.0 %, to $11.3
million for the year ended December 31, 1995, from $12.7 million for the same
period in 1994 due to the factors set forth above.
SUPPLEMENTAL NET INCOME. After giving effect to the supplemental
adjustments which assume that minority interests were purchased for common stock
of the Company as of January 1, 1994 and that the Company was subject to federal
and state income taxes prior to the IPO, net income increased by $1.9 million,
or 20.2%, to $11.3 million for the year ended December 31, 1995, from $9.4
million, on a supplemental basis, for the same period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements through cash generated by its
operating activities, bank borrowings and equity offerings. The Company's
principal uses of cash have been to support its operations, which generated
$16.7 million in 1996, fund acquisitions, acquire capital equipment and repay
outstanding debt. Prior to the IPO, the Company paid dividends to its
stockholders and distributions to minority interests. These dividends and
distributions were primarily for payment of taxes on income, includable by the
stockholders and partners in their personal income tax returns, as a result of
the Company's predecessor and affiliated partnerships being a Subchapter S
corporation and limited partnerships, respectively.
YEAR ENDED DECEMBER 31, 1996
Net cash provided by operating activities was $16.7 million for the
year ended December 31, 1996, due primarily to cash generated by operations, a
$20.2 million increase in accrued medical claims expense associated with the PCA
Agreement, offset by a $14.4 million increase in accounts receivable primarily
due to the start up of several new corrections contracts and a $3.5 million
decrease in the reserve for self-insured claims from the payment of expiring
professional liability reserves relating to the Company's Self Insured
Retention (SIR).
Net cash used in investing activities of $6.8 million was due to
expenditures of $3.1 million for acquisitions and purchases of capital equipment
of $4.7 million.
Net cash used in financing activities of $7.5 million was due to $18.9
million of principal payments offset by borrowings of $9.7 million on the Credit
Facility and proceeds from the exercise of stock options of $1.7 million.
As a result of the factors discussed above, cash increased by $2.3
million to $3.6 million at December 31, 1996 from $1.3 million at December 31,
1995.
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<PAGE> 18
YEAR ENDED DECEMBER 31, 1995
Net cash used in operating activities was $5.8 million for the year
ended December 31, 1995, due primarily to an increase in accounts receivable of
approximately $13.3 million caused by the start-up of new Corrections contracts,
the implementation of a new fee-for-service billing system, the modification of
the Company's professional liability insurance policy to provide for first
dollar coverage and payments of expiring policy SIR expense reserves and the
increase in income tax payments due to the Company becoming a C Corporation at
the time of the IPO, offset by cash generated from operations.
Net cash used in investing activities of $9.6 million was primarily the
result of expenditures of $7.0 million for acquisitions and purchases of capital
equipment for $4.0 million.
Net cash provided by financing activities of $15.3 million was
primarily the result of $16.2 million in net proceeds from the Company's second
public offering which was effective November 1995, $0.9 in proceeds from the
exercise of stock options, and borrowings of $26.2 million under the Credit
Facility, offset by payments of $27.9 million on the Credit Facility.
As a result of the factors discussed above, cash decreased to $1.3
million at December 31, 1995 from $1.4 million at December 31, 1994.
GENERAL
The Company's number of days of revenue in average outstanding trade
receivables for the years ended December 31, 1996, 1995 and 1994 were 70, 69,
and 64 days, respectively. The higher number of days in outstanding receivables
at December 31, 1996 and 1995 is due to the start-up of several new
fee-for-service and Corrections contracts in 1996 and 1995.
In November 1995, the Company executed an amendment with its bank to
increase the amount available under the Credit Facility to $60.0 million. The
Credit Facility matures September 30, 1998. At December 31, 1996, no amounts
were outstanding under the Credit Facility. At December 31, 1995, there was $9.0
million outstanding under the Credit Facility.
The Company expects to satisfy its anticipated demands and commitments
for cash in the next twelve months from existing cash, cash provided by
operations and amounts available under its Credit Facility. If the Company's
requirements for working capital and capital expenditures, including future
acquisitions, exceed currently anticipated levels, the Company may be required
to obtain additional funds, if available, in the credit or capital markets.
-16-
<PAGE> 19
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements and supplementary data required by this item
can be found at the pages listed in the following index:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants...................................... 18
Consolidated Balance Sheets at December 31, 1996 and 1995............................... 19
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994...................................................... 20
Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994...................................... 21
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994...................................................... 22
Notes to Consolidated Financial Statements.............................................. 24
Supplementary Data: Consolidated Quarterly Financial
Information (unaudited)............................................................... 40
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company has not changed independent accountants within the 24 months prior
to December 31, 1996.
-17-
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
InPhyNet Medical Management Inc.
We have audited the accompanying consolidated balance sheets of
InPhyNet Medical Management Inc. and Subsidiaries (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the index at Item 14(a)(2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
InPhyNet Medical Management Inc. and Subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Miami, Florida
February 14, 1997
-18-
<PAGE> 21
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,618 $ 1,305
Accounts receivable, net of allowances of approximately $83,000 and
$91,000 at December 31, 1996 and 1995 84,300 69,759
Accounts receivable from affiliates 202 559
-------- --------
84,502 70,318
Deferred income taxes 741 2,014
Prepaid expenses 8,945 4,633
Other current assets 5,819 3,559
-------- --------
Total current assets 103,625 81,829
Equipment, furniture and leasehold improvements, net 11,709 11,186
Other assets:
Costin excess of net assets acquired, net of accumulated amortization of
approximately $2,593 and $1,413 at December 31, 1996
and 1995, respectively 36,826 26,111
Other assets 2,672 4,090
-------- --------
39,498 30,201
-------- --------
Total assets $154,832 $123,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related benefits $ 15,713 $ 15,096
Accounts payable and other current liabilities 8,472 6,517
Accrued medical claims 21,710 1,501
Reserve for self-insured claims 3,692 7,179
-------- --------
Total current liabilities 49,587 30,293
Long-term debt, net of current portion 339 9,617
Deferred income taxes 3,345 938
Stockholders' equity:
Common stock, par value -- $0.01; 50,000 shares authorized,
15,821 and 15,690 issued and outstanding at December 31, 1996
and 1995, respectively 158 157
Additional paid-in capital 66,386 63,731
Retained earnings 35,017 18,480
-------- --------
Total stockholders' equity 101,561 82,368
-------- --------
Total liabilities and stockholders' equity $154,832 $123,216
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-19-
<PAGE> 22
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenue $ 407,239 $ 323,782 $ 267,401
Revenue from affiliates 1,281 1,558 2,969
--------- --------- ---------
Total revenue 408,520 325,340 270,370
Expenses:
Compensation and related benefits 235,299 209,194 179,223
Contracted medical services 98,276 49,111 33,029
Insurance 12,252 11,784 13,522
Acquisition costs associated with
poolings of interests (Note 3) -- 1,700 --
Other 33,826 32,224 28,079
--------- --------- ---------
Total operating expenses 379,653 304,013 253,853
--------- --------- ---------
Income from operations 28,867 21,327 16,517
Nonoperating (income) expense:
Interest income (349) (417) (326)
Interest expense 1,134 1,910 1,305
Loss on sale of Physician Practices 682 -- --
Other non-operating income (189) (259) (72)
--------- --------- ---------
Total nonoperating expense 1,278 1,234 907
--------- --------- ---------
Income before minority interest and income tax expense 27,589 20,093 15,610
Minority interest in net income -- -- 2,711
--------- --------- ---------
Income before income tax expense 27,589 20,093 12,899
Income tax expense (Note 7) 10,898 8,805 153
--------- --------- ---------
Net income $ 16,691 $ 11,288 $ 12,746
========= ========= =========
Net income per share $ 1.04 $ 0.75
========= =========
Weighted average shares outstanding 16,021 15,038
========= =========
SUPPLEMENTAL DATA (UNAUDITED) (NOTE 1):
Historical income before income taxes $ 12,899
Pro forma purchase of minority interest 2,711
---------
Supplemental income before income tax expense 15,610
Pro forma income tax expense 6,244
---------
Supplemental net income $ 9,366
=========
Supplemental net income per share $ 0.74
=========
Supplemental weighted average shares outstanding 12,703
=========
</TABLE>
-20-
See accompanying notes to Consolidated Financial Statements
<PAGE> 23
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER ADDITIONAL TOTAL
OF COMMON PAID-IN RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS EQUITY
------ ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 8,502 $ 85 $ 81 $15,112 $ 15,278
Adjustment to reflect change in
in accounting method for equity
investments -- -- -- 696 696
Net income -- -- -- 12,746 12,746
Offering, net of expenses 2,100 21 21,609 -- 21,630
Dividends -- -- -- (4,254) (4,254)
Transfer of predecessor company
retained earnings to additional
paid-in capital upon conversion
from an S to a C corporation -- -- 16,277 (16,277) --
Issued in connection with acquisitions 3,256 33 5,794 -- 5,827
Unrealized holding losses on available-
for-sale investments -- -- -- (704) (704)
Other 140 1 (1) (27) (27)
------ --- ------ ------ --------
BALANCE AT DECEMBER 31, 1994 13,998 140 43,760 7,292 51,192
Adjustments to beginning balances
for the acquisition of
MetroAmerican Radiology, Inc. 473 5 -- 1,780 1,785
Net income -- -- -- 11,288 11,288
Offering, net of expenses 1,000 10 16,213 -- 16,223
Transfer of acquired company
retained earnings to additional
paid-in capital upon conversion
from an S to a C corporation -- -- 1,780 (1,780) --
Exercise of stock options 204 2 1,209 -- 1,211
Issued in connection with acquisitions 57 -- 775 -- 775
Unrealized appreciation on available-
for-sale investments -- -- -- 41 41
Other (42) -- (6) (141) (147)
------ ----- ------ ------ --------
BALANCE AT DECEMBER 31, 1995 15,690 157 63,731 18,480 82,368
Net income -- -- -- 16,691 16,691
Exercise of stock options 131 1 2,655 -- 2,656
Unrealized depreciation on
available-for-sale investments -- -- -- (154) (154)
------ ----- ------ -------- -------
BALANCE AT DECEMBER 31, 1996 15,821 $ 158 $66,386 $ 35,017 $ 101,561
====== ===== ======= ======== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements
-21-
<PAGE> 24
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Cash received from services rendered $ 394,466 $ 312,239 $ 259,064
Cash paid for compensation and related benefits (234,942) (208,680) (176,956)
Cash paid for contracted medical services (83,680) (48,825) (31,727)
Cash paid for insurance (17,746) (14,412) (12,808)
Cash paid for other operating expenses (36,161) (34,516) (25,539)
Interest received 349 420 326
Interest paid (1,119) (1,910) (1,305)
Income taxes paid (4,503) (10,119) (2,228)
--------- --------- ---------
Net cash provided by (used in) operating activities 16,664 (5,803) 8,827
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (3,089) (7,012) (8,052)
Purchases of equipment (4,746) (3,973) (3,454)
Other investing activities 1,009 1,418 (1,249)
--------- --------- ---------
Net cash used in investing activities (6,826) (9,567) (12,755)
FINANCING ACTIVITIES:
Proceeds from stock offering -- 16,223 22,028
Proceeds from exercise of stock options 1,684 897 --
Proceeds from borrowings of long-term debt 9,700 26,152 15,851
Principal payments on long-term debt (18,909) (27,872) (23,196)
Dividends -- -- (7,860)
Partnership distributions to minority interests -- -- (2,930)
Stock redemptions -- (147) (28)
--------- --------- ---------
Net cash provided by (used in) financing activities (7,525) 15,253 3,865
--------- --------- ---------
Net increase (decrease) in cash 2,313 (117) (63)
Cash at beginning of period 1,305 1,422 1,485
--------- --------- ---------
Cash at end of period $ 3,618 $ 1,305 $ 1,422
========= ========= =========
See accompanying notes to Consolidated Financial Statements.
-22-
</TABLE>
<PAGE> 25
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS )
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 16,691 $ 11,288 $ 12,746
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 3,140 2,518 1,865
Amortization 1,712 1,220 687
Loss on sale of physician practices 682 -- --
Accrual for contract losses under PCA Agreement (6,241) -- --
Other non-cash charges (credits) to operations, net 385 (178) (72)
Increase in accounts receivable (14,411) (13,292) (12,077)
Decrease in accounts receivable from affiliates 357 192 771
(Increase) decrease in prepaid expenses and
other current assets (2,615) (5,079) 20
Increase (decrease) in accounts payable (2,215) (1,679) 2,153
Increase (decrease) in accrued medical claims 20,209 282 (953)
Increase in accrued compensation and related benefits 357 515 2,267
Increase (decrease) in reserve for
self-insured claims (3,487) (2,505) 784
Increase (decrease) in income taxes payable (1,580) 64 121
Increase (decrease) in deferred income taxes 3,680 851 (2,196)
Minority interest in net income -- -- 2,711
-------- -------- --------
Net cash provided by (used in) operating activities $ 16,664 $ (5,803) $ 8,827
======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-23-
<PAGE> 26
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
InPhyNet Medical Management Inc. (together with its Subsidiaries,
"InPhyNet" or the "Company") was incorporated in May 1994 as the successor to
Emergency Medical Services Associates, Inc. ("EMSA") which commenced operations
in 1974 to provide physician management services to hospital emergency
departments. Since that time, the Company has expanded the range and scope of
its services and its business now consists of (i) Hospital Physician Services,
through which it delivers emergency medicine and other hospital-based physician
services under contracts with hospitals and the United States Department of
Defense and (ii) Capitated Medical Services, through which it manages the
delivery of comprehensive medical services under contracts with Health
Maintenance Organizations ("HMOs") and state and local correctional
institutions.
In August 1994, the Company completed an initial public offering (the
"IPO") of 2,415,000 shares of its common stock at a price of $12.00 per share.
Of the shares offered, 2,100,000 shares were offered by the Company and 315,000
shares were offered by certain stockholders of the Company (the "Offering
Stockholders"). Net proceeds to the Company were approximately $21,630,000 after
deducting underwriting commissions of approximately $1,773,000 and offering
expenses of approximately $1,797,000. The net proceeds were used to reduce the
Company's long-term debt. The Company did not receive any of the proceeds from
the shares sold by the Offering Stockholders.
In November 1995, the Company completed a public offering of 3,225,000
shares of its common stock at a price of $18.00 per share. Of the shares
offered, 1,000,000 shares were offered by the Company and 2,225,000 shares were
offered by certain stockholders of the Company (the "Selling Stockholders"). Net
proceeds to the Company were approximately $16,223,000 after deducting
underwriting commissions of approximately $900,000 and offering expenses of
approximately $877,000. The net proceeds were used to reduce the Company's
long-term debt. The Company did not receive any of the proceeds from the shares
sold by the Selling Stockholders.
REVENUE
Revenue is recorded in the period services are rendered as determined
by the respective contract with each health care provider.
The Company directly contracts with hospitals, HMO's, various state and
local government agencies and the United States Department of Defense to provide
medical services.
The Company's contracts with its hospital physician services clients
(approximately 53% of total Company revenue at December 31, 1996) typically
provide for payments on either a fee-for-service basis (72% of hospital
physician services revenue at December 31, 1996), whereby the Company bills
patients or third-party payors directly for medical services, or a flat-fee
basis (28% of hospital physician services revenue at December 31, 1996), whereby
the Company is paid a fixed amount based on the number of hours of medical
staffing or number of patient visits provided. Fee-for-service contracts also
may, in certain instances, involve the payment of a subsidy to the Company by
the client. Fee-for-service contracts, which usually require the Company to
assume the financial risks relating to patient volume, payor mix and
reimbursement rates, have longer collection periods than flat-fee and capitated
fee contracts and require the Company to bear the credit risk of uninsured
individuals.
The Company's contracts with the Department of Defense provide for
payment to the Company based on the number of patient visits or the number of
hours worked. The Company is at risk for the medical services provided if the
number of patient visits or hours worked exceed certain limits as defined in the
contracts.
-24-
<PAGE> 27
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under the Company's contracts with HMO's (approximately 28% of total
Company revenue at December 31, 1996), the Company receives a fixed, monthly fee
from third-party payors for each covered life in exchange for assuming
responsibility for the provision of medical services. To the extent that
enrollees require more frequent or extensive care than was anticipated by the
Company, revenue to the Company under a contract may be insufficient to cover
the costs of care provided.
The Company provides comprehensive medical services, including mental
health and dental services, to inmates in various state and local correctional
institutions (approximately 19% of total Company revenue at December 31, 1996).
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.
Approximately 93% of InphyNet's revenue is earned through contracts
which are directly between the payor (i.e. HMO, hospital, correctional facility
or Department of Defense) and InphyNet or a wholly owned subsidiary of InphyNet.
In these cases, the contratual revenue is earned by InphyNet or a consolidated
subsidiary in which InphyNet owns a direct and majority voting interest.
Approximately 7% of Inphynet's revenue relates to contracts with
hospitals to which a Controlled Entity (as defined below), rather than InphyNet,
is a party.
MEDICAL COSTS
The Company employs or subcontracts with physicians on an hourly or
salary basis to provide medical services under the Company's hospital, HMO,
correctional and Department of Defense contracts. Additionally, some physicians
may receive a bonus at the discretion of the Company.
The Company provides for claims incurred but not yet reported based on
past experience together with current factors. Estimates are adjusted as changes
in these factors occur and such adjustments are reported in the year of
determination. Although considerable variability is inherent in such estimates,
management believes that these reserves are adequate.
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of
InPhyNet, investments in which it has a greater than 50% voting interest and
Controlled Entities (as defined below). All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company has entered into management contracts and stock transfer
restriction agreements ( the "Transfer Agreements") with professional
corporations ("Controlled Entities") owned by one or more physicians. The
management and Transfer Agreements may not be terminated by the Controlled
Entities for any reason. The physician(s) that own the Controlled Entities are
generally treated as employees of the Company and are solely responsible for the
practice of medicine and delivery of medical services. The management contracts
provide that the Company shall be responsible for the general management and
administration of the day to day operations of the Controlled Entities,
including but not limited to business planning, financial management,
bookkeeping, accounting, data processing as well as human resources management.
The management contracts also provide that the Company shall have the exclusive
right to select the individuals serving as directors of Controlled Entities. The
Transfer Agreements provide that all shares of the Controlled Entities are
required to be transferred to a "Designated Transferee" for a nominal amount
paid to the transferor at the Company's sole option, at any time and for any
reason. These agreements provide the Company with unilateral and perpetual
control over the assets and business operations of the entities.
Notwithstanding the lack of legal record ownership of the Controlled
Entities, consolidation of the entities is necessary to present fairly the
financial position and results of operations of the Company because of the
existence of a parent-subsidiary relationship by means other than record
ownership by the Company of the Controlled Entities voting stock.
Investments in unconsolidated joint ventures ("Affiliates") in which a
20% to 50% voting interest is owned by the Company are carried at cost plus
equity in earnings since the date of acquisition.
-25-
<PAGE> 28
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
Deposits in banks may exceed the amount of insurance provided on such
deposits. The Company performs reviews of the credit worthiness of its
depository banks. The Company has not experienced any losses on its deposits of
cash.
ACCOUNTS RECEIVABLE
Accounts receivable result primarily from medical services provided to
patients on a fee-for-service basis and on a fixed compensation or capitated
basis from hospitals, military facilities and prison systems where the Company
provides medical services. Fee-for-service amounts are paid by government
sponsored health care programs (primarily Medicare and Medicaid), insurance
companies, self-insured employees and patients. These receivables are
geographically dispersed throughout the United States.
Accounts receivable include an allowance for contractual adjustments,
charity and other adjustments. Contractual adjustments result from differences
between the rates charged for the service performed and amounts reimbursed under
government sponsored health care programs and insurance contracts. Charity and
other adjustments represent services provided to patients for which fees are not
expected to be collected at the time the service is provided.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities, which are included in other assets, are
carried at fair market value, with resulting unrealized holding gains and losses
reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
investment income (see Note 16).
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Financial Accounting
Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options generally equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized (see Note 12).
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are recorded at cost
and depreciated using the straight-line method over the estimated useful lives
of the assets. Equipment and furniture are depreciated over a 5 - 7 year period.
Leasehold improvements are amortized over the underlying assets' useful lives or
the term of the lease, whichever is shorter.
-26-
<PAGE> 29
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COSTS IN EXCESS OF NET ASSETS ACQUIRED
Costs in excess of net assets acquired are stated net of accumulated
amortization and are amortized on a straight-line basis over periods ranging
from ten to forty years. The Company periodically evaluates the recovery of the
carrying amount of costs in excess of net assets acquired by determining if any
impairment indicators are present. These indicators include duplication of
resources resulting from acquisitions, income derived from businesses acquired,
the estimated undiscounted cash flows of the entity over the remaining
amortization period and other factors.
INCOME TAXES
Prior to the IPO, EMSA was taxed under the provisions of Subchapter S
of the Internal Revenue Code, which generally provides that in lieu of corporate
income taxes, stockholders are taxed on the Company's taxable income in
accordance with their ownership interests. As a result, the accompanying
financial statements include no provision for income taxes related to EMSA's
income prior to the completion of the IPO.
Concurrent with the IPO, EMSA converted to C corporation status and
became an accrual basis taxpayer with respect to federal income taxes and, for
those states that recognize such tax election, state income taxes. Accordingly,
for the year ended December 31, 1994, the consolidated statement of income
includes pro forma adjustments (unaudited) for income tax expense which would
have been recorded had EMSA been a taxable corporation based on the tax laws in
effect during that period.
Prior to its acquisition, MetroAmerican was taxed under the provisions
of Subchapter S of the Internal Revenue Code. Concurrent with the acquisition of
MetroAmerican, MetroAmerican converted to C corporation status and became an
accrual basis taxpayer with respect to federal income taxes and, for those
states that recognize such tax election, state income taxes. Income tax expense
that would have been recorded if the Company had been subject to corporate
income taxes for that period is not significant.
Deferred income taxes have been provided in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes" (Statement
109) (see Note 7).
LONG LIVED ASSETS
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" ("Statement 121"), requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. The
Company adopted Statement 121 in 1996 and, based on current circumstances, does
not believe that any impairment indicators are present.
NET INCOME PER SHARE
The computation of net income per share is based upon the weighted
average number of common shares and common stock equivalents, primarily from
stock options, outstanding during the period using the treasury stock method.
Weighted average shares outstanding gives effect to the shares of common stock
issued in connection with the Radiology Associates acquisition which was
accounted for as a pooling of interests, as if the shares were outstanding for
all periods presented. Shares issued in connection with the acquisition of
MetroAmerican, which was accounted for as an immaterial pooling of interests,
were treated as outstanding as of January 1, 1995 (see Note 3).
SUPPLEMENTAL NET INCOME AND SUPPLEMENTAL NET INCOME PER SHARE (UNAUDITED)
Supplemental net income is calculated assuming the minority interests
were purchased for common stock of the Company on January 1, 1994 and the
Company was a taxable entity for all periods presented.
-27-
<PAGE> 30
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The supplemental weighted average number of shares outstanding gives
effect to the issuance of common stock in connection with the acquisition of the
minority interests as if these transactions occurred on January 1, 1994.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the current year's presentation.
2. PROPOSED MERGER AGREEMENT
On January 21, 1997, the Company and MedPartners, Inc. ("MedPartners")
announced they have agreed to merge. Upon consummation of the merger, each share
of the Company's common stock will be exchanged for 1.311 shares of MedPartners
common stock. Also, all of the Company's options will vest and will be converted
into options of MedPartners based on the exchange ratio. The consummation of the
merger is subject to, among other things, performance by each party under the
merger plan and regulatory approval. In addition, the approval of the
transaction requires approval by the shareholders of the Company and the Board
of Directors of MedPartners.
3. ACQUISITIONS
Effective May 1, 1994, in a transaction accounted for as a purchase,
the Company acquired substantially all the assets of Fox Healthcare Services
Inc. and affiliated entities ("Fox Healthcare") for $5,000,000 in cash,
excluding expenses associated with the acquisition of approximately $100,000,
and a preferred limited partnership interest in the Company. At the time of the
IPO, the preferred limited partnership interest was exchanged for $2,750,000 of
the Company's common stock at the initial offering price of $12 per share. Costs
in excess of net assets acquired were approximately $7,750,000. Fox Healthcare
provides medical care to members of Humana Medical Plan, Inc. through the
Company's clinics and also contracts with other medical providers for other
medical services such as inpatient care and certain diagnostic procedures.
Effective May 24, 1994, the Company acquired, in a purchase
transaction, the common stock of two home health care companies ("AmCare") for
$1,800,000 in cash and a $600,000 promissory note. Costs in excess of net assets
acquired were approximately $2,500,000.
Contemporaneous with the completion of the IPO, the Company exchanged
127,090 shares of its common stock for the 1.79% limited partnership interest in
the Company. This transaction, which was accounted for as a purchase, resulted
in costs in excess of net assets acquired of approximately $880,000.
The following unaudited pro forma summary (in thousands) combines the
consolidated results of operations of the Company, Fox Healthcare, AmCare and
the acquisition of the minority interests and the preferred limited partnership
interest in the Company, as if these transactions had occurred at January 1,
1994, after giving effect to certain adjustments including the amortization of
goodwill, among others. The unaudited pro forma summary does not purport to be
indicative of the results which may have been obtained had the acquisitions been
consummated at the dates assumed, or of future results of operations of the
consolidated companies.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1994
-----------------
(UNAUDITED)
<S> <C>
Total revenue $279,777
========
Income before income tax expense $ 15,717
========
Net income $ 9,430
========
Net income per share $ 0.74
========
</TABLE>
-28-
<PAGE> 31
3. ACQUISITIONS (CONTINUED)
During the year ended December 31, 1995, the Company acquired, in
transactions accounted for as purchases, substantially all the assets and
operations of five primary care practices for approximately $6.7 million and
approximately 57,000 shares of the Company's common stock valued at $17.68 per
share. Costs in excess of net assets acquired were approximately $7.5 million.
The pro forma effects of these acquisitions on total revenue, net income and
earnings per share are not material.
Effective July 1, 1995, in a transaction accounted for as a pooling of
interests, the Company acquired MetroAmerican Radiology, Inc. and an affiliated
entity ("MetroAmerican"). The accounts and results of operations of
MetroAmerican have not been included in the accompanying financial statements
prior to January 1, 1995, because the restatement would not have a material
effect on the Company's consolidated financial statements. In connection with
the transaction, the Company exchanged approximately 473,000 shares of Common
Stock for all of the outstanding shares of MetroAmerican. As a result of this
transaction, the Company acquired contracts to provide radiology services on a
fee-for-service basis. The expenses associated with the transaction were
approximately $500,000.
Effective September 1, 1995, in a transaction accounted for as a
pooling of interests, the Company acquired Radiology Associates of Hollywood,
Inc. and affiliated entities ("Radiology Associates"). As a result, the
accompanying financial statements include the accounts and results of operations
of Radiology Associates for all periods presented. In connection with the
transaction, the Company exchanged 1,625,000 shares of Common Stock for all of
the outstanding shares of Radiology Associates. Radiology Associates, provides
radiology and management services to hospitals, outpatient centers, radiation
oncology centers and a regional teleradiology reading facility. Expenses
associated with the transaction were approximately $1,200,000.
Prior to the date of the acquisition, total revenue and net income (loss) for
the Company and the pooled entities are as follows:
<TABLE>
<CAPTION>
INPHYNET
MEDICAL POOLED
MANAGEMENT INC. ENTITIES CONSOLIDATED
--------------- -------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Total revenue $306,455 $ 18,885(1) $325,340
======== ======== ========
Net income (loss) $ 11,546 $ (258)(1) $ 11,288
======== ======== ========
YEAR ENDED DECEMBER 31, 1994:
Total revenue $253,425 $ 16,945(2) $270,370
======== ======== ========
Net income $ 12,542 $ 204(2) $ 12,746
======== ======== ========
</TABLE>
(1) Represents results of MetroAmerican and Radiology Associates from
January 1, 1995 to the date of acquisition.
(2) MetroAmerican was accounted for as an immaterial pooling of interests
and accordingly the accounts and results of its operations have not
been included in the Consolidated Financial Statements prior to January
1, 1995.
Effective January 16, 1996, in a transaction accounted for as a
purchase, the Company acquired all of the outstanding stock of Sachs, Morris &
Sklaver, Inc. for approximately $3.1 million. As a result of this transaction,
the Company added two medical centers to its base of primary care practices.
Costs in excess of net assets acquired were approximately $3.0 million. The pro
forma effects of this acquisition on total revenue, net income and earnings per
share are not material.
Effective July 2, 1996, in a transaction accounted for as a purchase,
the Company acquired certain assets of NHS National Health Services, Inc. As a
result of this transaction, the Company acquired contracts to provide medical
care to inmates in correctional institutions. The agreement stipulates that
installments of the purchase price be determined on each annual anniversary of
the transaction's effective date over a period of five years based upon the
contracts future operating performance. Accordingly, costs in excess of net
assets acquired will be recognized upon determination of the ultimate purchase
price over the five year period. At closing, the total consideration paid and
costs in excess of net assets acquired was not significant. The pro forma
effects of this acquisition on total revenue, net income and earnings per share
are not material.
-29-
<PAGE> 32
4. SIGNIFICANT AGREEMENTS
Effective July 1, 1996, the Company entered into a five-year agreement
(the "PCA Agreement"), with an option for an additional five years, with
Physician Corporation of America ("PCA"). Under the PCA Agreement, InPhyNet will
manage independent primary care physicians in South Florida and the Tampa Bay
region. At December 31, 1996, physicians provided primary care services to
approximately 50,500 covered lives: 24,500 in South Florida and 26,000 in the
Tampa Bay area. PCA provides comprehensive health care service through its
HMO's, Life and Property and Casualty Insurance Carriers and Worker's
Compensation administrators located throughout the southeastern United States
and the Caribbean.
In connection with the PCA Agreement, the Company has established a
$9.3 million reserve for losses associated with the provider contracts the
Company was required to assume. For the year ended December 31, 1996, the
Company has charged $6.2 million of losses under the PCA Agreement against this
reserve. The remaining amount will be reduced by losses incurred through June
30, 1997.
5. EQUIPMENT, FURNITURE, AND LEASEHOLD IMPROVEMENTS
Equipment, furniture, and leasehold improvements are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Equipment $17,546 $14,683
Furniture 6,306 5,467
Leasehold improvements 1,589 1,325
------- -------
25,441 21,475
Less accumulated depreciation (13,732) (10,289)
------- -------
Equipment, furniture, and
leasehold improvements, net $11,709 $11,186
======= =======
</TABLE>
6. NET REVENUE
Net revenue consists of gross charges, net of allowances for
contractual, charity and other adjustments. Contractual adjustments are based on
the difference between charges at established rates and amounts estimated by
management to be reimbursable by the Medicare and Medicaid programs, and public
and private insurance contracts under applicable laws, regulations and program
instructions. Reimbursable amounts are generally less than the established gross
charge.
Final determination of amounts earned for certain patients is subject
to review by appropriate program representatives. Charity and other adjustments
represent services provided to patients for which fees are not expected to be
collected at the time the service is provided.
Net revenue consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gross revenue $ 674,467 $ 567,436 $ 468,281
Less allowances for contractual,
charity and other adjustments (267,228) (243,654) (200,880)
--------- --------- ---------
Net revenue $ 407,239 $ 323,782 $ 267,401
========= ========= =========
</TABLE>
-30-
<PAGE> 33
6. NET REVENUE (CONTINUED)
Net revenue attributable to major customers consists of the following (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Humana Medical Plans, Inc. and its affiliates $ 60,691 $ 58,866 $37,199
========= ========== =======
Department of Corrections, State of
Massachusetts $ -- $ -- $18,905
========= ========== =======
</TABLE>
Effective June 30, 1994, the contract with the Department of
Corrections, State of Massachusetts was not renewed with the Company.
7. INCOME TAXES
Historical
Concurrent with the IPO, the Company converted to C Corporation status
and became an accrual basis taxpayer with respect to federal income taxes and,
for those states that recognize such tax election, state income taxes.
Significant components of income tax expense (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 6,303 $ 6,128 $ 2,411
State and local 915 1,826 405
------- ------- -------
Total current 7,218 7,954 2,816
------- ------- -------
Deferred:
Federal 3,044 652 (2,263)
State and local 636 199 (400)
------- ------- -------
Total deferred 3,680 851 (2,663)
------- ------- -------
$10,898 $ 8,805 $ 153
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The Company's net deferred tax assets (liabilities) are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Current deferred income taxes:
Deferred tax assets $ 2,538 $ 4,408
Deferred tax liabilities (1,797) (2,394)
------- -------
741 2,014
------- -------
Long-term deferred income taxes:
Deferred tax assets 419 473
Deferred tax liabilities (3,764) (1,411)
------- -------
(3,345) (938)
------- -------
Net deferred tax assets (liabilities) $(2,604) $ 1,076
======= =======
</TABLE>
-31-
<PAGE> 34
7. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Insurance reserves $ 1,382 $ 2,770
Allowance for charity and other adjustments (1,104) 95
Change in accounting method for income
taxes from cash to accrual (628) (2,745)
Deferred loss on PCA Agreement (3,005) --
Other 751 956
------- -------
Net deferred tax assets (liabilities) $(2,604) $ 1,076
======= =======
</TABLE>
The reconciliation of income tax attributable to net income computed at federal
statutory rates to income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate $ 9,656 35% $ 6,832 34% $ 4,386 34%
State and local income taxes, net
of federal tax benefit 1,242 5% 1,324 6% 253 2%
Taxes on income earned prior to
revocation of Subchapter S
election -- -- (243) -- (1,871) (15)%
Tax expense (benefit) from
conversion to C corporation -- -- 892 4% (2,615) (21)%
------ -------- ------ ------- ------ -------
$10,898 40% $ 8,805 44% $ 153 --
======= ======== ======= ======= ======= ========
</TABLE>
Prior to July 1, 1995, MetroAmerican was a Subchapter S corporation
and, accordingly, was not subject to corporate income taxes. Concurrent with the
acquisition of MetroAmerican on July 1, 1995, MetroAmerican converted to C
corporation status and became an accrual basis taxpayer with respect to federal
income taxes and, for those states that recognize such tax election, state
income taxes. Accordingly, at the date of the transaction, the Company recorded
a charge to income tax expense of approximately $892,000 to reflect the
cumulative effect of adopting Statement 109.
-32-
<PAGE> 35
7. INCOME TAXES (CONTINUED)
Supplemental Income Taxes
The following unaudited supplemental information reflects income tax expense
that would have been incurred during the year ended December 31, 1994 had the
Company and its subsidiaries been subject to income taxes (in thousands):
<TABLE>
<CAPTION>
CURRENT:
<S> <C>
Federal $4,721
State and local 1,249
------
Total current 5,970
------
DEFERRED:
Federal 217
State and local 57
------
Total deferred 274
------
$6,244
======
</TABLE>
The unaudited pro forma income tax expense differed from the amounts computed by
applying the federal statutory rate of 34% to income before income taxes as
follows (in thousands) for the year ended December 31, 1994:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
<S> <C> <C>
Tax at U.S. statutory rate $ 5,307 34%
State and local income taxes,
net of federal tax benefit 937 6%
-------- ----
$ 6,244 40%
======== ====
</TABLE>
8. PROFESSIONAL LIABILITY LOSS RESERVE
In August 1995, the Company renewed substantially all of its
professional liability coverage with a commercial insurance company. The new
policy is on a claims made basis with a prefunded extended reporting
endorsement. The extended reporting endorsement effectively provides for first
dollar coverage for professional liability claims. The policy expires in August
1999.
Historically, the Company maintained professional liability coverage
for the Company and its employee and independent contractor physicians with a
commercial insurance company on a claims made basis. The policy included a
self-insured retention and the Company has recorded an estimate of its liability
for this self-insured portion of its professional liability claims.
The Company is involved in various legal proceedings incidental to its
business, substantially all of which involve claims related to the alleged
malpractice of employed and contracted medical professionals. In the opinion of
the Company's management, no individual item of litigation or group of similar
items of litigation, taking into account the insurance coverage maintained by
the Company, is likely to have a material adverse effect on the Company's
financial position, results of operations and liquidity.
9. LONG-TERM DEBT
On November 22, 1995, the Company entered into an Amended and Restated
Revolving Credit and Reimbursement Agreement (the "Agreement") with its bank.
The Agreement superseded the former term loan facility and extended to the
Company an unsecured revolving loan commitment of up to $60,000,000. The maximum
amount available to the Company is reduced by outstanding letters of credit (see
Note 10).
-33-
<PAGE> 36
9. LONG-TERM DEBT (CONTINUED)
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
---- ----
<S> <C> <C>
$60,000 revolving credit and reimbursement arrangement, variable interest
rate as selected by the Company (ranging from 6.765% to 7.25% as of
December 31, 1995). Interest payments are due on the last day of an
interest period, as defined in the Agreement (at least quarterly) with
the entire amount outstanding due September 30, 1998 $ -- $ 9,000
Other 851 1,019
-------- --------
851 10,019
Current portion (512) (402)
-------- --------
$ 339 $ 9,617
======== ========
</TABLE>
Under the terms of the Agreement, among other restrictive covenants,
the Company must maintain, on a consolidated basis, certain financial ratios
relating to leverage, working capital, and net worth. The Agreement also
restricts, among other things, the amount of loans and investments in any entity
which is not part of the consolidated group, capital expenditures, additional
indebtedness and limits the payment of cash dividends on its common stock to
twenty-five percent of current period net income.
Long-term debt as of December 31, 1996 matures as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 512
1998 219
1999 120
2000 --
2001 --
------
$ 851
======
</TABLE>
10. LETTERS OF CREDIT
Unused outstanding letters of credit are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Outstanding under state regulations
as collateral for the self-insured portion of the
Company's worker's compensation programs $ 100 $ 200
Available to insurance carrier
as collateral for the company's professional
liability insurance program 1,000 1,000
Available as collateral
for corrections contracts 650 650
Available as collateral
for PCA Agreement 13,310 --
------- -------
$15,060 $ 1,850
======= =======
</TABLE>
All of the unused outstanding letters of credit expire during 1997.
The Company intends to renew each letter of credit as they expire.
-34-
<PAGE> 37
11. RETIREMENT PLAN
The Company maintains the EMSA 401(k) Profit Sharing Plan (the "Plan"),
a deferred profit sharing plan which covers substantially all full time
employees and provides for discretionary employer contributions in such amounts
as the Board of Directors may annually determine. Employer contributions vest
ratably over five years. The Plan may be terminated at any time without further
obligation by the Company. However, should the plan be terminated, employees
will become 100% vested with respect to the employer contributions.
The Company's contribution to the Plan for the years ended December 31,
1996, 1995 and 1994 was approximately $455,000, $321,000 and $296,000,
respectively.
12. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of common stock,
par value $0.01 per share. In May 1994, the Board of Directors of EMSA declared
a 165.1 to 1 stock split which became effective on the effective date of the
IPO. The Company's consolidated financial statements have been retroactively
restated to reflect 1) the stock split, 2) the increase in the number of
authorized shares, and 3) the shares issued in connection with the Poolings as
of the date the respective transactions are recorded in the Company's
consolidated financial statements.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred
stock, par value $0.10 per share. The Company has no present plans to issue any
shares of preferred stock. In August 1995 the Board of Directors adopted a
Shareholder Rights Plan (the "Rights Plan"). In order to implement the Rights
Plan, the Board of Directors declared a dividend of one Right for each share of
the Company's common stock to stockholders of record on September 1, 1995. Each
Right, when exercisable, represents the right to purchase one one-thousandth of
a share of a newly issued series of Preferred Stock of the Company designated
"Series A Junior Participating Preferred Stock," par value $.10 per share. The
exercise price of the Rights is $85.00 per Right, the redemption price is $0.01
per Right, and the Rights expire on August 23, 2005. In the event that any
person or entity, together with affiliates or associates, acquires more than a
certain specified percentage of voting stock of the Company, each Right will
entitle the holder (other than an acquiring person and its affiliates or
associates) to acquire, in certain circumstances, additional shares of voting
stock at less than the prevailing market price. The Company has reserved 50,000
shares of the Series A Junior Participating Preferred Stock for issuance upon
exercise of the Rights.
DIVIDENDS AND PARTNERSHIP DISTRIBUTIONS
Prior to the IPO, when the Company was taxed as an S Corporation, the
Board of Directors of the Company approved dividends and partnership
distributions in the following amounts (in thousands) during the year ended
December 31, 1994:
<TABLE>
<S> <C>
Dividends $ 4,254
Partnership distributions to minority interests 1,746
-------
$ 6,000
=======
</TABLE>
STOCK OPTION PLANS
During 1994, the Company adopted the 1994 Stock Incentive Plan ("Stock
Incentive Plan") and the Non-Employee Director Stock Option Plan ("Directors
Plan"). Under the Stock Incentive Plan and the Directors Plan, the Company is
authorized to issue options to purchase 2,500,000 and 200,000 shares of the
Company's common stock, respectively.
-35-
<PAGE> 38
12. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Incentive Plan options are granted at the discretion of the
Compensation Committee of the Company and typically expire ten years after the
date of the grant. The exercise price of options issued is determined by the
Compensation Committee in accordance with the provisions of the plan document.
Under the Stock Incentive Plan, the Company is authorized to grant stock
options, stock appreciation right, restricted stock award, phantom stock awards
and performance share units. In the event that there is a change in control of
the Company, the plan stipulates that all outstanding options will become fully
vested and exercisable.
Directors Plan options are granted at the fair market value on the date
of the grant and expire ten years from the date of grant. Concurrent with being
elected as a director, each non-employee director is granted an option to
purchase 10,000 shares of common stock, and is automatically granted an option
to purchase an additional 2,500 shares of common stock each year at the annual
shareholders meeting. In the event that there is a change in control of the
Company, the plan stipulates that all outstanding options will become fully
vested and exercisable.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
which provides an alternative to APB No. 25. Statement 123 allows for a fair
value based method of accounting for stock options. However, for companies that
continue to account for stock-based compensation arrangements under APB 25, such
as the Company, Statement 123 requires disclosure of the pro forma effect on net
income and earnings per share of its fair value based accounting for those
arrangements. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1996, 1995 and 1994, respectively; risk free
interest rates of 6.04%, 5.24% and 6.49%, dividend yields of 0%, volatility
factors of the expected market price of the Company's common stock of .601 and a
weighted-average expected life of the options of 3 years. As of December 31,
1996, the weighted average remaining contractual life of all options outstanding
was 4.25 years.
The following unaudited pro forma summary presents the Company's net
income and earnings per share as if the estimated fair value of the options were
amortized to expense over the options' vesting period (in thousands except
earnings per share information):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Pro forma net income $ 15,255 $ 11,156
======== ========
Pro forma net income per share $ 0.95 $ 0.74
======== ========
</TABLE>
The pro forma effect of compensation expense from stock option awards on pro
forma net income reflects the vesting of 1995 option awards in 1995 and 1996,
and 1996 option awards in 1996, in accordance with Statement 123. Because pro
forma compensation expense associated with a stock option award is recognized
over the vesting period, the initial impact of applying Statement 123 may not be
indicative of pro forma compensation expense in future years, when the effect of
multiple awards will be reflected in pro forma net income.
-36-
<PAGE> 39
12. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS FOR EXERCISE OPTIONS FOR EXERCISE OPTIONS FOR EXERCISE
SHARES (000) PRICE ($) SHARES (000) PRICE ($) SHARES (000) PRICE ($)
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-Beginning
of year 1,454 13.55 1,030 10.81 347 9.08
Granted 684 16.90 522 18.13 706 11.70
Exercised (128) 13.29 (79) 11.10 -- --
Forfeited (34) 15.73 (19) 12.00 (23) 12.00
------ ------ -----
Outstanding-end of
year 1,976 14.62 1,454 13.55 1,030 10.81
====== ====== ======
Exercisable at end of
year 730 639 347
====== ====== ======
Weighted-average fair
value of options
granted during the year $ 6.37 $ 8.57 $ 4.69
====== ====== ======
</TABLE>
Options outstanding and exercisable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF OPTION PRICES (000'S) LIFE PRICE (000'S) PRICE
- ---------------------- ------- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$ 9.08 - $15.00 915 4.5 yrs. $ 10.88 659 $ 10.50
$15.01 - $23.53 1,061 4.7 yrs. $ 17.84 71 $ 17.81
----- ---
1,976 730
===== ===
</TABLE>
Options available for grant at December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Stock Incentive Plan 281
Directors Plan 160
---
441
===
</TABLE>
-37-
<PAGE> 40
13. PRO FORMA HISTORICAL NET INCOME PER SHARE
The pro forma historical net income per share amounts, as required by
generally accepted accounting principles, after giving effect to the pro forma
income tax adjustments as described in Note 1, are as follows for the year ended
December 31, 1994 (in thousands, except per share data):
<TABLE>
<S> <C>
Historical income before income tax expense $ 12,899
Pro forma income tax expense 5,160
--------
Pro forma net income $ 7,739
========
Pro forma net income per share $ 0.72
========
Historical weighted average shares outstanding 10,785
========
</TABLE>
14. RELATED PARTY TRANSACTIONS
One of the buildings used for corporate offices of the Company is
leased from a Florida limited partnership. In consideration for signing the
lease, the Company was granted an 8 percent limited partnership interest in the
partnership which owns and operates the building. In addition, this limited
partnership has two limited partners who are directors, officers and
stockholders of the Company. The lease provides for the payment of a
proportionate share of increases in operating expenses over the base year in
addition to the monthly rent. The lease term expires December 31, 1997. The
amounts paid during the years ended December 31, 1996, 1995 and 1994 were
approximately $443,000, $413,000 and $ 408,000, respectively.
In September 1993, the Company assumed a lease for office space in a
building that is owned by certain stockholders of the Company. The lease term
expires December 31, 2000. The amounts paid during the years ended December 31,
1996, 1995 and 1994 were approximately $332,000, $354,000, and $298,000 ,
respectively.
The Company received income of approximately $1,281,000, $1,558,000,
and $2,969,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, for administrative, consulting, and billing fees provided to
Affiliates. At December 31, 1996 and 1995, accounts receivable from Affiliates
related to the above services were approximately $202,000 and $559,000,
respectively.
The Company incurred professional fees of approximately $97,000,
$220,000 and $441,000 for financial advisory services provided to the Company
during the years ended December 31, 1996, 1995, and 1994, respectively, by the
Company's financial advisor. A general partner of the Company's financial
advisor is a member of the Company's Board of Directors. In addition, a brother
of the Company's Chief Financial Officer is a general partner in the same
financial advisory firm.
During 1995, the Company incurred approximately $100,000 for services
provided by a consulting firm, a partner of which is a member of the Company's
Board of Directors. Upon termination of the consulting services, the individual
serving as a director accepted a position as the Company's Chief Operating
Officer.
-38-
<PAGE> 41
15. OPERATING LEASES
The Company is obligated under various noncancelable operating leases.
The minimum future obligation under these agreements at December 31, 1996 is as
follows (in thousands):
<TABLE>
<S> <C>
1997 $ 3,886
1998 3,068
1999 2,777
2000 1,654
2001 1,186
2002 and thereafter --
---------
$ 12,571
=========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $3,792,000, $3,453,000, and $2,736,000, respectively. Certain of
the Company's operating leases contain rent escalation clauses and renewal
options as defined in the respective agreements.
16. EQUITY SECURITIES
In May 1993 the FASB issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities (the
"Statement"). The Company adopted the provisions of the statement for
investments held as of or acquired after January 1, 1994. In accordance with the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The cumulative effect as of January 1, 1994
of adopting the Statement increased the opening balance of stockholders' equity
by approximately $696,000 to reflect the net unrealized holding gains on
securities classified as available-for-sale previously carried at lower of cost
or market. No unrealized holding losses on investments have been reflected in
1994 net income. As of December 31, 1996, the fair market value and cost of the
Company's marketable equity securities were approximately $300,000 and $500,000,
respectively.
17. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH
The carrying amount reported in the balance sheet for cash approximates its fair
value.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts reported in the balance sheet for accounts receivable and
accounts payable approximate their fair value.
INVESTMENT SECURITIES
The fair values for equity securities are based on quoted market prices.
LONG TERM DEBT
The carrying amount of the Company's long term debt approximates their fair
value. The Credit Facility contains borrowing options of 1 to 6 months at which
time borrowed amounts are repaid or reborrowed at new interest rates based on
prime or LIBOR.
-39-
<PAGE> 42
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
SUPPLEMENTARY DATA
(UNAUDITED)
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS)(EXCEPT PER SHARE
DATA):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Total revenue $ 87,903 $ 90,466 $ 113,340 $ 116,811
Operating expenses 81,545 83,864 105,614 108,630
----------- ----------- ------------ -----------
Income from operations $ 6,358 $ 6,602 $ 7,726 $ 8,181
=========== =========== ============ ===========
Net income $ 3,650 $ 3,590(1) $ 4,617 $ 4,834
=========== =========== ============ ===========
Net income per share $ 0.23 $ 0.22(1) $ 0.29 $ 0.30
=========== =========== ============ ===========
Weighted average number of
common shares outstanding 16,067 16,061 15,966 16,002
=========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1995
Total revenue $ 77,106 $ 81,858 $ 82,034 $ 84,342
Operating expenses 71,767 76,412 78,133 77,701
----------- ----------- ------------ -----------
Income from operations $ 5,339 $ 5,446 $ 3,901 $ 6,641
=========== =========== ============ ===========
Net income $ 2,823 $ 3,169 $ 1,208(2) $ 4,088
=========== =========== ============ ===========
Net income per share
$ 0.19 $ 0.21 $ 0.08(2) $ 0.26
=========== =========== ============ ===========
Weighted average number of common
shares outstanding 14,629 14,810 15,026 15,614
=========== =========== ============ ===========
</TABLE>
- -----------------------
(1) Net income has been reduced by one time charges consisting of the loss on
the sale of physician practices of $0.7 million and certain management
restructuring charges of $0.3 million recorded during the three months
ended June 30, 1996. The effect of these costs, net of tax, is to reduce
net income per share by $0.04.
(2) Net income has been reduced by acquisition costs incurred in connection
with poolings of interest of $1.7 million and employee severance and other
costs of $0.8 million. The effect of these costs, net of tax, in addition
to $0.9 million of tax conversion charge (see Note 7 to the Company's
consolidated financial statements) is to reduce net income per share by
$0.16.
- 40 -
<PAGE> 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names, ages and titles of the persons who are
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Clifford Findeiss.................. 56 Chairman of the Board, President and Chief Executive Officer
Erie D. Chapman, III .............. 53 Senior Executive Vice President, Chief Operating Officer and Director
George W. McCleary, Jr............. 45 Executive Vice President, Chief Financial Officer, Secretary and
Director
Jere D. Creed...................... 55 Senior Vice President, Hospital Physician Services and Director
Marta Prado........................ 45 Senior Vice President, Capitated Medical Services and Director
Neil J. Principe................... 51 Senior Vice President, Hospital Physician Services - Business
Development and Director
Victor J. Weinstein................ 51 Senior Vice President, Mergers and Acquisitions, Treasurer and Director
Thomas E. Dewey, Jr.(1)(2)......... 64 Director
Donald C. Wegmiller(1)(2).......... 58 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
CLIFFORD FINDEISS, Chairman of the Board of Directors since August
1994, has served as President and Chief Executive Officer of the Company since
1974. He was a founder of the Company. Dr. Findeiss holds a B.S. in Mechanical
Engineering from Northwestern University (1964), an M.D. from Northwestern
University Medical School (1968), and an M.S. in Pharmacology from Northwestern
University (1969).
ERIE D. CHAPMAN, III, a Director since May 1995, was appointed Chief
Operating Officer of the Company in November 1995. He was President and Chief
Executive Officer of U.S. Health Corporation, an Ohio not for profit company he
co-founded, from 1984 until June 1995, and was Chief Executive Officer and Vice
Chairman (1992-1994) and President and Chief Executive Officer (1983-1992) of
Riverside Methodist Hospitals, Columbus, Ohio. Mr. Chapman currently serves as a
director of 13 privately held corporations. He holds a B.S. degree from
Northwestern University (1965) and a J.D. from George Washington University
(1968). He is a member of the Ohio Bar Association.
GEORGE W. MCCLEARY, JR., a Director since August 1994, has served as
Executive Vice President, Chief Financial Officer and Secretary since August
1994. He has been employed by the Company since December 1983. Mr. McCleary
holds a B.A. from Boston University (1974), a Masters degree in International
Business from the American Graduate School of International Management (1975),
and a J.D. from Stetson University College of Law (1979). He is a member of the
Florida Bar Association.
JERE D. CREED, a Director since August 1994, has served as Senior Vice
President, Hospital Physician Services since September 1993. He was a founder of
the Company and has been an executive officer since 1974. Dr. Creed holds a B.A.
from Youngstown University (1964) and an M.D. from the University of Miami
School of Medicine (1970). He is certified by the ABEM and is an examiner for
the ABEM. Dr. Creed serves as a Clinical Associate Professor of Medicine at the
University of Miami School of Medicine.
MARTA PRADO, a Director since August 1994, was appointed to Senior Vice
President, Capitated Medical Services in November 1995. Ms. Prado had served as
Senior Vice President, Correctional Care since September 1993. She has been
employed by the Company since 1980. Ms. Prado holds a B.S. in Nursing from the
University of Miami School of Nursing and Medicine (1971).
-41-
<PAGE> 44
NEIL J. PRINCIPE, a Director since August 1994, was appointed Senior
Vice President, Hospital Physician Services-Business Development in November
1995. Dr. Principe had served as Vice President, Recruitment since September
1993. He has been an executive officer of the Company since 1974. He holds a
B.A. from Cornell University (1967), and an M.D. from the State University of
New York Downstate Medical College (1971). He has completed a residency in
internal medicine and is certified by the ABEM and by the ABIM.
VICTOR J. WEINSTEIN, a Director since August 1994, was appointed Senior
Vice President, Mergers and Acquisitions, and Treasurer in November 1995. He has
been affiliated with the Company since 1976. Dr. Weinstein holds a B.A. from
Tulane University (1966) and an M.D. from Tulane University Medical School
(1970). He has completed a residency in internal medicine and is certified by
the ABEM and by the ABIM.
THOMAS E. DEWEY JR., a Director since August 1994, has been a General
Partner of McFarland Dewey & Co., a financial advisory services firm since 1989.
Prior to the formation of McFarland Dewey & Co., he was President of Thomas E.
Dewey, Jr. & Co., Inc., a financial advisory services firm, from 1976 to 1989,
and a General Partner of Kuhn, Loeb & Co. from 1965 to 1975. Mr. Dewey is a
director of Northwest Natural Gas Company and Chairman Emeritus of Lenox Hill
Hospital, New York, N.Y. He holds an A.B. from Princeton University (1954) and
an M.B.A. from Harvard University (1958).
DONALD C. WEGMILLER, a Director since August 1994, has been President
of the Management Compensation Group/Healthcare, a consulting firm that
specializes in compensation and benefit programs for health care executives and
physicians, since April 1993. From 1978 to April 1993, Mr. Wegmiller was
President and Chief Executive Officer of Health Span Health Services (a
successor to Health One Corporation), a Minneapolis-based health care system.
Mr. Wegmiller also served as Chairman of the Board of American Hospital
Association and currently serves as a director of Possis Medical, Inc.,
Minnesota Power & Light Company, HBO & Company, and Medical Graphics
Corporation. He holds a B.A. from the University of Minnesota (1960), and an
M.A. from the University of Minnesota (1962).
CLASSIFICATION OF BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes -- Class
I, Class II and Class III -- which must be as equal in number of members as
possible. Each class of directors serves for a three year term and is elected on
a rotating three year-basis.
The Class I Directors (Clifford Findeiss, George W. McCleary, Jr., Neil
J. Principe and Erie D. Chapman, III) hold office until the 1998 annual
shareholders meeting. The Class II Directors (Jere D. Creed, Thomas E. Dewey,
Jr., Marta Prado and Victor J. Weinstein) hold office until the 1999 annual
shareholders meeting. The Class III Director (Donald C. Wegmiller) holds office
until the 1997 annual shareholders meeting.
-42-
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the
Company's Chief Executive Officer and the four other most highly compensated
executive officers of the Company (collectively, the "Named Executive Officers")
for services in all capacities for the years ended December 31, 1996, 1995 and
1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-------------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS ($) OPTIONS (#) COMPENSATION ($)
--------------------------- ---- ---------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Clifford Findeiss 1996 362,500 -- -- -- --
Chairman of the Board of Directors, 1995 420,826 -- -- -- --
Chief Executive Officer and 1994 388,317 -- -- -- 144
President
Erie D. Chapman, III (1) 1996 275,000 -- 57,035(2) -- 251,876(3)
Senior Executive Vice President, 1995 27,500 -- -- 210,000 --
Chief Operating Officer and 1994 -- -- -- -- --
Director
George W. McCleary, Jr 1996 350,000 -- -- 75,000 --
Executive Vice President, 1995 375,000 -- -- 12,000 --
Chief Financial Officer, 1994 374,999 35,000 -- 25,000 51
Secretary and Director
Jere D. Creed 1996 253,750 -- -- -- --
Senior Vice President, Hospital 1995 350,000 -- -- -- --
Physician Services and Director 1994 353,029 -- -- -- 144
Marta Prado 1996 290,000 -- -- 75,000 156,700(3)
Senior Vice President, Capitated 1995 238,114 -- -- 8,000 --
Medical Services and Director 1994 200,000 25,000 -- 20,000 51
</TABLE>
- ------------------------------
(1) Mr. Chapman assumed his position with the Company on November 17, 1995.
(2) Under the terms of Mr. Chapman's employment agreement, he received
3,202 shares of restricted stock that vest ratably over 12 months. At
December 31, 1996, Mr. Chapman owned 3,202 shares of restricted stock.
(3) Represents compensation from the exercise of stock options.
STOCK OPTION GRANTS IN 1996
The following tables set forth, with respect to any of the Named Executive
Officers, options granted during the Company's last fiscal year and the future
potential realized value of such options at assumed annual rates of stock price
appreciation:
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN 1996
POTENTIAL REALIZED
NUMBER OF PERCENT OF VALUE AT ASSUMED ANNUAL
SECURITIES TOTAL OPTIONS MARKET RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE AT DATE OF EXPIRATION ------------------------------
NAME GRANTED (#) FISCAL YEAR PER SHARE GRANT(2) DATE 0%($) 5%($) 10%($)
- ---- ----------- ----------- --------- ------ ---------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George W. McCleary, Jr. 75,000(1) 11.79% $17.20 $17.75 January 2002 41,250 413,598 865,218
Marta Prado 75,000(1) 11.79% $17.20 $17.75 January 2002 41,250 413,598 865,218
</TABLE>
- ------------------------------
(1) These options were granted in December 1996 under the 1994 Stock
Incentive Plan. One-third of the options granted became fully vested
and exercisable on January 2, 1997, and one-third of the options
granted will vest and become exercisable on each of January 2, 1998 and
January 2, 1999, respectively.
(2) As reported on the Nasdaq National Market on the date of grant.
-43-
<PAGE> 46
AGGREGATED OPTION EXERCISES AND OPTION VALUES
The following table provides certain information concerning the exercise of
options during fiscal 1996, the number of securities underlying unexercised
options held by any of the Named Executive Officers and the value of each such
officer's unexercised options at December 31, 1996:
AGGREGATED OPTION EXERCISES IN 1996 AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE
- ---- --------------- ----------------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
Erie D. Chapman, III 40,000 251,876 43,333/126,667 31,666/ 88,334
George W. McCleary, Jr. -- -- 231,295/ 95,335 2,014,490/110,010
Marta Prado 10,000 156,700 135,412/ 89,668 1,168,946/100,008
</TABLE>
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with each of its Named
Executive Officers. The provisions of the employment agreements are
substantially identical, except for Mr. Chapman's (which is described below).
The employment agreements, other than Mr. Chapman's, have terms of three years,
expiring on December 1, 1999. The employment agreements with Messrs. Findeiss,
Chapman, McCleary, Creed and Ms. Prado, provide for base annualized salaried
compensation of $362,500, $275,000, $350,000, $253,750, and $290,000,
respectively, for such persons through December 1, 1999. Each employment
agreement requires the officer to devote substantially all of The Company may
terminate the employment agreements for any reason at any time. In the event of
a termination by the Company without cause, the officer is entitled to one
year's salary plus a prorated portion of any bonus the officer would have
earned. The employment agreements provide that for one year after termination of
employment with the Company for any reason, the officer will not directly or
indirectly, own, manage, operate, join, control or participate in or be
connected with, as an officer, employee, partner, stockholder, or otherwise, any
business, individual, partnership, firm, or corporation which is at the time
engaged principally or significantly in a business which is, directly or
indirectly, at the time in competition with the business of the Company (or any
subsidiary or affiliate) in an area in which the Company (or such subsidiary or
affiliate) then conducts business.
-44-
<PAGE> 47
Mr. Chapman's employment agreement is for a term of three years
expiring on December 31, 1998, with the Company's option to extend for two
additional one-year terms. Under the terms of Mr. Chapman's employment
agreement, the Company agreed to grant Mr. Chapman 3,202 shares of stock each
January 1st over the term of the employment agreement. Each grant vests at the
rate of one-twelfth on the last day of each month, during the year of each
grant. Mr. Chapman is also to be paid a quarterly bonus of $18,750, if the
Company meets or exceeds the projected street consensus of the Company's
quarterly earnings per share as listed on First Call Research Network on the
first day of the fiscal year and an annual bonus of $50,000 if the Company meets
or exceeds its budgeted annual revenues for a fiscal year, excluding revenues
attributable to any entities acquired in transactions accounted for as poolings
of interests with respect to periods prior to the acquisition date. The
employment agreement of Mr. Chapman has a change of control provision that
provides for a severance payment in an amount equal to his annual compensation
if, during the six months following a change in control, he is terminated
without cause or, in certain circumstances, there is a substantial diminution in
his duties.
In the event that there is a change of control in the Company, certain
provisions of executive employment agreements and stock option plans will become
effective. Each Named Executive Officers' respective employment agreement
provides (except in the case of Erie D. Chapman, III) for severance payments in
an amount equal to (i) 1.5 times each such officer's annual salary if, within 12
months following a change of control, the officer terminates his employment for
any reason or the Surviving Corporation terminates such officer's employment
other than for disability or cause, and (ii) 0.5 times such officer's annual
salary, if at least 12 but not more than 25 months following a change of
control, the Surviving Corporation terminates such officer's employment other
than for disability or cause or if the officer terminates his employment for
good reason.
In addition, at December 31, 1996, the Named Executive Officers have
current option grants, the vesting of which will accelerate upon a change of
control of the Company, including Erie D. Chapman, III (126,667 options at
exercise prices ranging from $16.00 to $17.375 per share), George W. McCleary,
Jr. (95,335 options at exercise prices ranging from $12.00 to $19.76 per share)
and Marta Prado (89,668 options at exercise prices ranging from $12.00 to $19.76
per share).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors determines
executive compensation, subject to the terms of each executive officer's
employment agreement with the Company. No executive officer of the Company
served on any board of directors or compensation committee of any entity other
than the Company with which any member of the Compensation Committee is
affiliated.
-45-
<PAGE> 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of March 13, 1997 by: (i) each
person known to the Company to beneficially own more than 5% of the common
stock; (ii) each director and nominee for director of the Company; (iii) each
executive officer named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, each shareholder named has sole voting and investment power with
respect to such shareholder's shares.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL OWNERSHIP
OF COMMON STOCK
------------------------------------------------------------------
NUMBER STOCK OPTIONS TOTAL SHARES PERCENTAGE OF
OF EXERCISABLE BENEFICIALLY OUTSTANDING
SHARES WITHIN 60 DAYS(3) OWNED SHARES
--------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Clifford Findeiss (1) 1,028,666 -- 1,028,666 6.30%
Joseph J. Badal 983,872 -- 983,872 6.03%
Jere D. Creed (1) 974,669 -- 974,669 5.97%
T. Rowe Price Associates, Inc. 936,800 -- 936,800 5.74%
Neil J. Principe 489,320 -- 489,320 3.00%
Victor J. Weinstein (1) 451,303 -- 451,303 2.76%
George W. McCleary, Jr 155,932 262,295 418,227 2.52%
Marta Prado 87,325 164,412 251,737 1.53%
Erie D. Chapman, III 4,269(2) 43,333 47,602 *
Donald C. Wegmiller -- 7,499 7,499 *
Thomas E. Dewey, Jr -- 7,499 7,499 *
All directors and executive officers as a
group (nine persons) 3,191,484 485,034 3,676,518 21.87%
</TABLE>
- ------------------------------
* Less than 1%.
(1) The shares beneficially owned by Drs. Findeiss, Creed and Weinstein are
held through the J. Clifford Findeiss Revocable Trust, the Jere D.
Creed Revocable Trust and the Victor Jerome Weinstein Revocable Trust,
respectively.
(2) Includes 534 shares of Common Stock that will vest through May 1, 1997
pursuant to the January 1, 1997 grant of 3,202 shares of Common Stock
in accordance with Mr. Chapman's employment agreement (see Employment
Agreements).
(3) Includes all vested options and options that will vest within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
One of the buildings used for the Company's corporate offices is
leased from Barr-Bell Limited, a Florida limited partnership. The Company
acquired an 8 percent limited partnership interest in the partnership which owns
and operates the building. Clifford Findeiss, the Company's Chief Executive
Officer, President and Chairman of the Board of Directors, and Neil J. Principe,
a Senior Vice President of Business Development and Director, are Barr-Bell
limited partners. The total rent paid during the year ended December 31, 1996
was approximately $443,000, which will increase annually in proportion to
increases in the Consumer Price Index. The lease provides for the payment by the
Company of a proportionate share of increases in operating expenses over the
base year in addition to the monthly rent. The lease term expires December 31,
1997.
During 1996, the Company incurred professional fees in an aggregate
amount of approximately $97,000 for financial advisory services provided to the
Company by McFarland Dewey & Co. ("McFarland Dewey"). Thomas E. Dewey, Jr.,
became a member of the Company's Board of Directors subsequent to the completion
of the IPO and is a general partner in McFarland Dewey. In addition, a brother
of the Company's Chief Financial Officer is a general partner in McFarland
Dewey.
The Company believes that the terms of the transactions described
above are fair to the Company and comparable to what would have been obtained in
arms' length negotiations with unaffiliated parties.
-46-
<PAGE> 49
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10
percent of the Common Stock, to file with the Securities and Exchange Commission
("SEC") and the Nasdaq National Market initial reports of beneficial ownership
and changes in beneficial ownership of the Common Stock. Such persons are also
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on a review of
the copies of such reports furnished to the Company and written representations
as to transactions for which reports are required, all Section 16(a) filing
requirements applicable to such individuals were complied with during 1996
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The list of financial statements required by this item is set forth
in Item 8, "Consolidated Financial Statements and Supplementary
Data."
(2) Financial Statement Schedule
Page
----
Schedule II - Valuation and Qualifying Accounts 48
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules.
(3) Exhibits
The exhibits filed herewith or incorporated by reference are
listed on the index at pages 49 and 50.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during 1996.
-47-
<PAGE> 50
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
----------- ----------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowances for contractual,
charity and other adjustments $ 91,000 -- $ 267,000 $(275,000) $ 83,000
YEAR ENDED DECEMBER 31, 1995
Allowances for contractual,
charity and other adjustments $ 63,000 -- $ 244,000 $(216,000) $ 91,000
YEAR ENDED DECEMBER 31, 1994
Allowances for contractual,
charity and other adjustments $ 47,000 -- $ 201,000 $(185,000) $ 63,000
</TABLE>
- ------------------------------
(1) See Note 6 to the Consolidated Financial Statements
(2) Accounts written off, net of recoveries
-48-
<PAGE> 51
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
(ITEM 14(A)(3))
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of August 31, 1995, between InPhyNet Medical Management
Inc., IMMI Radiology Acquisition Corporation, Rosendorf, Margulies, Boroshok and Schoenbaum
Radiology Associates of Hollywood, Inc., Imaging Health Services, Inc., Hollywood Professional
Collections, Inc. and the shareholders of Rosendorf, Margulies, Boroshok and Schoenbaum Radiology
Associates of Hollywood, Inc., Imaging Health Services, Inc. and Hollywood Professional
Collections, Inc. listed on Exhibit A thereto.***
2.2 Agreement and plan of merger dated as of January 20, 1997 by and among MedPartners, Inc. Seabird Merger
Corporation and Inphynet Management Inc.
3.1 Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4.1 Specimen Common Stock certificate*
4.2 Rights Agreement, dated as of August 23, 1995, between InPhyNet Medical Management Inc., and State
Street Bank and Trust Company, as Rights Agent***
10.1 Inphynet Medical Management Inc. 1994 Non-Employee Director Stock Option Plan*
10.2 Inphynet Medical Management Inc. 1994 Stock Incentive Plan*
10.3 Form of Executive Employment Agreement
10.4 Registration Rights Agreement between the Company and the Holders (as defined herein)**
10.5 Agreement of Lease, dated January 16, 1987, between Barr-Bell Ltd., as lessor, and EMSA, as lessee*
10.6 Office Lease for 1200 South Pine Island Road, dated as of March 16, 1992, between Hartford Fire
Insurance Company, as lessor, and EMSA, as lessee*
10.7 Corporate Center Office Lease, dated as of January 1, 1993, between Ridgewood Miller Partners, as
lessor, and Acute Care Specialists, Inc., as lessee*
10.8 First Amendment to Lease Agreement, dated June 1, 1993, between Ridgewood Miller Partners, as
Lessor, and Acute Care Specialists, Inc., as lessee*
10.9 Form of Guaranty and Suretyship Agreement, dated as of September 15, 1994, made by certain of the
Company's subsidiaries to the banks and agent that are parties to the Amended and Restated
Revolving Credit and Reimbursement Agreement**
10.10 Amended and Restated Revolving Credit and Reimbursement Agreement, dated September 15, 1994, by
and among Inphynet Medical Management Inc., NationsBank of Florida, National Association, as
Lender and NationsBank of Florida, National Association, as Agent**
10.11 Amendment No. 1 to amended and Restated Revolving Credit and Reimbursement Agreement, dated
November 22, 1995, by and among Inphynet Medical Management Inc., NationsBank of Florida, National
Association, as Lender and NationsBank of Florida, National Association, as Agent****
</TABLE>
-49-
<PAGE> 52
INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
INDEX TO EXHIBITS (CONTINUED)
(ITEM 14(A)(3))
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
</TABLE>
* Incorporated by reference from the Company's Registration Statement in
Form S-1, No. 33-80106, previously filed with the Securities and
Exchange Commission (the "Commission") and declared effective on August
19, 1994.
** Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 and filed with the
Commission on November 14, 1994.
*** Incorporated by reference to the Registrant's Report on Form 8-K filed
on August 28, 1995.
**** Incorporated by reference to the Registrant's Report on Form 10-K for
the year ended December 31, 1995.
-50-
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 27, 1997.
INPHYNET MEDICAL MANAGEMENT INC.
By: /s/ Clifford Findeiss
-------------------------------------------
Name: Clifford Findeiss
Title: President and Chief Executive Officer,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on March 27, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Clifford Findeiss President, Chief Executive Officer and Chairman of the
- ------------------------------------ Board of Directors
Clifford Findeiss
/s/ Erie D. Chapman, III Senior Executive Vice President, Chief Operating Officer
- ------------------------------------ and Director
Erie D. Chapman, III
/s/ George W. McCleary, Jr. Executive Vice President, Chief Financial Officer,
- ------------------------------------ Director and Secretary
George W. McCleary, Jr.
/s/ Mary Ann Blanford Vice President, Chief Accounting Officer
- ------------------------------------
Mary Ann Blanford
/s/ Jere D. Creed Senior Vice President and Director
- ------------------------------------
Jere D. Creed
/s/ Marta Prado Senior Vice President and Director
- ------------------------------------
Marta Prado
/s/ Neil J. Principe Senior Vice President and Director
- ------------------------------------
Neil J. Principe
/s/ Victor J. Weinstein Senior Vice President, Treasurer and Director
- ------------------------------------
Victor J. Weinstein
</TABLE>
-51-
<PAGE> 54
SIGNATURES (CONTINUED)
/s/ Thomas E. Dewey, Jr. Director
- ------------------------------------
Thomas E. Dewey, Jr.
/s/ Donald C. Wegmiller Director
- ------------------------------------
Donald C. Wegmiller
-52-
<PAGE> 55
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 20, 1997 (the
"Agreement"), among MEDPARTNERS, INC., a Delaware corporation (the "Parent"),
SEABIRD MERGER CORPORATION, a Delaware corporation (the "Subsidiary"), and
INPHYNET MEDICAL MANAGEMENT INC., a Delaware corporation (the "Company").
WHEREAS, the Boards of Directors of the Parent, the Company and the
Subsidiary have approved the merger of the Company with and into the Subsidiary
(the "Merger"), upon the terms and conditions set forth in this Agreement,
whereby each share of Common Stock, par value $.01 per share, of the Company
(the "Company Common Stock"), not owned directly or indirectly by the Company,
will be converted into the right to receive the merger consideration provided
for herein (the Company Common Stock may be sometimes hereinafter referred to as
the "Company Shares");
WHEREAS, each of the Parent, the Subsidiary and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
(as defined herein) shall qualify as a reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests."
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1. THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the General Corporation Law of the State
of Delaware (the "DGCL"), the Company shall be merged with and into the
Subsidiary at the Effective Time (as defined in Section 1.3). Following the
Effective Time, the separate corporate existence of the Company shall cease and
the Subsidiary shall continue as the surviving corporation (the "Surviving
Corporation") as a business corporation incorporated under the laws of the State
of Delaware under the name "InPhyNet Medical Management, Inc." and shall succeed
to and assume all the rights and obligations of the Company in accordance with
the DGCL.
1.2. The Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. New York City Time on a date to be specified by the parties
(the "Closing Date"), which shall be no later than the second business day after
the satisfaction or waiver of the conditions set forth in Sections 9.1, 9.2 and
9.3, at the offices of Willkie Farr & Gallagher, One Citicorp Center, 153 East
53rd Street, New York, New York, unless another date or place is agreed to in
writing by the parties hereto.
1.3. Effective Time. Subject to the provisions of this Agreement, the
Company and the Subsidiary shall file a Certificate of Merger (the "Certificate
of Merger") executed in accordance with the relevant provisions of the DGCL and
shall make all other filings or recordings required under the DGCL to effect the
Merger as soon as practicable on or after the Closing Date. The Merger shall
become effective at such time as the Certificate of Merger is duly filed with
the Secretary of State of the State of Delaware, or at such other time as the
Parent, the Subsidiary and the Company shall agree should be specified in the
Certificate of Merger (the "Effective Time").
1.4. Effect of the Merger. The Merger shall have the effects set forth in
the DGCL. Without limiting the generality of the foregoing, and subject thereto
and any other applicable laws, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and the Subsidiary
shall vest in the
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Surviving Corporation, and all debts, liabilities, restrictions, disabilities
and duties of the Company and the Subsidiary shall become the debts,
liabilities, restrictions, disabilities and duties of the Surviving Corporation.
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1. Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of the Company Shares:
(a) Subsidiary Common Stock. Each share of Common Stock, par value
$1.00 per share, of the Subsidiary issued and outstanding immediately prior
to the Effective Time shall remain issued and outstanding.
(b) Cancellation of Certain Shares of Company Common Stock. Each
share of Company Common Stock that is owned by the Company, the Parent or
by any subsidiary of the Company or the Parent shall automatically be
canceled and retired and shall cease to exist, and none of the Common
Stock, par value $.001 per share, of the Parent (the "Parent Common
Stock"), cash or other consideration shall be delivered in exchange
therefor.
(c) Conversion of the Company Shares. At the Effective Time, each
Company Share (other than the Company Shares to be canceled in accordance
with Section 2.1(b)) issued and outstanding immediately prior to the
Effective Time, including the corresponding right (the "Company Right") to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $.10 per share (the "Company Series A
Preferred"), of the Company pursuant to the terms of the Amended and
Restated Rights Agreement, dated as of November 16, 1995, between the
Company and State Street Bank and Trust Company, as it may be amended from
time to time (the "Company Rights Agreement"), shall be converted into the
right to receive 1.311 shares of Parent Common Stock (the "Exchange
Ratio"), including the corresponding right (the "Parent Right"), with
respect to each share of Parent Common Stock, to purchase one one-hundredth
of a share of Series C Junior Participating Preferred Stock, par value
$.001 per share (the "Parent Series C Preferred Stock"), of the Parent
pursuant to the terms of the Stockholders' Rights Agreement, dated as of
March 1, 1995, among MedPartners, Inc., now MP of Delaware, Inc. and a
wholly owned subsidiary of MedPartners, Inc. and Chemical Bank, a national
banking association, as it may be amended from time to time (the "Parent
Rights Agreement"). All such shares of Parent Common Stock shall be fully
paid and nonassessable and, together with the Parent Rights, are
hereinafter sometimes referred to as the "Parent Shares". Upon such
conversion, all such Company Shares shall be canceled and cease to exist,
and each holder thereof shall cease to have any rights with respect thereto
other than the right to receive the Parent Shares issued in exchange
therefor and cash in lieu of fractional Parent Shares in accordance with
the terms provided herein. Prior to the Distribution Date (as defined in
the Company Rights Agreement) and unless the context otherwise requires,
all references in this Agreement to the Company Common Stock shall be
deemed to include the Company Rights; prior to the Rights Distribution Date
(as defined in the Parents Rights Agreement) and unless the context
otherwise requires, all references in this Agreement to the Parent Company
Stock shall be deemed to include the Parent Rights.
(d) Stock Options. At the Effective Time, all rights with respect to
Company Common Stock pursuant to any Company stock options which are
outstanding at the Effective Time, whether or not then vested or
exercisable, shall be converted into and become rights with respect to
Parent Common Stock, and the Parent shall assume each Company stock option
in accordance with the terms of any stock option plan under which it was
issued and any stock option agreement by which it is evidenced. It is
intended that the foregoing provisions shall be undertaken in a manner that
will not constitute a "modification" as defined in Section 425 of the Code,
as to any stock option which is an "incentive stock option." Each Company
stock option so assumed shall be exercisable for that number of shares of
the Parent Common Stock equal to the number of the Company Shares subject
thereto multiplied by the Exchange Ratio, and shall have an exercise price
per share equal to the Company exercise price divided by the Exchange
Ratio. All options issued pursuant to the Company's 1994 Stock Incentive
Plan and the 1994 Non-
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Employee Director Stock Option Plan shall be fully vested at the Effective
Time in accordance with the terms of such Plans.
(e) Adjustment of Exchange Ratio. If after the date hereof and prior
to the Effective Time the Parent shall have declared a stock split
(including a reverse split) of Parent Common Stock or a dividend payable in
Parent Common Stock, or any other distribution of securities or dividend
(in cash or otherwise) to holders of Parent Common Stock with respect to
their Parent Common Stock (including without limitation such a distribution
or dividend made in connection with a recapitalization, reclassification,
merger, consolidation, reorganization or similar transaction) then the
Exchange Ratio shall be appropriately adjusted to reflect such stock split,
dividend or other distribution of securities.
2.2. Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, the Parent shall
enter into an agreement with First Chicago Trust Company of New York (the
"Exchange Agent"), which provides that the Parent shall deposit with the
Exchange Agent as of the Effective Time, for the benefit of the holders of
the Company Shares, for exchange in accordance with this Section 2.2 and
the Merger Agreement, through the Exchange Agent, (i) certificates
representing the shares of the Parent Common Stock issuable pursuant to
Section 2.1 and (ii) cash in an amount equal to the aggregate amount
required to be paid in lieu of fractional interests of Parent Common Stock
pursuant to Section 2.2(e) (such shares of the Parent Common Stock,
together with any dividends or distributions with respect thereto with a
record date after the Effective Time, and together with the cash referred
to in clause (ii) of this Section 2.2(a), being hereinafter referred to as
the "Exchange Fund") in exchange for outstanding Company Shares.
(b) Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Company Shares (the "Certificates") whose shares
were converted into the right to receive the merger consideration provided
for in Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent
and shall be in such form and have such other provisions as the Parent may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing
shares of Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by the Parent, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares
of Parent Common Stock and cash which such holder has the right to receive
pursuant to the provisions of Sections 2.1 and 2.2, and the Certificate so
surrendered shall forthwith be canceled. If any cash or any certificate
representing the Parent Shares is to be paid to or issued in a name other
than that in which the Certificate surrendered in exchange therefor is
registered, a certificate representing the proper number of shares of the
Parent Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
shares of the Parent Common Stock to a person other than the registered
holder of such Certificate or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. Until surrendered
as contemplated by this Section 2.2, each Certificate shall be deemed at
any time after the Effective Time to represent only the right to receive
upon such surrender the certificate representing shares of the Parent
Common Stock and cash in lieu of any fractional shares of the Parent Common
Stock as contemplated by this Section 2.2. No interest will be paid or will
accrue on any cash payable in lieu of any fractional shares of the Parent
Common Stock. To the extent permitted by law, former stockholders of record
of the Company shall be entitled to vote after the Effective Time at any
meeting of the Parent's stockholders the number of whole shares of Parent
Common Stock into which their respective Company Shares are converted,
regardless of whether such holders have exchanged their Certificates for
certificates representing Parent Common Stock in accordance with this
Section 2.2.
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(c) Distribution with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to
any such holder pursuant to Section 2.2(e) until the surrender of such
Certificate in accordance with this Section 2.2. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall
be paid to the holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender and
with a payment date subsequent to such surrender payable with respect to
such whole shares of Parent Common Stock. If any holder of converted
Company Shares shall be unable to surrender such holder's Certificates
because such Certificates shall have been lost or destroyed, such holder
may deliver in lieu thereof an affidavit and indemnity bond in form and
substance and with surety reasonably satisfactory to the Parent.
(d) No Further Ownership Rights in Company Shares. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Section 2 (including any cash paid
pursuant to Section 2.2(c) or 2.2(e) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the Company
Shares theretofore represented by such Certificates. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Section 2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of the
Parent. Notwithstanding any other provision of this Agreement, each holder
of Company Shares exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Parent Common Stock
(after taking into account all Certificates delivered by such holder) shall
receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Parent Common Stock multiplied by the
per share closing price on the New York Stock Exchange Composite Tape of
Parent Common Stock on the date of the Effective Time (or, if shares of the
Parent Common Stock do not trade on The New York Stock Exchange, Inc. (the
"NYSE") on such date, the first date of trading of the Parent Common Stock
on the NYSE after the Effective Time).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of the Certificates for six
months after the Effective Time shall be delivered to the Parent, upon
demand, and any holders of the Certificates who have not theretofore
complied with this Section 2 shall thereafter look only to the Parent for
payment of Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to the
Parent Common Stock.
(g) No Liability. None of the Parent, the Subsidiary, the Company or
the Exchange Agent shall be liable to any person in respect of any shares
of Parent Common Stock (or dividends or distributions with respect thereto)
or cash from the Exchange Fund delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to the end of the
applicable period after the Effective Time under escheat laws (or
immediately prior to such earlier date on which any shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock or any
dividends or distributions with respect to Parent Common Stock in respect
of such Certificates would otherwise escheat to or become the property of
any governmental entity), any such shares, cash, dividends or distributions
in respect of such Certificates shall, to the extent
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permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by the Parent, on a daily
basis. Any interest and other income resulting from such investments shall
be paid to the Parent.
2.3. Certificate of Incorporation of Surviving Corporation. The
Certificate of Incorporation of the Subsidiary, effective immediately following
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation from and after the Effective Time and until thereafter amended as
provided by law.
2.4. By-laws of the Surviving Corporation. The By-laws of the Subsidiary
shall be the By laws of the Surviving Corporation from and after the Effective
Time and until thereafter altered, amended or repealed in accordance with the
DGCL, the Certificate of Incorporation of the Surviving Corporation and the said
Bylaws.
2.5. Directors and Officers. The directors and officers of the Subsidiary
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and By-laws of the Surviving Corporation.
2.6. Assets, Liabilities, Reserves and Accounts. At the Effective Time,
the assets, liabilities, reserves and accounts of each of the Subsidiary and the
Company shall be taken up on the books of the Surviving Corporation at the
amounts at which they respectively shall be carried on the books of said
corporations immediately prior to the Effective Time, except as otherwise set
forth in this Agreement and subject to such adjustments, or elimination of
intercompany items, as may be appropriate in giving effect to the Merger in
accordance with generally accepted accounting principles.
2.7. Corporate Acts of the Subsidiary. All corporate acts, plans,
policies, approvals and authorizations of the Subsidiary, its sole stockholder,
its Board of Directors, committees elected or appointed by the Board of
Directors, and all its officers and agents, valid immediately prior to the
Effective Time, shall be those of the Surviving Corporation and shall be as
effective and binding thereon as they were with respect to the Subsidiary.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Parent and the Subsidiary
as follows:
3.1. Organization, Existence and Good Standing of the Company. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all necessary corporate power and
authority to own its properties and assets and to carry on its business as
presently conducted. The Company is not, and has not been within the two years
immediately preceding the date of this Agreement, a subsidiary or division of
another corporation, nor has the Company within such time owned, directly or
indirectly, any shares of the Parent Common Stock.
3.2. Subsidiaries or Affiliated Entities.
(a) Attached as Schedule 3.2 to the Disclosure Schedule delivered to
the Parent by the Company at the time of the execution and delivery of this
Agreement (the "Company Disclosure Schedule") is a list of all subsidiaries
of the Company and all professional corporations or professional
associations of which the Company has the right to control the voting
securities (individually, a "Company Subsidiary" and collectively, the
"Company Subsidiaries") and their states of incorporation, and all general
or limited partnerships in which a general partner is the Company, a
Company Subsidiary or another partnership directly or indirectly controlled
by the Company (individually, a "Company Partnership" and collectively, the
"Company Partnerships"), and their states of organization.
(b) Except as set forth in Schedule 3.2 to the Company Disclosure
Schedule, neither the Company, nor any Company Subsidiary nor any Company
Partnership owns an equity interest in or controls, directly or indirectly,
any other corporation, association, partnership, joint venture, business
organization or
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limited liability company or other entity, other than the Company
Subsidiaries and the Company Partnerships.
3.3. Organization, Existence and Good Standing of Company Subsidiaries and
Company Partnerships.
(a) Each Company Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its respective state of
incorporation. Each Company Subsidiary has all necessary corporate power to
own its properties and assets and to carry on its business as presently
conducted.
(b) Each Company Partnership that is a limited partnership is validly
formed, each Company Partnership that is a general partnership has been
duly organized, and each Company Partnership is in good standing under the
laws of its respective state of organization. Each Company Partnership has
all necessary power to own its property and assets and to carry on its
business as presently conducted.
3.4. Foreign Qualifications. The Company, each Company Subsidiary and each
Company Partnership that is not a general partnership is qualified to do
business as a foreign corporation or foreign limited partnership, as the case
may be, and is in good standing in each jurisdiction where the nature or
character of the property owned, leased or operated by it or the nature of the
business transacted by it makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect on the Company.
3.5. Capitalization. The Company's authorized capital stock consists of
50,000,000 shares of Common Stock, par value $.01 per share, of which 15,820,597
shares were issued and outstanding as of the close of business on January 17,
1997, and 20,000,000 shares of Preferred Stock, par value $.10 per share, of
which no shares are issued and outstanding and 50,000 shares of Company Series A
Preferred were reserved for issuance upon exercise of the Company Rights. All of
the issued and outstanding Company Shares are duly and validly issued, fully
paid and nonassessable. Except as disclosed in the Company Documents (as herein
defined), and except as set forth in Schedule 3.5 to the Company Disclosure
Schedule, there are no options, warrants or similar rights granted by the
Company, or outstanding securities convertible into Company Common Stock, or any
other agreements to which the Company is a party providing for the issuance or
sale by it of any additional securities which would remain in effect after the
Effective Time. There is no liability for dividends declared or accumulated but
unpaid with respect to any of the Company Shares. There are no obligations,
contingent or otherwise, of the Company or any Company Subsidiary or Company
Partnership to repurchase, redeem or otherwise acquire any shares of Company
Common Stock or the capital stock of or other equity interest in any Company
Subsidiary or Company Partnership.
3.6. Power and Authority; Non-Contravention.
(a) Subject to the satisfaction of the conditions precedent set forth
herein, the Company has all necessary corporate power and authority to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered or to be executed and delivered by it
pursuant to this Agreement, and, subject to the satisfaction of the
conditions precedent set forth herein, has taken all action required by its
Certificate of Incorporation, By-laws or otherwise, to authorize the
execution, delivery and performance of this Agreement and such related
documents. The Agreement has been duly and validly executed and delivered
by the Company and, assuming the due authorization, execution and delivery
by the Parent and the Subsidiary, constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in accordance
with its terms.
(b) Except as set forth in Schedule 3.6 to the Company Disclosure
Schedule, the execution and delivery of this Agreement does not and,
subject to the receipt of required stockholder and regulatory approvals and
any other required third-party consents or approvals, the consummation of
the Merger will not, violate any provisions of the Certificate of
Incorporation or By-laws of the Company or any provisions of, or result in
the acceleration of any obligation under, any mortgage, lien, lease,
agreement, instrument, order, arbitration award, judgment or decree, to
which the Company, any Company Subsidiary or any Company Partnership is a
party, or by which it is bound, or violate any restrictions of any kind to
which it is subject which, if violated or accelerated would have a material
adverse effect on the Company; provided, however, nothing contained herein
is intended to constitute a representation or warranty with
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respect to any conflict or violation or other impact upon the Certificate
of Incorporation, By-laws, mortgage, lien, lease, agreement, instrument,
order, arbitration award, judgment or decree to which the Parent or any of
its subsidiaries is a party or to which any such parties are bound.
3.7. Company Public Information. The Company has heretofore made available
to the Parent a true and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by it with the Securities and
Exchange Commission (the "SEC") (as any such documents have since the time of
their original filing been amended, the "Company Documents") since January 1,
1995, which are all the documents (other than preliminary material) that it was
required to file with the SEC since such date. As of their respective dates, the
Company Documents did not contain any untrue statements of material facts or
omit to state material facts required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the Company Documents
complied in all material respects with the applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated under such statutes. The financial statements contained
in the Company Documents, together with the notes thereto, have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated (except as may be indicated in the notes
thereto, or, in the case of the unaudited financial statements, as permitted by
Form 10-Q), reflect all known liabilities of the Company and its consolidated
subsidiaries, fixed or contingent, required to be stated therein, and present
fairly the financial condition of the Company and its consolidated subsidiaries
at said dates and the consolidated results of operations and cash flows of the
Company and its consolidated subsidiaries for the periods then ended. The
consolidated balance sheet of the Company at September 30, 1996, included in the
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 of
the Company is herein sometimes referred to as the "Company Balance Sheet."
3.8. Contracts, etc.
(a) All material contracts, leases, agreements and arrangements to which
the Company or any of the Company Subsidiaries or Company Partnerships is a
party (collectively, the "Company Material Contracts") are legally valid and
binding in accordance with their terms and in full force and effect. Except as
disclosed in Schedules 3.8 and 3.10 to the Company Disclosure Schedule, to the
knowledge of the Company, all parties to the Company Material Contracts have
complied with the provisions of such contracts, and to the knowledge of the
Company, no party is in default thereunder, and no event has occurred which, but
for the passage of time or the giving of notice or both, would constitute a
default thereunder, except, in each case, where the noncompliance with or
invalidity of the Company Material Contract or the default or breach thereunder
or thereof would not, individually or in the aggregate, have a material adverse
effect on the Company.
(b) Except as set forth in Schedule 3.8(b) to the Company Disclosure
Schedule, no Company Material Contract will, by its terms, terminate as a result
of the transactions contemplated hereby or require any consent from any obligor
thereto in order to remain in full force and effect immediately after the
Effective Time, except for such Company Material Contracts which, if terminated,
would not have a material adverse effect on the Company.
(c) Except as set forth in Schedule 3.8(c) to the Company Disclosure
Schedule, none of the Company or any Company Subsidiary or Company Partnership
has granted any right of first refusal or similar right in favor of any third
party with respect to any material portion of its properties or assets
(excluding liens described in Section 3.9) or entered into any noncompetition
agreement or similar agreement materially restricting its ability to engage in
any business in any location.
3.9. Properties and Assets. The Company (including, as applicable, the
Company Subsidiaries or the Company Partnerships) owns all of the real and
personal property included in the Company Balance Sheet (except assets recorded
under capital lease obligations and such property as has been disposed of during
the ordinary course of the Company's business since the date of the Company
Balance Sheet), free and clear of any liens, claims, charges, exceptions or
encumbrances, except for those (i) if any, which in the aggregate are not
material and which do not materially affect continued use of such property, or
(ii) which are set forth in Schedule 3.9 to the Company Disclosure Schedule or
in the Company Documents.
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3.10. Legal Proceedings. Except as disclosed in the Company Documents or
as listed in Schedule 3.10 to the Company Disclosure Schedule, there are no
actions, suits or proceedings pending or, to the knowledge of the Company,
threatened against the Company, at law or in equity, relating to or affecting
the Company, any Company Subsidiary or any Company Partnership, which
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the Company or a material adverse effect on the
ability of the Company to consummate the transactions contemplated hereby. To
the knowledge of the Company, Schedule 3.10 to the Company Disclosure Schedule
sets forth a true and complete list, as of the date hereof, of all pending
professional liability claims, non-professional liability insurance claims and
actions pending before the Equal Employment Opportunity Commission (EEOC) to
which the Company, any Company Subsidiary or any Company Partnership is a named
party.
3.11. Subsequent Events. Except as disclosed in the Company Documents
filed prior to the date hereof or as set forth in Schedule 3.11 to the Company
Disclosure Schedule, the Company (including the Company Subsidiaries and the
Company Partnerships) has not, since the date of the Company Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid
or satisfied any material obligation or liability (absolute, accrued,
contingent or otherwise) which discharge or satisfaction would have a
material adverse effect on the Company, other than (i) liabilities shown or
reflected on the Company Balance Sheet or (ii) liabilities incurred since
the date of the Company Balance Sheet in the ordinary course of business.
(c) Incurred any funded indebtedness or increased or established any
reserve for taxes or any other liability on its books or otherwise provided
therefor which would have a material adverse effect on the Company, except
as may have been required due to income or operations of the Company since
the date of the Company Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of the
Company.
(e) Sold or transferred any of the assets material to the consolidated
business of the Company, canceled any material debts or claims or waived
any material rights, except in the ordinary course of business.
(f) Except for annual increases in the base rates of compensation and
bonuses of officers and employees in the ordinary course of business,
granted any general or uniform increase in the rates of pay of employees or
any material increase in salary payable or to become payable by the Company
to any officer or employee, consultant or agent (other than normal merit
increases), or by means of any bonus or pension plan, contract or other
commitment, increased in a material respect the compensation of any
officer, employee, consultant or agent.
(g) Except for this Agreement and any other agreement executed and
delivered pursuant to this Agreement, entered into any material transaction
other than in the ordinary course of business or permitted under this
Agreement.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon the
exercise of outstanding options under the Company's stock option plans or
stock purchase plans).
(i) Declared, set aside or paid any dividend or made any other
distribution or payment with respect to any shares of its capital stock or
directly or indirectly redeemed, purchased or otherwise acquired any shares
of its capital stock or the capital stock or equity interests of any
Company Subsidiary or Company Partnership.
(j) Changed in any material respect the accounting methods or
practices followed by the Company, including any material change in any
assumption underlying, or method of calculating, any bad debt,
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contingency or other reserve, except as may be required by changes in
generally accepted accounting principles.
3.12. Accounts Receivable.
(a) Since the date of the Company Balance Sheet, the Company has not
changed any principle or practice with respect to the recordation of
accounts receivable or the calculation of reserves therefor, or any
material collection, discount or write-off policy or procedure, except as
may be required by changes in generally accepted accounting principles.
(b) The Company (including the Company Subsidiaries and the Company
Partnerships) is in compliance with the terms and conditions of all
third-party payor arrangements relating to its accounts receivable, except
to the extent that such noncompliance would not have a material adverse
effect on the Company. Without limiting the generality of the foregoing,
neither the Company nor any Company Subsidiary or Company Partnership has
received notice from any government authority alleging that the Company or
any Company Subsidiary or Company Partnership is in violation of any
Medicare and Medicaid provider agreements to which it is a party.
3.13. Tax Returns. The Company has filed all tax returns required to be
filed by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on the
Company. The Company has made all payments shown as due on such returns. Except
as reflected in Schedule 3.13 to the Company Disclosure Schedule, the Company
has not been notified that any material tax returns of the Company are currently
under audit by the Internal Revenue Service or any state or local tax agency.
The Company is not a party to any agreement for the extension of time or the
waiver of the statute of limitations for the assessment or payment of any
federal, state or local taxes.
3.14. Employee Benefit Plans; Employment Matters.
(a) Except as disclosed in the Company Documents or as set forth in
Schedule 3.14(a) to the Company Disclosure Schedule, neither the Company
nor any Company Subsidiary or Company Partnership has established or
maintains or is obligated to make contributions to or under or otherwise
participate in (i) any bonus or other type of incentive compensation plan,
program, agreement, policy, commitment, contract or arrangement, (whether
or not set forth in a written document), (ii) any pension, profit-sharing,
retirement or other plan, program or arrangement, or (iii) any other
employee benefit plan, fund or program, including but not limited to, those
described in Section 3(3) of ERISA. All such plans disclosed in the Company
Documents or listed in Schedule 3.14(a) (individually, a "Company Plan" and
collectively, the "Company Plans") have to the knowledge of the Company,
and except as set forth in Schedule 3.14(a) been operated and administered
in all material respects in accordance with, as applicable, ERISA, the
Code, Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay
Act of 1967, as amended, the Age Discrimination in Employment Act of 1967,
as amended, and the related rules and regulations adopted by those federal
agencies responsible for the administration of such laws. No act or failure
to act by the Company or any Company Subsidiary or Company Partnership has
resulted in a "prohibited transaction" (as defined in ERISA) with respect
to the Company Plans that has had a material adverse effect and that is not
subject to a statutory or regulatory exception. To the knowledge of the
Company, no "reportable event" (as defined in ERISA) has occurred with
respect to any of the Company Plans which is subject to Title IV of ERISA
except as set forth in Schedule 3.14(a). Neither the Company nor any
Company Subsidiary or Company Partnership has previously made, is currently
making, or is obligated in any way to make, any contributions to any
multi-employer plan within the meaning of the Multi-Employer Pension Plan
Amendments Act of 1980.
(b) Except as disclosed in the Company Documents or as set forth in
Schedule 3.14(b) to the Company Disclosure Schedule, neither the Company
nor any Company Subsidiary or Company Partnership is a party to any oral or
written (i) union, guild or collective bargaining agreement which agreement
covers employees in the United States (nor is it aware of any union
organizing activity
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currently being conducted in respect to any of its employees), (ii)
agreement with any executive officer or other key employee the benefits of
which are contingent, or the terms of which are materially altered, upon
the occurrence of a transaction of the nature contemplated by this
Agreement and which provides for the payment of in excess of $25,000, or
(iii) agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting the benefits of
which will be accelerated by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement.
3.15. Compliance with Laws. Except as disclosed in the Company Documents
or as set forth in Schedule 3.15 to the Company Disclosure Schedule, neither the
Company nor any Company Subsidiary or Company Partnership has received any
notices of material violations of any federal, state and local laws, regulations
and ordinances relating to its business and operations, including, without
limitation, the Occupational Safety and Health Act, the Americans with
Disabilities Act, the applicable Medicare or Medicaid statutes and regulations
and any Environmental Laws, and no notice of any pending inspection or violation
of any such law, regulation or ordinance has been received by the Company or any
Company Subsidiary or any Company Partnership which, if it were determined that
a violation had occurred, would have a material adverse effect on the Company.
3.16. Regulatory Approvals. Except as disclosed in the Company Documents
or in Schedule 3.16 to the Company Disclosure Schedule, the Company and each
Company Subsidiary or Company Partnership, as applicable, holds all licenses,
certificates of need and other regulatory approvals required or necessary to be
applied for or obtained in connection with its business as presently conducted
or as proposed to be conducted, except where the failure to obtain or hold such
license, certificate of need or regulatory approval would not have a material
adverse effect on the Company. All such licenses, certificates of need and other
regulatory approvals related to the business, operations and facilities of the
Company and each Company Subsidiary or Company Partnership are in full force and
effect, except where any failure of such license, certificate of need or
regulatory approval to be in full force and effect would not have a material
adverse effect on the Company. Any and all past litigation concerning such
licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, has been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and no action (equitable, legal or
administrative), arbitration or other process is pending, or to the best
knowledge of the Company, threatened, which in any way challenges the validity
of, or seeks to revoke, condition or restrict any such license, certificate of
need, or regulatory approval. Subject to compliance with applicable securities
laws and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
("HSR Act"), the consummation of the Merger will not violate any law or
restriction to which the Company is subject which, if violated, would have a
material adverse effect on the Company.
3.17. Brokers. Except for fees payable to Morgan Stanley & Co.
Incorporated and McFarland Dewey & Co. pursuant to their respective engagement
letters, dated January 15, 1997 and January 17, 1997, there are no valid claims
for brokerage commissions or finder's or similar fees in connection with the
transactions contemplated by this Agreement which may be now or hereafter
asserted against the Parent or the Company or any subsidiary or other controlled
entity of the Parent or the Company resulting from any action taken by the
Company or its officers, directors or agents, or any of them.
3.18. Vote Required. The affirmative vote of the holders of a majority of
the outstanding Company Shares entitled to vote thereon is the only vote of the
holders of any class or series of the Company capital stock necessary for the
Company to approve this Agreement, the Merger and the transactions contemplated
thereby.
3.19. Pooling Matters. To the best knowledge of the Company, neither the
Company nor any of its affiliates has taken or agreed to take any action that
(without giving effect to any actions taken or agreed to be taken by the Parent
or any of its affiliates) would prevent the Parent from accounting for the
business combination to be effected by the Merger as a pooling of interests for
financial reporting purposes.
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3.20. No Untrue Representations. No representation or warranty by the
Company in this Agreement, and no Schedule or certificate issued by the Company
and furnished or to be furnished to the Parent pursuant hereto, or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make the statements or facts contained therein not misleading in
light of all of the circumstances then prevailing.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUBSIDIARY
RELATED TO THE SUBSIDIARY
The Subsidiary and the Parent, jointly and severally, hereby represent and
warrant to the Company as follows:
4.1. Organization, Existence, Good Standing and Capitalization of the
Subsidiary. The Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Subsidiary's
authorized capital consists of 1,000 shares of Common Stock, par value $.01 per
share, all of which shares are issued and registered in the name of and owned by
the Parent. The Subsidiary has not, within the two years immediately preceding
the date of this Agreement, owned, directly or indirectly, any Company Shares.
4.2. Power and Authority; Non-Contravention.
(a) The Subsidiary has all necessary corporate power and authority to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered, or to be executed and delivered, by it
pursuant to this Agreement, and, subject to the satisfaction of the
conditions precedent set forth herein, has taken all actions required by
law, its Certificate of Incorporation, its By-laws or otherwise, to
authorize the execution and delivery of this Agreement and such related
documents. The Agreement has been duly and validly executed and delivered
by the Subsidiary and, assuming the due authorization, execution and
delivery by the Company, constitutes the legal, valid and binding
obligation of the Subsidiary in accordance with its terms.
(b) The execution and delivery of this Agreement does not and, subject
to the receipt of required regulatory approvals and any other required
third-party consents or approvals, the consummation of the Merger
contemplated hereby will not, violate any provisions of the Certificate of
Incorporation or By-laws of the Subsidiary, or any agreement, instrument,
order, judgment or decree to which the Subsidiary is a party or by which it
is bound, violate any restrictions of any kind to which the Subsidiary is
subject, or result in the creation of any lien, charge or encumbrance upon
any of the property or assets of the Subsidiary.
4.3. Brokers. There are no claims for brokerage commissions, investment
bankers' fees or finder's fees in connection with the transaction contemplated
by this Agreement resulting from any action taken by the Subsidiary or any of
its officers, directors or agents.
4.4. No Subsidiaries. The Subsidiary does not own stock in, and does not
control directly or indirectly, any other corporation, association or business
organization. The Subsidiary is not a party to any joint venture or partnership.
4.5. Legal Proceedings. There are no actions, suits or proceedings pending
or threatened against the Subsidiary, at law or in equity, relating to or
affecting the Subsidiary, including the Merger. The Subsidiary does not know or
have any reasonable grounds to know of any justification for any such action,
suit or proceeding.
4.6. No Contracts or Liabilities. The Subsidiary was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby. Other than the obligations created under this Agreement, the Subsidiary
has no obligations or liabilities (contingent or otherwise) under any contracts,
claims, leases, loans or otherwise.
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SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PARENT
The Parent hereby represents and warrants to the Company as follows:
5.1. Organization, Existence and Good Standing of the Parent. The Parent
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Parent has all necessary corporate power to
own its properties and assets and to carry on its business as presently
conducted. The Parent is not, and has not been within the two years immediately
preceding the date of this Agreement, a subsidiary or division of another
corporation, nor has the Parent within such time owned, directly or indirectly,
any of the Company Shares.
5.2. Subsidiaries and Affiliated Entities.
(a) Attached as Schedule 5.2 to the Parent Disclosure Schedule
delivered to the Company by the Parent at the time of the execution and
delivery of this Agreement (the "Parent Disclosure Schedule") is a list of
all subsidiaries of the Parent (individually, a "Parent Subsidiary," and
collectively, the "Parent Subsidiaries") and their states of incorporation
and all professional corporations or professional associations of which the
Parent has control and their states of incorporation. Except as set forth
in Schedule 5.2 to the Parent Disclosure Schedule, the Parent does not own
stock in and does not control, directly or indirectly, any other
corporation, association, partnership or business organization.
(b) Also disclosed in Schedule 5.2 to the Parent Disclosure Schedule
is a list of all general or limited partnerships in which a general partner
is the Parent, a Parent Subsidiary or another partnership controlled by the
Parent (individually a "Parent Partnership" and collectively, the "Parent
Partnerships"), and all limited liability companies in which the Parent, or
a Parent Subsidiary or a Parent Partnership is a member (individually, a
"Parent LLC," the Parent Partnerships and the Parent LLCs being
collectively called the "Other Parent Entities"), and their states of
organization.
(c) Except as set forth in Schedule 5.2 to the Parent Disclosure
Schedule, neither the Parent nor any Parent Subsidiary owns an equity
interest in, nor does such entity control, directly or indirectly, any
other joint venture or partnership.
(d) Although the financial results of the medical groups affiliated
with the Parent physician practice management business are consolidated for
accounting purposes on the Parent Balance Sheet, the terms "Parent
Subsidiary" and "Other Parent Entity" do not include any affiliated medical
groups.
(e) For the purposes of the representations and warranties of the
Parent set forth in this Agreement, any act, event, development or state of
facts affecting or otherwise relating to any professional corporation or
professional association of which the Parent has, directly or indirectly,
control or with which the Parent, any Parent Subsidiary or Other Parent
Entity has a long-term management contract, which act, event, development
or state of facts has or could reasonably be expected to adversely affect
the Parent, any Parent Subsidiary or Other Parent Entity, shall be deemed
an act, event, development or state of facts affecting or relating to the
Parent, any Parent Subsidiary or Other Parent Entity, as the case may be,
to the extent of such adverse effect.
5.3. Organization, Existence and Good Standing of Parent Subsidiaries and
Other Parent Entities.
(a) Each Parent Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its respective state of
incorporation. Each Parent Subsidiary has all necessary corporate power to
own its properties and assets and to carry on its business as presently
conducted.
(b) Each Parent Partnership that is a limited partnership is validly
formed, each Parent Partnership that is a general partnership has been duly
organized, and each Parent Partnership is in good standing under the laws
of its respective state of organization. Each Parent Partnership has all
necessary power to own its property and assets and to carry on its business
as presently conducted.
(c) Each Parent LLC is a limited liability company validly formed and
in good standing under the laws of its respective state of organization.
Each Parent LLC has all necessary power to own its property and assets and
to carry on its business as presently conducted.
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5.4. Foreign Qualifications. The Parent, each Parent Subsidiary and each
Other Parent Entity that is not a general partnership is qualified to do
business as a foreign corporation, foreign limited partnership or foreign
limited liability company, as the case may be, and is in good standing in each
jurisdiction where the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to so qualify would not have a
material adverse effect on the Parent.
5.5. Capitalization. The Parent's authorized capital stock consists of
400,000,000 shares of Common Stock, par value $.001 per share, of which
166,684,478 shares were issued and outstanding as of the close of business on
January 17, 1997, and no shares are held in treasury, and 9,500,000 shares of
Preferred Stock, par value $.001 per share, of which no shares are issued and
outstanding, and no shares are held in treasury, and 500,000 shares of Parent
Series C Preferred Stock reserved for issuance upon the exercise of the Parent
Rights, of which no shares are issued and outstanding and no shares are held in
treasury. All of the issued and outstanding shares of the Parent Common Stock
have been duly and validly issued and are fully paid and nonassessable. Except
as disclosed in the Parent Documents (as herein defined), and except as
described in Schedule 5.5 to the Parent Disclosure Schedule, there are no
options, warrants or similar rights granted by the Parent or any other
agreements to which the Parent is a party providing for the issuance or sale by
it of any additional securities. There is no liability for dividends declared or
accumulated but unpaid with respect to any shares of the Parent Common Stock.
There are no obligations, contingent or otherwise, of the Parent or any Parent
Subsidiary or Other Parent Entity to repurchase, redeem or otherwise acquire any
shares of Parent Common Stock or the capital stock of or other equity interest
in any Parent Subsidiary or Other Parent Entity.
5.6. Parent Common Stock. On the Closing Date, the Parent will have a
sufficient number of authorized but unissued and/or treasury shares of its
Common Stock available for issuance to the holders of the Company Shares in
accordance with the provisions of this Agreement. The Parent Common Stock to be
issued pursuant to this Agreement will, when so delivered, be (i) duly and
validly issued, fully paid and nonassessable, and (ii) listed on the NYSE, upon
official notice of issuance.
5.7. Power and Authority; Non-Contravention.
(a) Subject to the satisfaction of the conditions precedent set forth
herein, the Parent has all necessary corporate power and authority to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered, or to be executed and delivered, by it
pursuant to this Agreement, and, subject to the satisfaction of the
conditions precedent set forth herein has taken all actions required by
law, its Certificate of Incorporation, its By-laws or otherwise, to
authorize the execution and delivery of this Agreement and such related
documents. This Agreement has been duly and validly executed and delivered
by the Parent and, assuming the due authorization, execution and delivery
by the Company, constitutes the legal, valid and binding obligation of the
Parent enforceable against the Parent in accordance with its terms.
(b) The execution and delivery of this Agreement does not and, subject
to the receipt of required stockholder and regulatory approvals and any
other required third-party consents or approvals, the consummation of the
Merger contemplated hereby will not, violate any provisions of the
Certificate of Incorporation or By-laws of the Parent, or any provision of,
or result in the acceleration of any obligation under, any mortgage, lien,
lease, agreement, instrument, order, arbitration award, judgment or decree
to which the Parent, any Parent Subsidiary or Other Parent Entity is a
party or by which it is bound, or violate any restrictions of any kind to
which the Parent is subject which, if violated or accelerated, would have a
material adverse effect on the Parent.
5.8. Parent Public Information. The Parent has heretofore made available
to the Company a true and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by it or its predecessors,
MedPartners, Inc. and MedPartners/Mullikin Inc., with the SEC (as any such
documents have since the time of their original filing been amended, the "Parent
Documents") since January 1, 1995, which are all the documents (other than
preliminary material) that it was required to file with the SEC since such date.
As of their respective dates, the Parent Documents did not contain any untrue
statements of material facts or omit to state material facts required to be
stated therein or necessary to make the statements therein,
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in light of the circumstances under which they were made, not misleading. As of
their respective dates, the Parent Documents complied in all material respects
with the applicable requirements of the Securities Act and the Exchange Act, and
the rules and regulations promulgated under such statutes. The financial
statements contained in the Parent Documents, together with the notes thereto,
have been prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated (except as may be
indicated in the notes thereto, or, in the case of the unaudited financial
statements, as permitted by Form 10-Q), reflect all known liabilities of the
Parent, fixed or contingent, required to be stated therein, and present fairly
the financial condition of the Parent at said dates and the consolidated results
of operations and cash flows of the Parent for the periods then ended. The
consolidated balance sheet of the Parent at September 30,1996, included in the
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 of
the Parent is herein sometimes referred to as the "Parent Balance Sheet."
5.9. Contracts, etc.
(a) All material contracts, leases, agreements and arrangements to
which the Parent or any of the Parent Subsidiaries or Other Parent Entities
is a party (collectively, the "Parent Material Contracts") are legally
valid and binding in accordance with their terms and in full force and
effect. To the knowledge of the Parent, all parties to the Parent Material
Contracts have complied with the provisions of such Contracts, and to the
knowledge of the Parent, no party is in default thereunder, and no event
has occurred which, but for the passage of time or the giving of notice or
both, would constitute a default thereunder, except, in each case, where
the noncompliance with or invalidity of the Parent Material Contract or the
default or breach thereunder or thereof would not, individually or in the
aggregate, have a material adverse effect on the Parent.
(b) Except as set forth in Schedule 5.9 to the Parent Disclosure
Schedule, no Parent Material Contract will by its terms, terminate as a
result of the transactions contemplated hereby or require any consent from
any obligor thereto in order to remain in full force and effect immediately
after the Effective Time, except for such Parent Material Contracts which,
if terminated, would not have a material adverse effect on the Parent.
5.10. Legal Proceedings. Except as listed in Schedule 5.10 to the Parent
Disclosure Schedule, there are no actions, suits or proceedings pending or, to
the knowledge of the Parent, threatened against the Parent, any Parent
Subsidiary or Other Parent Entity at law or in equity, relating to or affecting
the Parent, any Parent Subsidiary or any Other Parent Entity, including the
Merger, which individually or in the aggregate, could reasonably be expected to
have a material adverse effect on the Parent, or a material adverse effect on
the ability of the Parent to consummate the transactions contemplated hereby.
5.11. Subsequent Events. Except as set forth on Schedule 5.11 to the
Parent Disclosure Schedule, the Parent (including the Parent Subsidiaries and
the Other Parent Entities) has not, since the date of the Parent Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid
or satisfied any material obligation or liability (absolute, accrued,
contingent or otherwise) which discharge or satisfaction would have a
material adverse effect on the Parent, other than (i) liabilities shown or
reflected on the Parent Balance Sheet or (ii) liabilities incurred since
the date of the Parent Balance Sheet in the ordinary course of business.
(c) Incurred any funded Indebtedness or increased or established any
reserve for taxes or any other liability on its books or otherwise provided
therefor which would have a material adverse effect on the Parent, except
as may have been required due to income or operations of the Parent since
the date of the Parent Balance Sheet.
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(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of the Parent.
(e) Sold or transferred any of the assets material to the consolidated
business of the Parent, canceled any material debts or claims or waived any
material rights, except in the ordinary course of business.
(f) Except for annual increases in the base rates of compensation and
bonuses of officers and employees in the ordinary course of business,
granted any general or uniform increase in the rates of pay of employees or
any material increase in salary payable or to become payable by the Parent
to any officer or employee, consultant or agent (other than normal merit
increases), or by means of any bonus or pension plan, contract or other
commitment, increased in a material respect the compensation of any
officer, employee, consultant or agent.
(g) Except for this Agreement and any other agreement executed and
delivered pursuant to this Agreement, entered into any material transaction
other than in the ordinary course of business or permitted under other
Sections of this Agreement.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon the
exercise of outstanding options under the Parent's stock option plans).
(i) Declared, set aside or paid any dividend or made any other
distribution or payment with respect to any shares of its capital stock or
directly or indirectly redeemed, purchased or otherwise acquired any shares
of its capital stock or the capital stock or equity interests of any Parent
Subsidiary or Other Parent Entity.
(j) Changed in any material respect the accounting methods or
practices followed by the Company, including any material change in any
assumption underlying, or method of calculating any bad debt, contingency
or other reserve, except as may be required by changes in generally
accepted accounting principles.
5.12. Accounts Receivable.
(a) Since the date of the Parent Balance Sheet, the Parent has not
changed any principle or practice with respect to the recordation of
accounts receivable or the calculation of reserves therefor, or any
material collection, discount or write-off policy or procedure, except as
may be required by changes in generally accepted accounting principles.
(b) The Parent (including the Parent Subsidiaries and the Other Parent
Entities) is in compliance with the terms and conditions of all third-party
payor arrangements relating to its accounts receivable, except to the
extent that such noncompliance would not have a material adverse effect on
the Parent. Without limiting the generality of the foregoing, neither the
Parent nor any Parent Subsidiary or Other Parent Entity has received notice
from any governmental authority alleging that the Parent or any Parent
Subsidiary is in violation of any Medicare and Medicaid provider agreements
to which it is a party, which violation would have a material adverse
effect on the Parent.
5.13. Tax Returns. The Parent has filed all tax returns required to be
filed by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on the
Parent. The Parent has made all payments shown as due on such returns.
5.14. Compliance with Laws. Neither the Parent nor any Parent Subsidiary
or Other Parent Entity has received any notices of material violations of any
federal, state and local laws, regulations and ordinances relating to its
business and operations, including, without limitation, the Occupational Safety
and Health Act, the Americans with Disabilities Act, Medicare or applicable
Medicaid statutes and regulations and any Environmental Laws, and no notice of
any pending inspection or violation of any such law, regulation or
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ordinance has been received by the Parent or any Parent Subsidiary or Other
Parent Entity which, if it were determined that a violation had occurred, would
have a material adverse effect on the Parent.
5.15. Regulatory Approvals. Except as disclosed in the Parent Documents or
in Schedule 5.15 to the Parent Disclosure Schedule, the Parent and each Parent
Subsidiary or Other Parent Entity, as applicable, holds all licenses,
certificates of need and other regulatory approvals required or necessary to be
applied for or obtained in connection with its business as presently conducted
or as proposed to be conducted, except where the failure to obtain or hold such
license, certificate of need or regulatory approval would not have a material
adverse effect on the Parent. All such licenses, certificates of need and other
regulatory approvals relating to the business, operations and facilities of the
Parent and each Parent Subsidiary or Other Parent Entity are in full force and
effect, except where any failure of such license, certificate of need or
regulatory approval to be in full force and effect would not have a material
adverse effect on the Parent. Any and all past litigation concerning such
licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, have been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and no action (equitable, legal or
administrative), arbitration or other process is pending, or to the best
knowledge of the Parent, threatened, which in any way challenges the validity
of, or seeks to revoke, condition or restrict any such license, certificate of
need, or regulatory approval. Subject to compliance with applicable securities
laws and the HSR Act, the consummation of the Merger will not violate any law or
restriction to which the Parent is subject which, if violated, would have a
material adverse effect on the Parent.
5.16. Investment Intent. The Parent is acquiring the Company Shares
hereunder for its own account and not with a view to the distribution or sale
thereof, and the Parent has no understanding, agreement or arrangement to sell,
distribute, partition or otherwise transfer or assign all or any part of the
Company Shares to any other person, firm or corporation.
5.17. Brokers. Except for the fee payable to Smith Barney Inc. pursuant to
the engagement letter, dated November 8, 1996, there are no valid claims for
brokerage commissions, finder's fees or similar fees in connection with the
transactions contemplated by this Agreement which may be now or hereafter
asserted against the Parent or the Company or any subsidiary or other controlled
entity of the Parent or the Company resulting from any action taken by the
Parent or any of its officers, directors or agents or any of them.
5.18. No Stockholder Vote Required. No vote is required of the holders of
the outstanding capital stock of the Parent to approve this Agreement, the
Merger and the transactions contemplated hereby.
5.19. Pooling Matters. To the best knowledge of the Parent, neither the
Parent nor any of its affiliates has taken or agreed to take any action that
(without giving effect to any actions taken or agreed to be taken by the Company
or any of its affiliates) would prevent the Company from accounting for the
business combination to be effected by the Merger as a pooling of interests for
financial reporting purposes.
5.20. No Untrue Representations. No representation or warranty by the
Parent in this Agreement, and no Schedule or certificate issued by the Parent
and furnished or to be furnished to the Parent pursuant hereto, or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements or facts contained therein not misleading in
light of all of the circumstances then prevailing.
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS
6.1. Access to Information.
(a) Between the date hereof and the Closing Date, each of the Company
and the Parent will give to the other party and its counsel, accountants
and other representatives reasonable access to all the properties,
documents, contracts, personnel files and other records of such party and
shall furnish the other party with copies of such documents and with such
information with respect to the affairs of such party as the other party
may from time to time reasonably request. Each party will disclose and make
available to the other party and its representatives all books, contracts,
accounts, personnel records, letters of intent, papers, records,
communications with regulatory authorities and other documents relating to
the
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business and operations of such party. In addition, the Company shall make
available to the Parent all such banking, investment and financial
information as shall be necessary to allow for the efficient integration of
the Company's banking, investment and financial arrangements with those of
the Parent at the Effective Time.
(b) The Company hereby agrees to provide the Parent with such
information and documentation as the lenders under the Revolving Credit and
Reimbursement Agreement, dated as of September 5, 1996, between the Parent
and NationsBank National Association (South), as agent for the lenders
named therein, shall reasonably request in connection with their review of
the Merger.
6.2. Return of Records. If the transactions contemplated hereby are not
consummated and this Agreement terminates, each party agrees to promptly return
all documents, contracts, records or properties of the other party and all
copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate or representative of any
party shall be deemed to be "Evaluation Material" under the terms of the
Confidentiality Agreement, dated September 18, 1996, between the Company and the
Parent (the "Confidentiality Agreement").
6.3. Effect of Access.
(a) Nothing contained in this Section 6 shall be deemed to create any
duty or responsibility on the part of either party to investigate or
evaluate the value, validity or enforceability of any contract, lease or
other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely
upon such express representations and warranties irrespective of any
investigations made by such parties, except to the extent that such
investigations result in actual knowledge of the inaccuracy or falsehood of
particular representations and warranties.
SECTION 7. COVENANTS
7.1. Preservation of Business. Except as contemplated by this Agreement,
each of the Company and the Parent will use its reasonable best efforts to
preserve its business organization intact, to keep available to the Parent and
the Surviving Corporation the services of their present employees, and to
preserve for the Parent and the Surviving Corporation the goodwill of the
suppliers, customers and others having business relations with them and their
respective subsidiaries.
7.2. Material Transactions. Except as contemplated by this Agreement,
prior to the Effective Time, neither the Company nor any Company Subsidiary nor
Company Partnership will (other than as required pursuant to the terms of this
Agreement and the related documents), without first obtaining the written
consent of the Parent:
(a) Encumber any asset or enter into any transaction or make any
contract or commitment relating to the properties, assets and business of
the Company or the Company Subsidiaries or the Company Partnerships, other
than in the ordinary course of business or as otherwise disclosed herein.
(b) Enter into any employment contract or similar agreement in which
the cash compensation is in excess of $100,000 per annum, or the term is
greater than one year, which is not terminable upon notice of 90 days or
less, at will, and without penalty to the Company or such Company
Subsidiary or Company Partnership, other than physician contracts entered
into in the ordinary course of business.
(c) Enter into any contract or agreement (i) which cannot be performed
within three months or less, or (ii) which involves the expenditure of over
$1,000,000, other than in the ordinary course of business.
(d) Issue or sell, or agree to issue or sell, any shares of capital
stock or other securities of the Company or such Company Subsidiary or
Company Partnership, except upon exercise of currently outstanding stock
options.
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(e) Make any payment or distribution to the trustee under any bonus,
pension, profit-sharing or retirement plan or incur any obligation to make
any such payment or contribution which is not in accordance with the
Company's usual past practice, or make any payment or contributions or
incur any obligation pursuant to or in respect of any other plan or
contract or arrangement providing for bonuses, executive incentive
compensation, pensions, deferred compensation, retirement payments,
profit-sharing or the like, establish or enter into any such plan, contract
or arrangement, or terminate any plan.
(f) Extend credit to anyone, except in the ordinary course of business
consistent with prior practices.
(g) Guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with prior practices.
(h) Amend its Certificate or Articles of Incorporation or By-laws.
(i) Take any action of a character described in Section 3.11(a) to
3.11(j), inclusive.
7.3. Meeting of Stockholders. The Company will take all steps necessary in
accordance with its Certificate of Incorporation and By-laws to call, give
notice of, convene and hold meetings of its stockholders (the "Stockholder
Meeting") as soon as practicable after the effectiveness of the Registration
Statement (as defined in Section 7.4 hereof), for the purpose of approving and
adopting this Agreement and the transactions contemplated hereby and for such
other purposes as may be necessary. Unless this Agreement shall have been
validly terminated as provided herein, the Board of Directors of the Company
(subject to the provisions of Section 8.1(d) hereof) will (i) recommend to its
stockholders the approval and adoption of this Agreement, the transactions
contemplated hereby and any other matters to be submitted to the stockholders in
connection therewith, to the extent that such approval is required by applicable
law in order to consummate the Merger, and (ii) use its reasonable, good faith
efforts to obtain the approval by its stockholders of this Agreement and the
transactions contemplated hereby.
7.4. Registration Statement.
(a) The Parent shall prepare and file with the SEC and any other
applicable regulatory bodies, as soon as reasonably practicable, a
Registration Statement on Form S-4 with respect to the shares of the Parent
Common Stock to be issued in the Merger (the "Registration Statement"), and
will otherwise proceed promptly to satisfy the requirements of the
Securities Act, including Rule 145 thereunder. Such Registration Statement
shall contain a proxy statement of the Company containing the information
required by the Exchange Act (the "Proxy Statement"). The Parent shall use
its reasonable best efforts to cause the Registration Statement to be
declared effective and to maintain such effectiveness until all of the
shares of the Parent Common Stock covered thereby have been distributed.
The Parent shall promptly amend or supplement the Registration Statement to
the extent necessary in order to make the statements therein not misleading
or to correct any statements which have become false or misleading. The
Parent shall use its reasonable best efforts to have the Proxy Statement
approved by the SEC under the provisions of the Exchange Act. The Parent
shall provide the Company with copies of all filings made pursuant to this
Section 7.4 and shall consult with the Company on responses to any comments
made by the Staff of the SEC with respect thereto.
(b) The information specifically designated as being supplied by the
Company for inclusion or incorporation by reference in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, at the time the Proxy Statement is first mailed to holders of
the Company Common Stock, at the time of the Stockholder Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, not misleading. The information
specifically designated as being supplied by the Company for inclusion or
incorporation by reference in the Proxy Statement shall not, at the date
the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to holders of the Company Common Stock, at the time of the
Stockholder Meeting and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they are
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made, not misleading. If at any time prior to the Effective Time, any event
or circumstance relating to the Company, or its officers or directors,
should be discovered by the Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy
Statement, the Company shall promptly inform the Parent. All documents, if
any, that the Company is responsible for filing with the SEC in connection
with the transactions contemplated hereby will comply as to form and
substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange
Act and the rules and regulations thereunder.
(c) The information specifically designated as being supplied by the
Parent for inclusion or incorporation by reference in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, at the time the Proxy Statement is first mailed to holders of
the Company Common Stock, at the time of the Stockholder Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, not misleading. The information
specifically designated as being supplied by the Parent for inclusion or
incorporation by reference in the Proxy Statement in connection with the
Stockholder Meeting shall not, at the date the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to holders of the
Company Common Stock, at the time of the Stockholder Meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, not misleading. If at any time prior to the
Effective Time any event or circumstance relating to the Parent or its
officers or Directors, should be discovered by the Parent which should be
set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement, the Parent shall promptly inform the Company and shall
promptly file such amendment to the Registration Statement. All documents
that the Parent is responsible for filing with the SEC in connection with
the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Securities
Act and the rules and regulations thereunder and the Exchange Act and the
rules and regulations thereunder.
(d) Prior to the Closing Date, the Parent shall use its reasonable
best efforts to cause the shares of Parent Common Stock to be issued
pursuant to the Merger to be registered or qualified under all applicable
securities or Blue Sky laws of each of the states and territories of the
Untied States, and to take any other actions which may be necessary to
enable the Common Stock to be issued pursuant to the Merger to be
distributed in each such jurisdiction.
(e) Prior to the Closing Date, the Parent shall file a Subsequent
Listing Application with the NYSE relating to the shares of the Parent
Common Stock to be issued in connection with the Merger, and shall cause
such shares of the Parent Common Stock to be listed on the NYSE, upon
official notice of issuance, prior to the Closing Date.
(f) The Company shall furnish all information to the Parent with
respect to the Company and the Company Subsidiaries as the Parent may
reasonably request for inclusion in the Registration Statement, the Proxy
Statement and shall otherwise cooperate with the Parent in the preparation
and filing of such documents.
7.5. Exemption from State Takeover Laws. The Company shall take all
reasonable steps necessary to exempt the Merger from the requirements of any
state takeover statute or other similar state law which would prevent or impede
the consummation of the transactions contemplated hereby, by action of the
Company's Board of Directors or otherwise.
7.6. HSR Act Compliance. The Parent and the Company shall promptly make
their respective filings, and shall thereafter use their reasonable best efforts
to promptly make any required submissions, under the HSR Act with respect to the
Merger and the transactions contemplated hereby. The Parent and the Company will
use their respective reasonable best efforts to obtain all other permits,
authorizations, consents and approvals from third parties and governmental
authorities necessary to consummate the Merger and the transactions contemplated
hereby.
7.7. Public Disclosures. The Parent and the Company will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this
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Agreement, and shall not issue any such press release or make any such public
statement prior to such consultation except as may be required by applicable law
or requirements of the NYSE or Nasdaq. The parties shall issue a joint press
release, mutually acceptable to the Parent and the Company, promptly upon
execution and delivery of this Agreement.
7.8. No Solicitations. The Company may, directly or indirectly, furnish
information and access, in response to unsolicited requests therefor, to the
same extent permitted by Section 6.1, to any corporation, partnership, person or
other entity or group, pursuant to appropriate confidentiality agreements, and
may participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any proposal to acquire all or any
significant portion of the equity securities of the Company or of the assets of
the Company and the Company Subsidiaries and Company Partnerships upon a merger,
purchase of assets, purchase of or tender offer for shares of its Common Stock
or similar transaction (an "Acquisition Transaction"), if the Board of Directors
of the Company determines in its good faith judgment in the exercise of its
fiduciary duties or the exercise of its duties under Rule 14e-2 under the
Exchange Act, after consultation with legal counsel and its financial advisors,
that such action is appropriate in furtherance of the best interest of its
stockholders. Except as set forth above, the Company shall not, and will direct
each officer, director, employee, representative and agent of such party not to,
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with or provide any information to any corporation,
partnership, person or other entity or group (other than the Parent or an
affiliate or associate or agent of the Parent, respectively) concerning any
merger, sale of assets, sale of or tender offer for its shares or similar
transactions involving all or any significant portion of the equity securities
of the Company or of the assets of the Company and the Company Subsidiaries and
Company Partnerships. The Company shall promptly notify the Parent if it shall,
on or after the date hereof, have entered into a confidentiality agreement with
any third party in response to any unsolicited request for information and
access in connection with a possible Acquisition Transaction, such notification
to include the identity of such third party and the proposed terms of such
possible Acquisition Transaction. In addition, the Company shall notify the
Parent within one day of determining to provide information to any corporation,
partnership, person or other entity or group in connection with any possible
Acquisition Transaction.
7.9. Other Actions. Subject to the provisions of Section 7.8 hereof, none
of the Company, the Parent and the Subsidiary shall knowingly or intentionally
take any action, or omit to take any action, if such action or omission would,
or reasonably might be expected to, result in any of its representations and
warranties set forth herein being or becoming untrue in any material respect, or
in any of the conditions to the Merger set forth in this Agreement not being
satisfied, or (unless such action is required by applicable law) which would
materially adversely affect the ability of the Company or the Parent to obtain
any consents or approvals required for the consummation of the Merger without
imposition of a condition or restriction which would have material adverse
effect on the Surviving Corporation or which would otherwise materially impair
the ability of the Company or the Parent to consummate the Merger in accordance
with the terms of this Agreement or materially delay such consummation.
7.10. Accounting Methods. Neither the Parent nor the Company shall change,
in any material respect, its methods of accounting in effect at its most recent
fiscal year end, except as required by changes in generally accepted accounting
principles as concurred by such parties' independent accountants.
7.11. Pooling and Tax-Free Reorganization Treatment. Neither the Parent
nor the Company shall intentionally take or cause to be taken any action,
whether on or before the Effective Time, which would disqualify the Merger as a
"pooling of interests" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code.
7.12. Affiliate and Pooling Agreements. The Parent and the Company will
each use their respective reasonable best efforts to causes each of their
respective directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act) to
execute and deliver to the Parent as soon as practicable an agreement in the
form attached hereto as Exhibit 7.12 relating to the disposition of shares of
the Company Common Stock and shares of the Parent Common Stock held by such
person and the shares of the Parent Common Stock issuable pursuant to this
Agreement.
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7.13. Cooperation.
(a) The Parent and the Company shall together, or pursuant to an
allocation of responsibility agreed to between them, (i) cooperate with one
another in determining whether any filings required to be made or consents
required to be obtained in any jurisdiction prior to the Effective Time in
connection with the consummation of the transactions contemplated hereby
and cooperate in making any such filings promptly and in seeking to obtain
timely any such consents, (ii) use their respective best efforts to cause
to be lifted any injunction prohibiting the Merger, or any part thereof, or
the other transactions contemplated hereby, and (iii) furnish to one
another and to one another's counsel all such information as may be
required to effect the foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless
this Agreement shall have been validly terminated as provided herein, each
of the Parent and the Company shall use all reasonable efforts (i) to take,
or cause to be taken, all actions necessary to comply promptly with all
legal requirements which may be imposed on such party (or any subsidiaries
or affiliates of such party) with respect to the Agreement and to
consummate the transactions contemplated hereby, subject, in the case of
the Company, to the vote of its stockholders described above, and (ii) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any governmental
entity which is required to be obtained or made by such party or any of its
subsidiaries or affiliates in connection with this Agreement and the
transactions contemplated hereby. Each of the Parent and the Company will
promptly cooperate with and furnish information to the other in connection
with any such burden suffered by, or requirement imposed upon, either of
then or any of their subsidiaries or affiliates in connection with the
foregoing.
7.14. Company Stock Options.
(a) As soon as reasonably practicable after the Effective Time, the
Parent shall deliver to the holders of the Company stock options,
appropriate notices setting forth such holders' rights pursuant to any
stock option plans under which such Company stock options were issued and
any stock option agreements evidencing such options which shall continue in
full force and effect on the same terms and conditions (subject to the
adjustments required by Section 2.1(d) or this Section 7.14 after giving
effect to the Merger and the assumption of such options by the Parent as
set forth herein) as in effect immediately prior to the Effective Time. The
Parent shall comply with the terms of the stock option plans, and the stock
option agreements as so adjusted, and shall use its reasonable best efforts
to ensure, to the extent required by, and subject to the provisions of,
such plans or agreements, that the Company stock options which qualified as
incentive stock options prior to the Effective Time shall continue to
qualify as incentive stock options after the Effective Time.
(b) The Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of the Parent Common Stock for
delivery upon exercise of the Company stock options assumed by the Parent
in accordance with Section 2.1(d). As soon as practicable after the
Effective Time, the Parent shall file with the SEC a registration statement
on Form S-8 with respect to shares of the Parent Common Stock subject to
such assumed Company stock options and shall use its best efforts to
maintain the effectiveness of a registration statement or registration
statements covering such options (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such the
Company stock options remain outstanding. The Parent shall administer the
plans assumed pursuant to Section 2.1(d) hereof in a manner that complies
with Rule 16b-3 promulgated under the Exchange Act to the extent the
applicable plan complied with such rule prior to the Merger.
(c) Except to the extent otherwise agreed to by the parties, all
restrictions or limitations on transfer and vesting with respect to the
Company stock options awarded under any plan, program, or arrangement of
the Company or any of its subsidiaries, to the extent that such
restrictions or limitations shall not have already lapsed, shall remain in
full force and effect with respect to such options after giving effect to
the Merger and the assumption by the Parent as set forth above.
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7.15. Publication of Combined Results. The Parent agrees that after the
end of the first full calendar month after the Effective Time, the Parent shall
cause publication of the combined results of operations of the Parent and the
Company in the First Quarterly Report on Form 10-Q which shall be filed after
such period. For purposes of this Section 7.15, the term "publication" shall
have the meaning provided in SEC Accounting Series Release No. 135.
7.16. Tax Opinion Certificates. Each of the Parent and the Company agrees
that it shall provide certificates containing reasonable representations to
counsel for the Parent and the Company in connection with such counsels'
rendering of their opinions as to the federal income tax consequences of the
Merger provided for in Section 9 of this Agreement.
7.17. Consents; Amendments, Etc.
(a) The Parent, the Subsidiary and the Company shall use their
reasonable best efforts, consistent with sound business judgment, to obtain
all material consents, approvals and authorizations of third parties with
respect to all material agreements to which such parties are parties, which
consents, approvals and authorizations are required of such third parties
by such documents, in form and substance acceptable to the Parent or the
Company, as the case may be, except where the failure to obtain such
consent, approval or authorization would not have a material adverse effect
on the business of the Surviving Corporation.
(b) The Parent, the Subsidiary and the Company shall use their best
efforts to obtain, or obtain the transfer of, any licenses and other
regulatory approvals necessary to allow the Surviving Corporation to
operate the Company's business, unless the failure to obtain such transfer
or approval would not have a material adverse effect on the Company.
7.18. Compensation Plans. The Parent confirms that the consummation of the
Merger constitutes a "Change in Control" or "Change of Control" of the Company
for all purposes within the meaning of all the Company Plans and compensation
plans or compensation agreements of the Company.
7.19. Insurance; Indemnification; Benefits.
(a) The Parent shall, or shall cause the Surviving Corporation to,
maintain in effect for not less than three years after the Effective Time
the Company's current policy of directors' and officers' liability
insurance for the benefit of the individuals who, at or before the
Effective Time, were directors or officers of the Company with respect to
matters occurring prior to the Effective Time; provided, however, that (i)
the Parent may substitute therefor policies of at least the same coverage
containing terms and conditions which are no less advantageous to the
covered officers and directors and (ii) the Parent shall not be required to
pay an annual premium for such insurance in excess of two times the last
annual premium paid prior to the date hereof, but in the event such premium
shall exceed such amount shall purchase as much coverage as possible for
such amount.
(b) From and after the Effective Time, the Parent shall indemnify,
defend and hold harmless the officers, directors and employees of the
Company and the Company Subsidiaries who were such at any time prior to the
Effective Time (the "Indemnified Parties") from and against all losses,
expenses, claims, damages or liabilities arising out of the transactions
contemplated by this Agreement to the fullest extent permitted or required
under applicable law, provided, however that the requirement to advance
expenses shall be limited to those instances in which the indemnified party
undertakes to repay such amount if it shall ultimately be determined that
he is not required to be indemnified under Section 145(c) of the DGCL. The
Parent agrees that all rights to indemnification existing in favor of the
directors, officers and employees of the Company and the Company
Subsidiaries as provided in the Company's or the Company's Subsidiaries'
Certificate of Incorporation or By-laws, as applicable and as in effect as
of the date hereof, with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect
from and after the Effective Time, and the Parent shall, and shall cause
the Surviving Corporation to, indemnify and hold harmless such persons to
the extent so provided. In the event of any actual or threatened claim,
action, suit, proceeding or investigation in respect of any indemnifiable
matter under this Section 7.19, (i) the Parent shall cause the Surviving
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Corporation to pay the reasonable fees and expenses of counsel selected by
the Indemnified Party in advance of the final disposition of any such
action to the fullest extent permitted by applicable law, upon receipt of
any undertaking required by applicable law, and (ii) the Parent shall cause
the Surviving Corporation to cooperate in the defense of any such matter.
(c) The Parent covenants and agrees that, following the Effective
Time, it will, or it will cause the Surviving Corporation to, (A) honor in
accordance with their terms all benefits accrued or vested under the
Company Plans as of the Effective Time, and (B) honor in accordance with
their terms all contracts, arrangements, commitments, or understandings
described in Schedule 3.14(b) to the Company Disclosure Schedule.
(d) The provisions of this Section 7.19 and Sections 7.14 and 7.18
shall survive the Merger, and are intended to be for the benefit of, and
shall be enforceable by, any officer, director, employee, trustee or agent
of the Company (or any Company Subsidiary or Company Partnership), and such
person's heirs or representatives, that is the subject of such Section as
the case may be (the expenses, including reasonable attorneys' fees, that
may be incurred thereby in enforcing such provisions to be paid by the
Parent).
7.20. Company Rights Agreement. The Company will amend, prior to the
Effective Time, the Company Rights Agreement to the extent necessary to provide
that the execution, delivery and performance of this Agreement and the
transactions contemplated hereby will not (i) cause the Parent or any of its
affiliates to become an Acquiring Person (as defined in the Company Rights
Agreement), or (ii) otherwise affect the rights of the holders of Company
Rights, including by causing such Company Rights to separate from the underlying
shares or by giving such holders the right to acquire securities of any party
hereto.
7.21. Resignation of Company Directors. On or prior to the Closing Date,
the Company shall deliver to the Parent evidence satisfactory to the Company of
the resignations of Directors of the Company, such resignations to be effective
immediately after the Effective Time.
7.22. Notice of Subsequent Events. The Parent and the Company shall notify
each other of any changes, additions or events occurring after the date hereof
which would cause any material adverse change or material adverse effect with
respect to the notifying party, promptly after obtaining knowledge of the same.
7.23. Conduct of Business by Parent Pending the Merger. Prior to the
Effective Time, unless the Company shall otherwise agree in writing or except as
otherwise required by this Agreement, the Parent shall not, nor shall it permit
any of the Parent Subsidiaries or Other Parent Entities to: (i) issue or sell,
or agree to issue or sell, other than in an acquisition approved by the Parent's
Board of Directors in accordance with the policies and procedures adopted by the
Parent's Board of Directors for such acquisitions, any shares of capital stock
or other securities (except for options granted under the Parent's existing
stock option plans at an exercise price not less than the fair market value at
the time of grant) of the Parent or such Parent Subsidiary or Other Parent
Entity, except upon exercise of currently outstanding stock options or pursuant
to stock purchase plans, or (ii) amend its Certificate of Incorporation or
Articles of Incorporation, except to increase the authorized number of shares of
capital stock of the Parent, or amend its By-laws in any manner which would have
a material adverse effect on the Merger. In addition, during the period from the
date hereof to the Effective Time, the Subsidiary shall not engage in any
activities of any nature except as provided in or contemplated by this
Agreement.
7.24. Restructuring the Merger. If the Company and the Parent mutually
determine that a forward subsidiary merger would adversely affect the ability of
the parties to consummate the Merger and that a reverse subsidiary merger would
not, the Merger will be restructured in the form of a reverse subsidiary merger
of the Subsidiary into the Company, with the Company being the Surviving
Corporation. In such event, this Agreement shall be appropriately modified to
reflect such form of merger.
7.25. Tax Covenants Following the Effective Time. Following the Effective
Time, the Parent shall not, and shall cause the Surviving Corporation not to,
take any action following the Effective Time which could disqualify the Merger
as a "reorganization" within the meaning of Section 368(a) of the Code.
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SECTION 8. TERMINATION, AMENDMENT AND WAIVER
8.1. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the holders of the Company Common Stock and the
holders of the Parent Common Stock:
(a) by mutual written consent of the Parent, the Subsidiary and the
Company;
(b) by either the Parent or the Company;
(i) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any required approval of the holders of the Company
Common Stock shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before
July 31, 1997, unless the failure to consummate the Merger is the result
of a willful and material breach of this Agreement by the party seeking
to terminate this Agreement; provided, however, that the passage of such
period shall be tolled for any part thereof (but not exceeding 60 days
in the aggregate) during which any party shall be subject to a nonfinal
order, decree, ruling or action restraining, enjoining or otherwise
prohibiting the consummation of the Merger or the calling or holding of
a meeting of stockholders;
(iii) if a United States federal or state court of competent
jurisdiction or other United States federal or state governmental entity
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger
and such order, decree, ruling or other action shall have become final
and nonappealable; provided, that the party seeking to terminate this
Agreement shall have used all reasonable efforts to remove such order,
decree, ruling or other action; or
(iv) in the event of a material breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Agreement which (A) would give rise to the failure of a condition set
forth in Section 9.2(a) or (b) or Section 9.3(a) or (b), as applicable,
and (B) cannot be or has not been cured within 30 days after the
occurrence or discovery of such breach by the breaching party, whichever
is later (a "Material Breach") (provided that the terminating party is
not then in Material Breach of any representation, warranty, covenant or
other agreement contained in this Agreement); or
(c) by either the Parent or the Company in the event that (i) all of
the conditions to the obligation of such party to effect the Merger set
forth in Section 9.1 shall have been satisfied and (ii) any condition to
the obligation of such party to effect the Merger set forth in Section 9.2
(in the case of the Parent) or Section 9.3 (in the case of the Company) is
not capable of being satisfied prior to the end of the period referred to
in Section 8.1(b)(ii); or
(d) by the Company, if the Company's Board of Directors shall have (i)
determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the holders of Company Shares or shall have
withdrawn such recommendation or (ii) approved, recommended or endorsed any
Acquisition Transaction (as defined in Section 7.8) other than this Merger
or (iii) resolved to do any of the foregoing; or
(e) by the Company, if the average of the last per share sale price of
the Parent Common Stock for the ten consecutive trading days ending on the
fifth trading day immediately preceding the date set for the Stockholder
Meeting as reported on the NYSE Composite Tape is equal to or less than
$17.125; or
(f) by the Company, upon the occurrence of a change, addition or event
requiring the Parent to give notice pursuant to Section 7.22 that (x) would
give rise to the failure of a condition set forth in Section 9.3(b) and (y)
is not capable of being cured prior to the end of the period referred to in
Section 8.1(b)(ii); provided, that the Company shall only be permitted to
terminate the Agreement within ten days after receipt of any such notice
and the information reasonably requested by it in order to evaluate the
significance of such change, addition or event; and provided, further, that
if the Company does not give the Parent written notice of termination
within such 10-day period, the Company shall be deemed to
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have consented to such change, addition or event and shall not be entitled
thereafter to assert that such change, addition or event gives rise to a
failure of a condition set forth in Section 9.3(b); or
(g) by the Parent, upon the occurrence of a change, addition or event
requiring the Company to give notice pursuant to Section 7.22 that (x)
would give rise to the failure of a condition set forth in Section 9.2(b)
and (y) is not capable of being cured prior to the end of the period
referred to in Section 8.1(b)(ii); provided, that the Company shall only be
permitted to terminate the Agreement within ten days after receipt of any
such notice and the information reasonably requested by it in order to
evaluate the significance of such change, addition or event; and provided,
further, that if the Parent does not give the Company written notice of
termination within such 10-day period, the Parent shall be deemed to have
consented to such change, addition or event and shall not be entitled
thereafter to assert that such change, addition or event gives rise to a
failure of a condition set forth in Section 9.2(b).
8.2. Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and have
no effect, without any liability or obligation on the part of any party, other
than the provisions of Sections 6.2, 7.7, 8.2 and 8.6, and except to the extent
that such termination results from the willful and material breach by a party of
any of its representations, warranties, covenants or other agreements set forth
in this Agreement.
8.3. Amendment. This Agreement may be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the holders of the Company Shares; provided, however, that after
such approval, there shall be made no amendment that pursuant to Section 251(d)
of the DGCL requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
8.4. Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
8.3, waive compliance with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.
8.5. Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3, or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of each of the Parent,
the Subsidiary and the Company, action by its Board of Directors or the duly
authorized designee of the Board of Directors.
8.6. Expenses; Break-up Fees.
(a) All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party
incurring such expense, except that expenses (other than legal, accounting
and investment banking costs, which shall be paid by the party incurring
such expenses) incurred in connection with preparing, filing, printing and
mailing the Proxy Statements and the Registration Statement shall be shared
equally by the Parent and the Company.
(b) In the event of a termination of this Agreement by the Company
pursuant to Section 8.1(d) as a result of the Board of Directors approving,
recommending or endorsing an Acquisition Transaction and within one year
after the effective date of such termination, the Company is the subject of
an Acquisition Transaction with any Person (as defined in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) (other than a party hereto), then at the
time of the consummation of such Acquisition Transaction, the Company shall
pay to the Parent a break-up fee of $12 million in immediately available
funds.
(c) The Company acknowledges that the provisions for the payment of
break-up fees and the allocation of expenses contained in this Section 8.6
are an integral part of the transactions contemplated
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by this Agreement and that, without these provisions, the Parent and the
Subsidiary would not have entered into this Agreement. Accordingly, if a
break-up fee shall become due and payable by the Company, and the Company
shall fail to pay such amount when due pursuant to this Section, and, in
order to obtain such payment, suit is commenced by the Parent which results
in a judgment against the Company therefor, the Company shall pay the
Parent's reasonable costs and expenses (including reasonable attorneys'
fees) in connection with such suit, together with interest computed on any
amounts determined to be due pursuant to this Section (computed from the
date upon which such amounts were due and payable pursuant to this Section)
and such costs (computed from the dates incurred) at the prime rate of
interest announced from time to time by NationsBank, National Association
(South). The obligations of the Company under this Section 8.6 shall
survive any termination of this Agreement.
In the event a break-up fee is payable pursuant to this Section 8.6, the
payment of any such break-up fee shall be the sole and exclusive remedy of the
Parent.
SECTION 9. CONDITIONS TO CLOSING
9.1. Mutual Conditions. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction, at or prior to the Closing
Date, of the following conditions (any of which may be waived in writing by the
Parent, the Subsidiary and the Company):
(a) None of the Parent, the Subsidiary or the Company nor any of their
respective subsidiaries shall be subject to any order, decree or injunction
by a United States federal or state court of competent jurisdiction which
(i) prevents the consummation of the Merger or (ii) would impose any
material limitation on the ability of the Parent effectively to exercise
full rights of ownership of the Common Stock of the Surviving Corporation
or any material portion of the assets or business of the Company and the
Company Subsidiaries and the Company Partnerships, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state
that makes the consummation of the Merger and any other transaction
contemplated hereby illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) The holders of shares of the Company Common Stock shall have
approved the adoption of this Agreement and any other matters submitted to
them for the purpose of approving the transactions contemplated hereby.
(e) The shares of the Parent Common Stock to be issued in connection
with the Merger shall have been listed on the NYSE, upon official notice of
issuance, and shall have been issued in transactions qualified or exempt
from registration under applicable securities or Blue Sky laws of such
states and territories of the United States as may be required.
(f) The Merger shall qualify for "pooling of interests" accounting
treatment, and the Parent and the Company shall each have received a
letter, dated the Closing Date, from Ernst & Young LLP as to their
concurrence with the Parent and the Company to that effect if the Merger is
consummated in accordance with the terms and provisions of this Agreement.
(g) The Registration Statement shall have been declared effective and
no stop order with respect to the Registration Statement shall be in
effect.
9.2. Conditions to Obligations of the Parent. The obligations of the
Parent to consummate the Merger and the other transactions contemplated hereby
shall be subject to the satisfaction, at or prior to the Closing Date, of the
following conditions (any of which may be waived by the Parent):
(a) The agreements of the Company to be performed at or prior to the
Closing Date pursuant to the terms hereof shall have been duly performed in
all material respects, and the Company shall have
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performed, in all material respects, all of the acts required to be
performed by it at or prior to the Closing Date by the terms hereof.
(b) The representations and warranties of the Company set forth in
Section 3.11(a) shall be true and correct as of the date of this Agreement
and as of the Closing Date as described in the next sentence. The
representations and warranties of the Company set forth in this Agreement
that are qualified as to materiality shall be true and correct, and those
that are not so qualified shall be true and correct in all material
respects, as of the date of this Agreement and as of the Closing as though
made at and as of such time, except to the extent such representations and
warranties expressly relate to an earlier date (in which case such
representations and warranties that are qualified as to materiality shall
be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of such earlier date); provided,
however, that the Company shall not be deemed to be in breach of any such
representations or warranties by taking any action permitted (or approved
by the Parent) under this Agreement. The Parent and the Subsidiary shall
have been furnished with a certificate, executed by a duly authorized
officer of the Company, dated the Closing Date, certifying as to the
fulfillment of the foregoing conditions.
(c) The Parent shall have received an opinion from Haskell Slaughter &
Young, L.L.C. to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, which
opinion may be based upon reasonable representations of fact provided by
officers of the Parent, the Company and the Subsidiary.
(d) The Parent shall have received an opinion from Willkie Farr &
Gallagher substantially to the effect set forth in Exhibit 9.2(d) hereto.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required to execute, deliver and perform this Agreement
shall have been obtained or made, except for filings in connection with the
Merger and any other documents required to be filed after the Effective
Time.
9.3. Conditions to Obligations of the Company. The obligations of the
Company to consummate the Merger and the other transactions contemplated hereby
shall be subject to the satisfaction, at or prior to the Closing Date, of the
following conditions (any of which may be waived by the Company):
(a) The agreements of the Parent and the Subsidiary to be performed at
or prior to the Closing Date pursuant to the terms hereof shall have been
duly performed, in all material respects, and the Parent and the
Subsidiaries shall have performed, in all material respects, all of the
acts required to be performed by them at or prior to the Closing Date by
the terms hereof.
(b) The representations and warranties of the Parent set forth in
Section 5.11(a) shall be true and correct as of the date of the Agreement
and as of the Closing Date as described in the next sentence. The
representations and warranties of the Parent and the Subsidiary set forth
in this Agreement that are qualified as to materiality shall be true and
correct, and those that are not so qualified shall be true and correct in
all material respects, as of the date of this Agreement and as of the
Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of such earlier
date). The Company shall have been furnished with a certificate, executed
by duly authorized officers of the Parent and the Subsidiary, dated the
Closing Date, certifying in such detail as the Company may reasonably
request as to the fulfillment of the foregoing conditions.
(c) The Company shall have received an opinion from Willkie Farr &
Gallagher to the effect that the Merger will constitute a reorganization
with the meaning of Section 368(a) of the Code which opinion may be based
upon reasonable representations of fact provided by officers of the Parent,
the Company and the Subsidiary.
(d) The Company shall have received an opinion from Haskell Slaughter
& Young, L.L.C. substantially to the effect set forth in Exhibit 9.3(d)
hereto.
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(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Time.
SECTION 10. MISCELLANEOUS
10.1. Nonsurvival of Representations and Warranties. Unless expressly
provided otherwise, none of the representations and warranties in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time. All covenants and agreements set forth in this Agreement shall
survive in accordance with their terms.
10.2. Notices. Any communications required or desired to be given
hereunder shall be deemed to have be properly given if sent by hand delivery or
by facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to the Parent or the Subsidiary:
MedPartners, Inc.
3000 Galleria Tower
Suite 1000
Birmingham, Alabama 35244
Attention: President
Fax: (205) 733-4154
with a copy to:
Haskell, Slaughter & Young, L.L.C.
1200 AmSouth/Harbert Plaza
Birmingham, Alabama 35244
Attention: F. Hampton McFadden, Jr., Esq.
Fax: (205) 324-1133
If to the Company:
InPhyNet Medical Management, Inc.
1200 South Pine Island Road, Suite 600
Fort Lauderdale, Florida 33324
Attention: President
Fax: (954) 424-2939
with a copy to:
InPhyNet Medical Management, Inc.
1200 South Pine Island Road, Suite 600
Fort Lauderdale, Florida 33324
Attention: General Counsel
Fax: (954) 424-7903
and with a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: William N. Dye, Esq.
Fax: (212) 821-8111
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All such communications shall be deemed to have been delivered on the date
of hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3. Further Assurances. Each party hereby agrees to perform any further
acts and to execute and deliver any documents which may be reasonably necessary
to carry out the provisions of this Agreement.
10.4. Governing Law. This Agreement shall be interpreted, construed and
enforced with the laws of the State of Delaware, applied without giving effect
to any conflicts-of-law principles.
10.5. "Knowledge." "To the knowledge", "to the best knowledge, information
and belief", or any similar phrase shall be deemed to refer to the knowledge of
the Chairman of the Board, Chief Executive Officer or Chief Financial Officer of
a party and to include the assurance that such knowledge is based upon a
reasonable investigation, unless otherwise expressly provided.
10.6. "Material adverse change" or "material adverse effect." "Material
adverse change" or "material adverse effect" means, when used in connection with
the Company or the Parent, any change, effect, event or occurrence that has, or
is reasonably likely to have, individually or in the aggregate, a material
adverse impact on the business or financial position of such party and its
subsidiaries and other controlled entities identified herein or in any Schedule
or Disclosure Schedule delivered pursuant to this Agreement, including the
subsidiaries and other entities, taken as a whole; provided, however, that
"material adverse change" and "material adverse effect" shall be deemed to
exclude the impact of (i) changes in generally accepted accounting principles,
(ii) changes in applicable law and (iii) any changes resulting from any
restructuring or other similar charges or write-offs taken by the Company with
the consent of the Parent; provided, however, that no such charges or write-offs
will be taken if such would adversely affect pooling-of-interests accounting
treatment for the Merger.
10.7. "Hazardous Materials." The term "Hazardous Materials" means any
material which has been determined by any applicable governmental authority to
be harmful to the health or safety of human or animal life or vegetation,
regardless of whether such material is found on or below the surface of the
ground, in any surface or underground water, airborne in ambient air or in the
air inside any structure built or located upon or below the surface of the
ground or in building materials or in improvements of any structures, or in any
personal property located or used in any such structure, including, but not
limited to, all hazardous substances, imminently hazardous substances, hazardous
wastes, toxic substances, infectious wastes, pollutants and contaminants from
time to time defined, listed, identified, designated or classified as such under
any Environmental Laws (as defined in Section 10.8 regardless of the quantity of
any such material).
10.8. "Environmental Laws." The term "Environmental Laws" means any
federal, state or local statute, regulation, rule or ordinance, and any judicial
or administrative interpretation thereof, regulating the use, generation,
handling, storage, transportation, discharge, emission, spillage or other
release of Hazardous Materials or relating to the protection of the environment.
10.9. Captions. The captions or headings in this Agreement are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Agreement.
10.10. Entire Agreement. This Agreement, the Company Disclosure Schedule,
the Parent Disclosure Schedule, the Appendices attached hereto and the
Confidentiality Agreement contain the entire agreement of the parties and
supersede any and all prior or contemporaneous agreements between the parties,
written or oral, with respect to the transactions contemplated hereby.
10.11. Counterparts. This Agreement may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.12. Binding Effect. This Agreement shall be binding on, and shall inure
to the benefit of, the parties hereto, and their respective successors and
assigns, and, except as expressly provided in Section 7.19(d), no other person
shall acquire or have any right under or by virtue of this Agreement. No party
may assign any right or obligation hereunder without the prior written consent
of the other parties.
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10.13. No Rule of Construction. The parties agree that, because all
parties participated in negotiating and drafting this Agreement, no rule of
construction shall apply to this Agreement which construes ambiguous language in
favor of or against any party by reason of that party's role in drafting this
Agreement.
IN WITNESS WHEREOF, the Parent, the Subsidiary and the Company have caused
this Agreement to be executed by their respective duly authorized officers, all
as of the day and year first above written.
MEDPARTNERS, INC.
By: /s/ LARRY R. HOUSE
------------------------------------
Name: Larry R. House
Title: Chairman, President and
Chief Executive Officer
SEABIRD MERGER CORPORATION
By: /s/ LARRY R. HOUSE
------------------------------------
Name: Larry R. House
Title: Chairman, President and
Chief Executive Officer
INPHYNET MEDICAL MANAGEMENT INC.
By: /s/ CLIFFORD FINDEISS
------------------------------------
Name: Clifford Findeiss
Title: Chairman, President and
Chief Executive Officer
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EXHIBIT 10.3
SENIOR EXECUTIVE EMPLOYMENT AGREEMENT
This Senior Executive Employment Agreement is dated as of
DATE, and is entered into between Inphynet Administrative Services, Inc.,
formerly known as Emergency Medical Services Associates, Inc. (the "Company"),
and NAME ("Executive").
WHEREAS, Executive and the Company desire to embody in this
Agreement the terms and conditions of Executive's employment by the Company.
NOW, THEREFORE, the parties hereby agree:
ARTICLE I
EMPLOYMENT, DUTIES AND RESPONSIBILITIES
1.01. EMPLOYMENT. The Company shall employ Executive in such
capacity as may be determined by the Board of Directors (the "Board") of
Inphynet Medical Management, Inc. ("IMMI") or the Chief Executive Officer of the
Company (the "CEO"). Executive hereby accepts such employment. Executive agrees
to devote his full business time and efforts to promote the interests of the
Company. The expenditure of reasonable amounts of time for personal or outside
business, charitable, voluntary activities shall not be deemed a breach of this
Agreement, provided such activities do not interfere with the services required
to be rendered by the Executive hereunder. Unless otherwise prohibited herein,
the making of personal investments and the conduct of private business affairs
shall not be prohibited hereunder.
1.02. DUTIES AND RESPONSIBILITIES. Executive shall have such
duties and responsibilities as may be assigned to him from time to time by the
Board or the CEO, and the Executive agrees to faithfully discharge such duties
to the best of his ability. In the performance of his duties, Executive shall
make his principal office in Broward County, Florida (or such other location as
the Company may be headquartered), or such place as he and the CEO may from time
to time agree.
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TERM
2.01. TERM. (a) The term of this Agreement (the "Term") shall
commence on the date hereof and shall continue until the day prior to the third
anniversary of the date hereof.
(b) Executive represents and warrants to the Company that, to
the best of his knowledge, neither the execution and delivery of this Agreement
nor the performance of his duties hereunder violates or will violate the
provisions of any other agreement to which he is a party or by which he is
bound.
ARTICLE III
COMPENSATION AND EXPENSES
3.01. SALARY, BONUSES AND BENEFITS. As compensation and
consideration for the performance by Executive of his obligations under this
Agreement, Executive shall be entitled to the following (subject, in each case,
to the provisions of ARTICLE V hereof):
(a) SALARY. The Company shall pay Executive a base salary
during the Term, payable in accordance with the normal payment procedures of the
Company and subject to such withholdings and other normal employee deductions as
may be required by law, at the annual rate of COMP ("Salary").
(b) BONUS. The Executive shall be entitled to participate
in the Company's Executive Incentive Bonus Plan under the terms and conditions
thereof, as it may be amended from time to time, and to receive an annual bonus
thereunder for any year with respect to which the criteria to receive a bonus
thereunder are attained.
(c) STOCK AWARDS. The Executive shall be eligible for
grants of stock or stock-based awards under the Company's 1994 Stock Incentive
Plan (or any successor thereto); provided that any such awards, and the amount
thereof, shall be in the sole discretion of the Compensation Committee of the
Board.
(d) BENEFITS. Executive shall be entitled to participate
during the Term in such pension, life insurance, health, disability and major
medical insurance plans, and in such
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<PAGE> 3
other employee benefit plans and programs, for the benefit of the employees of
the Company, as may be maintained from time to time during the Term, in each
case to the extent and in the manner available to other senior executives of the
Company and subject to the terms and provisions of such plans or programs.
(e) VACATION. Executive shall be entitled to a paid
vacation of at least four (4) weeks per annum, in accordance with Company policy
(but not necessarily consecutive vacation weeks) during the Term.
3.02. EXPENSES. The Company will reimburse Executive for
reasonable business-related expenses incurred by him in connection with the
performance of his duties hereunder during the Term, subject, however, to the
Company's policies relating to business-related expenses as in effect from time
to time during the Term.
ARTICLE IV
EXCLUSIVITY, ETC.
4.01. EXCLUSIVITY. Unless consistent with Article I of this
Agreement, Executive shall diligently and conscientiously devote substantially
all of his time and attention to the Company's affairs. Executive agrees that
all of his activities as an employee of the Company shall be in conformity with
all reasonable policies, rules, regulations and directions of the Board or the
CEO not inconsistent with this Agreement and established in good faith.
4.02. CONFIDENTIALITY. Executive agrees that he will not, at
any time during or after the Term, make use of or divulge to any other person,
firm or corporation any trade or business secret, process, method or means, or
any other confidential information concerning the business or policies of the
Company, which he may have learned in connection with his employment. For
purposes of this Agreement, a "trade or business secret, process, method or
means, or any other confidential information" shall mean and include written
information treated as confidential or as a trade secret by the Company.
Executive's obligation under this Section 4.02 shall not apply to any
information which (i) is known publicly; (ii) is in the public domain or
hereafter enters the public domain without the fault of Executive; (iii) is
known to Executive prior to his receipt of
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<PAGE> 4
such information from the Company, as evidenced by written records of Executive
or (iv) is hereafter disclosed to Executive by a third party not under an
obligation of confidence to the Company. Executive agrees not to remove from the
premises of the Company, except as an employee of the Company in pursuit of the
business of the Company or except as specifically permitted in writing by the
Company, any document or other object containing or reflecting any such
confidential information. Executive recognizes that all such documents and
objects, whether developed by him or by someone else, will be the sole exclusive
property of the Company. Except as specifically authorized by the CEO, upon
termination of his employment hereunder, Executive shall forthwith deliver to
the Company all such confidential information, including without limitation all
lists of customers, correspondence, accounts, records and any other documents or
property made or held by him or under his control in relation to the business or
affairs of the Company, and no copy of any such confidential information shall
be retained by him.
ARTICLE V
TERMINATION
5.01. TERMINATION BY THE COMPANY. The Company shall have the
right to terminate the Executive's employment at any time, with or without
"Cause." For purposes of this Agreement, "Cause" shall mean (i) the extended
failure by the Executive to perform his duties hereunder in a manner which meets
the expectations of the Board or the CEO, including the failure to comply with
any lawful instructions thereof, (ii) conduct grossly insubordinate or disloyal
to the Company, (iii) the conviction of or pleading guilty or no contest to a
felony, or (iv) the continued use of drugs (including alcohol) by the Executive
such that Executive becomes significantly impaired in the performance of his
duties hereunder, in each case (i)-(iv), as determined by the Board or the CEO
in good faith.
5.02. DEATH. In the event Executive dies during the Term, this
Agreement shall automatically terminate, such termination to be effective on the
date of Executive's death.
5.03. DISABILITY. In the event that Executive shall become
Disabled, the Company shall have the right to terminate this Agreement, such
termination to be effective upon the giving of notice thereof to Executive in
accordance with Section 6.03 hereof. The term "Disabled" shall mean (i) entitled
to benefits under the Company's long-term disability policy, (ii) entitled to
receive disability benefits pursuant to Title II of the Federal Social Security
Act, or (iii) inability to perform the Executive's obligations hereunder due to
a physical or mental disability for a period of at least 90 consecutive days, or
150 non-consecutive days within any 180 day period, as determined in good faith
by the Board or the CEO.
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5.04. TERMINATION FOR GOOD REASON. The Executive shall have
the right to terminate his employment with the Company for "Good Reason." For
purposes of this Agreement, "Good Reason" shall mean:
(a) without the Executive's consent, a decrease in
Executive's salary or benefits (other than changes in benefits that apply to all
of the Company's senior executives);
(b) a breach or default by the Company in the due
observance or performance of the Company's obligations under this Agreement, if
such default or breach continues for a period of thirty (30) days after written
notice of such default or breach is given to the Company by the Executive; and
(c) without the Executive's consent, a relocation of the
Executive's primary place of employment to a location which is (i) more than 30
miles from the Executive's then-current primary place of employment and (ii)
farther from the Executive's primary residence than such residence is from the
Executive's then-current primary place of employment.
5.05. EFFECT OF TERMINATION. (a) In the event of termination
of Executive's employment for any reason, the Company shall pay to Executive (or
his beneficiary in the event of his death) any base salary or other compensation
earned but not paid to Executive prior to the effective date of such
termination.
(b) Subject to Section 5.05(e), in the event of
termination of Executive's employment (i) by the Company for Cause, (ii) by
Executive for any reason other than Good Reason, (iii) because of Executive's
death, or (iv) pursuant to Section 5.03, because Executive has become Disabled,
neither the Executive nor any beneficiary shall be entitled to any further
compensation other than the amounts described in Section 5.05(a)
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hereof. This Section 5.05(b) shall not limit in any way the liability of the
Executive to the Company for the breach of this Agreement for the termination of
Executive's employment by the Executive for any reason other than Good Reason.
In the event of death or disability, Executive shall be paid an amount equal to
the Annual Bonus that Executive would have earned for the calendar year in which
his employment was terminated had such termination not occurred, prorated for
the number of days within such year that Executive was employed and paid as of
the time such Annual Bonus would have otherwise been paid had his employment not
been terminated.
(c) Subject to Section 5.05(e), in the event of
termination of Executive's employment (i) by the Company other than for Cause or
Disability or (ii) by Executive for Good Reason, the Company shall pay
Executive, in addition to the amounts described in Section 5.05(a) hereof, (A)
twelve months Salary in accordance with the normal pay practices of the Company,
and (B) an amount equal to the Annual Bonus that Executive would have earned for
the calendar year in which his employment was terminated, had such termination
not occurred, prorated for the number of days within such year that Executive
was employed and paid as of the time such Annual Bonus would have otherwise been
paid had his employment not been terminated. In addition, the Company shall
continue to provide the Executive for a period of one year following termination
all welfare benefits (including medical, hospitalization and life and disability
insurance) for which the Executive was eligible at the time of termination;
provided that (I) the Executive will be provided such benefits only if allowed
under applicable law or if including the Executive, would not jeopardize any tax
benefit available to the Company, and (II) the Company's obligation to provide
any such benefit will expire when the Executive becomes eligible for the same or
analogous benefit from another employer (including for this purpose the employer
of the Executive's spouse).
(d) The Executive's rights upon termination of employment
with respect to option or other incentive awards not covered by this Agreement
shall be governed by the terms and conditions of the option agreement or such
other award agreement.
(e) Notwithstanding Section 5.05(b) or (c), if the
Executive's employment is terminated (i) by the Company other than for
Disability or Cause (which for this purpose shall
6
<PAGE> 7
not include clause (i) of the second sentence of Section 5.01) or (ii) by the
Executive for any reason, in either case on or within 12 months after a "Change
of Control," the Company shall, within five (5) business days of such
termination, pay to Executive one and one-half times his annual Salary, in a
lump sum, in lieu of any other severance benefits, other than as set forth in
the last sentence of Section 5.05(c) above, to which the Executive may have been
entitled under this Agreement. Notwithstanding Section 5.05(b) or (c), if the
Executive's employment is terminated (i) by the Company other than for
Disability or Cause or (ii) by the Executive for Good Reason, more than 12 but
less than 25 months after a "Change in Control," the Company shall, within five
(5) business days of such termination, pay to the Executive one half times his
annual Salary, in a lump sum, in lieu of any other severance benefits to which
the Executive may have been entitled under this Agreement. For purposes of this
Agreement, "Change of Control" shall 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 (the "Exchange Act")), other than an "affiliate" of IMMI (as defined in 17
C.F.R. ss. 230.405) or an employee benefit plan maintained by IMMI or an
"affiliate", 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 IMMI's
capital stock entitled to vote in the election of directors ("Voting Stock"),
(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, excluding for this purpose any new director who is
approved by a vote of at least a majority of the directors then still in office
who were directors at the beginning of the period, (iii) a merger, consolidation
or similar transaction following which the holders of Voting Stock immediately
before such transaction do not have beneficial ownership of at least 50% of the
voting securities of the resulting entity or (iv) a sale of all or substantially
all of IMMI's assets occurs.
ARTICLE VI
MISCELLANEOUS
6.01. NO DUTY TO MITIGATE; NO OFFSET. In the event that an
amount becomes payable to Executive pursuant to Section 5.05(c) or 5.05(e)
above, such amount shall not be reduced by (i) any outstanding amounts owed by
Executive to the Company or (ii)
7
<PAGE> 8
the amount of any compensation for services earned by Executive from any source,
whether paid currently or deferred. Executive shall have no obligation to
mitigate any amounts to be paid under Section 5.05(c) or (e) above.
6.02. NONCOMPETITION; NONSOLICITATION. (a) During the Term and
during the one-year period following his termination of employment hereunder for
any reason, including termination is by the Company without Cause or by the
Executive with Good Reason, Executive shall not directly or indirectly, own,
manage, operate, join, control or participate in or be connected with, as an
officer, employee, partner, stockholder, or otherwise, any business, individual,
partnership, firm, or corporation (collectively "Entity") which is at the time
engaged principally or significantly in a business which is, directly or
indirectly, at the time in competition with the business of the Company, or any
subsidiary or affiliate (as defined in the Securities Exchange Act) thereof in
an area in which the Company or such subsidiary or affiliate then conducts
business. Nothing herein, however, shall prohibit Executive from acquiring or
holding any issue of stock or securities of any Entity which has any securities
listed on a national securities exchange or quoted in the daily listing of
over-the-counter market securities, provided that at any one time he and members
of his immediate family do not own more than five percent of the voting
securities of any such Entity.
(b) During the one-year period following his termination
of employment hereunder Executive shall not directly or indirectly solicit to
enter into the employ of any other Entity, or hire, any of the employees of the
Company.
(c) If any provision of this Section 6.02 is held to be
invalid, void or unenforceable, any court so holding shall substitute a valid,
enforceable provision that preserves, to the maximum lawful extent, the terms
and intent of this Section.
6.03. NOTICES. Any notice required or permitted hereunder
shall be in writing and shall be sufficiently given if personally delivered or
if sent by telegram or telex or by registered or certified mail, postage
prepaid, with return receipt requested, addressed: (a) in the case of the
Company to Inphynet Medical Management Inc., 1200 South Pine Island Road, Suite
600, Fort Lauderdale, Florida 33324-4460, Attention: General Counsel,
8
<PAGE> 9
or to such other address and/or to the attention of such other person as the
Company shall designate by written notice to Executive; and (b) in the case of
Executive, to Executive's last known address as reflected in the Company's
records, or to such other address as Executive shall designate by written notice
to the Company. Any notice given hereunder shall be deemed to have been given at
the time of receipt thereof by the person to whom such notice is given.
6.04. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the
entire agreement of the parties hereto with respect to the terms and conditions
of Executive's employment during the Term and supersedes any and all prior
agreements and understandings, whether written or oral, between the parties
hereto with respect to the subject matter hereof. This Agreement may not be
changed or modified except by an instrument in writing signed by both of the
parties hereto.
6.05. WAIVER. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed as a continuing
waiver or as a consent to or waiver of any subsequent breach hereof.
6.06. HEADINGS. The Article and Section headings herein are
for convenience of reference only, do not constitute a part of this Agreement
and shall not be deemed to limit or affect any of the provisions hereof.
6.07. GOVERNING LAW. This Agreement shall be governed by, and
construed and interpreted in accordance with, the internal laws of the State of
Florida without reference to the principles of conflict of laws.
6.08. AGREEMENT TO TAKE ACTIONS. Each party hereto shall
execute and deliver such documents, certificates, agreements and other
instruments, and shall take such other actions, as may be reasonably necessary
or desirable in order to perform his or its obligations under this Agreement or
to effectuate the purposes hereof.
6.09. ARBITRATION. Except for disputes with respect to Article
IV hereof, any dispute between the parties hereto respecting the meaning and
intent of this Agreement or any of its terms and provisions shall be submitted
to arbitration in Fort Lauderdale, Florida in accordance with the Commercial
Rules
9
<PAGE> 10
of the American Arbitration Association then in effect, and the
arbitration determination resulting from any such submission shall be final and
binding upon the parties hereto. Judgment upon any arbitration award may be
entered in any court of competent jurisdiction.
6.10. SURVIVORSHIP. The respective rights and obligations of
the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
6.11. VALIDITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision or provisions of this Agreement, which
shall remain in full force and effect.
6.12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has duly
executed this Agreement effective as of the date first written above.
Inphynet Administrative
Services, Inc.
By:
---------------------
J. Clifford Findeiss
President
Executive
- -------------------
NAME
10
<PAGE> 1
EXHIBIT 11 - INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF
PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------
1996 1995
---- ----
<S> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding 15,775 14,785
Effect of dilutive stock options based on the
treasury stock method 246 253
------- -------
Total weighted average shares outstanding 16,021 15,038
======= =======
Net income $16,691 $11,288
======= =======
Net income per share $ 1.04 $ 0.75
======= =======
</TABLE>
-56-
<PAGE> 1
EXHIBIT 21 - INPHYNET MEDICAL MANAGEMENT INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
InPhyNet Administrative Services, Inc., a Florida corporation
Rosendorf Margulies Borushok Shornbaum Radiology Associates
of Hollywood, Inc., a Florida corporation
Paragon Contracting Services, Inc., a Florida corporation
EMSA Contracting Services, Inc., a Florida corporation
EMSA Correctional Care, Inc., a Florida corporation
InPhyNet Hospital Services, Inc., a Florida corporation
InPhyNet Government Services, Inc., a Florida corporation
InPhyNet Managed Care Contracting Services, Inc., a Florida corporation
IMBS, Inc., a Florida corporation
-57-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-90418) pertaining to the InPhyNet Medical Management
Inc. 1994 Stock Incentive Plan and InPhyNet Medical Management Inc. 1994
Non-Employee Director Stock Option Plan of our report dated February 14, 1997,
with respect to the consolidated financial statements and schedule of InPhyNet
Medical Management Inc. and Subsidiaries included in its Annual Report on Form
10-K for the year ended December 31, 1996.
March 27, 1997 ERNST & YOUNG LLP
Miami, Florida
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,618
<SECURITIES> 0
<RECEIVABLES> 167,502
<ALLOWANCES> 83,000
<INVENTORY> 0
<CURRENT-ASSETS> 103,625
<PP&E> 25,441
<DEPRECIATION> 13,732
<TOTAL-ASSETS> 154,832
<CURRENT-LIABILITIES> 49,587
<BONDS> 339
0
0
<COMMON> 158
<OTHER-SE> 101,403
<TOTAL-LIABILITY-AND-EQUITY> 154,832
<SALES> 0
<TOTAL-REVENUES> 408,520
<CGS> 0
<TOTAL-COSTS> 379,653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,134
<INCOME-PRETAX> 27,589
<INCOME-TAX> 10,898
<INCOME-CONTINUING> 16,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,691
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
