-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MC+u22OZk+gn4hfmMQygza4LIcWPBdf6bpNxhuvSLN+kY1QAZeog6qI8FLkJkCYI yHFOeWJZZBMWYWo9OavhPw== 0000950144-98-003943.txt : 19980401 0000950144-98-003943.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003943 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDPARTNERS INC CENTRAL INDEX KEY: 0001000736 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 631151076 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14200 FILM NUMBER: 98583397 BUSINESS ADDRESS: STREET 1: 3000 GALLERIA TOWER STREET 2: STE 1000 CITY: BIRMINGHAM STATE: AL ZIP: 35244 BUSINESS PHONE: 2057338996 MAIL ADDRESS: STREET 1: 3000 GALLERIA TOWER STREET 2: SUITE 1000 CITY: BIRMINGHAM STATE: AL ZIP: 35244 FORMER COMPANY: FORMER CONFORMED NAME: MEDPARTNERS INC /DE/ DATE OF NAME CHANGE: 19960912 FORMER COMPANY: FORMER CONFORMED NAME: MEDPARTNERS MULLIKIN INC DATE OF NAME CHANGE: 19950915 10-K 1 MEDPARTNERS, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 FISCAL YEAR ENDED DECEMBER 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-27276 MEDPARTNERS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 63-1151076 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 3000 GALLERIA TOWER, SUITE 1000 BIRMINGHAM, ALABAMA 35244 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (205) 733-8996 Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, PAR VALUE $.001 PER SHARE THE NEW YORK STOCK EXCHANGE THRESHOLD APPRECIATION PRICE SECURITIES(TM) THE NEW YORK STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 1, 1998: Common Stock, par value $.001 per share -- $2,291,503,584. As of March 1, 1998, the Registrant had 197,860,913 shares of Common Stock, par value $.001 per share, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information set forth under Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant's definitive proxy statement for its 1998 Annual Meeting of Stockholders that will be filed no later than April 30, 1998. ================================================================================ 2 FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD LOOKING STATEMENTS. Statements in this document that are not historical facts are hereby identified as "forward looking statements" for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act of 1933 (the "Securities Act"). MedPartners, Inc. ("MedPartners" or the "Company") cautions readers that such "forward looking statements", including without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, wherever they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the best judgment of the Company's senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the "forward looking statements". Such "forward looking statements" should, therefore, be considered in light of various important factors, including those set forth below and others set forth from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission (the "SEC"). These "forward looking statements" are found at various places throughout this document. Additionally, the discussions herein under the captions "Business -- Physician Practice Services", "Business -- Pharmaceutical Services", "Business -- Contract Medical Services", "Business -- Information Systems", "Business -- Competition", "Business -- Government Regulation", "Business -- Corporate Liability and Insurance", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" are susceptible to the risks and uncertainties discussed below. Moreover, the Company, through its senior management, may from time to time make "forward looking statements" about the matters described herein or other matters concerning the Company. The Company disclaims any intent or obligation to update "forward looking statements". FACTORS THAT MAY AFFECT FUTURE RESULTS. The healthcare industry in general and the businesses engaged in by the Company in particular are in a state of significant flux. This, together with the circumstances that the Company has a relatively short operating history in an industry that also is relatively young and is the largest physician practice management company in the United States, makes the Company particularly susceptible to various factors that may affect future results such as the following: Risks relating to the Company's growth strategy; risks relating to integration in connection with the Company's acquisitions; risks relating to the Company's capital requirements; risks relating to identification of growth opportunities; risks relating to dependence on HMO enrollee growth; risks relating to the capitated nature of revenues; risks relating to utilization of medical services; risks relating to control of healthcare costs; risks relating to certain legal matters; risks relating to exposure to professional liability; risks relating to government regulation; risks relating to pharmacy licensing operations; risks relating to healthcare reform and proposed legislation; and risks relating to the volatility and/or decline of stock price. For a more detailed discussion of these factors and their potential impact on future results, see the applicable discussions herein. 3 PART I ITEM 1. BUSINESS. GENERAL MedPartners, Inc., a Delaware corporation ("MedPartners" or the "Company"), is one of the largest healthcare companies in the United States, with net revenue of approximately $6.3 billion for the year ended December 31, 1997. The Company operates three separate business divisions: Physician Practice Services, Pharmaceutical Services and Contract Medical Services. The Physician Practice Services Division is larger than any other physician practice management company ("PPM") in the United States, based on annual net revenue in that business of approximately $3.0 billion for the year ended December 31, 1997. The Pharmaceutical Services Division operates one of the largest independent prescription benefit management ("PBM") and therapeutic pharmaceutical services programs in the United States, with revenues of approximately $2.4 billion for the year ended December 31, 1997. The Contract Medical Services Division operates one of the largest hospital-based physician management services and one of the largest corrections and government services managed care businesses, with combined net revenue of approximately $0.8 billion for the year ended December 31, 1997. The Company's Physician Practice Services Division affiliates with physicians who are seeking the resources necessary to function effectively in healthcare markets that are evolving from fee-for-service to managed care payor systems. MedPartners also affiliates with physicians who seek greater efficiencies in operations of traditional fee-for-service practices. The Company seeks to enhance clinic operations by centralizing administrative functions and introducing management tools, such as clinical guidelines and medical management processes. The Company provides affiliated physicians with access to capital and to management information systems. In addition, the Company contracts with health maintenance organizations (and other third-party payors that compensate the Company and its affiliated physicians on a prepaid basis (collectively, "HMOs")), hospitals and outside providers on behalf of its affiliated physicians. These relationships provide physicians with the opportunity to operate under a variety of payor arrangements. The Company offers medical group practices and independent physicians a range of affiliation models. These affiliations are carried out by the acquisition of physician practice services entities or practice assets, either for cash or equity, or by affiliation on a contractual basis. In all instances, the Company enters into long-term practice management agreements that provide for the management of the affiliated physicians by the Company while assuring the clinical independence of the physicians. The Company also manages PBM programs for more than 2,194 clients throughout the United States, including corporations, insurance companies, unions, government employee groups and managed care organizations. The Company dispenses an average of 44,800 prescriptions daily through three mail service pharmacies and manages patients' immediate prescription needs through a network of approximately 53,000 retail and other pharmacies. The Company's therapeutic pharmaceutical services are designed to meet the healthcare needs of individuals with certain chronic diseases or conditions. These services include the design, development and management of comprehensive programs comprising drug therapy, physician support and patient education. The Company currently provides therapies and services for individuals with such conditions as hemophilia, growth disorders, immune deficiencies, cystic fibrosis and multiple sclerosis. The Company is in the process of integrating the pharmaceutical services program with the PPM business by providing pharmaceutical services to affiliated physicians, clinics and HMOs. The Contract Medical Services Division organizes and manages physicians and other healthcare professionals engaged in the delivery of emergency, radiology and teleradiology services, primary care and temporary staffing and support services. Through its Team Health subsidiary the Company provides these services to hospitals, clinics and managed care organizations, and the Company's Government Services unit provides these services to correctional facilities, Department of Defense facilities and government-affiliated physician groups throughout the United States. This Division also provides occupational health services to corporate industrial clients. Under contracts with hospitals and other clients, the Contract Medical Services Division identifies and recruits physicians and other healthcare professionals for admission to a client's 1 4 medical staff and coordinates the ongoing scheduling of staff physicians and other healthcare professionals who provide clinical coverage in designated areas of care. The Company was organized in 1993 with the goal of improving the nation's healthcare system by building an integrated delivery system that is physician-led and patient-centered. In pursuing this goal, the Company has grown quickly, primarily through the acquisition of 287 physician practices with over 6,064 physicians, including the acquisition in November 1995 of Mullikin Medical Enterprises, L.P. ("MME"), a privately held physician practice management entity based in Long Beach, California, the acquisition in February 1996 of Pacific Physician Services, Inc. ("PPSI"), a publicly traded physician practice management company based in Redlands, California, which had previously acquired Team Health, the acquisition in September 1996 of Caremark International Inc. ("Caremark"), a publicly traded physician practice management and pharmaceutical services company based in Northbrook, Illinois and the acquisition in June 1997 of InPhyNet Medical Management Inc. ("InPhyNet"), which, when combined with Team Health, created one of the largest hospital-based physician groups in the country. In September 1997, the Company completed the acquisition of Talbert Medical Management Holdings Corporation ("Talbert") for $187.1 million in cash. Talbert operated 52 health centers in five Southwestern states with approximately 258,000 patients in its network. On October 29, 1997, the Company announced its plan to be acquired by PhyCor, Inc. in a merger, but the transaction was terminated by mutual agreement prior to consummation. On January 16, 1998, the Company announced that Richard M. Scrushy, a Director of the Company and Chairman of the Board and Chief Executive Officer of HEALTHSOUTH Corporation, had become Chairman of the Board and acting Chief Executive Officer of the Company. On March 18, 1998, the Company announced the appointment of Edwin M. Crawford, formerly Chairman of the Board, President and Chief Executive Officer of Magellan Health Services, Inc. (formerly Charter Medical Corporation), as President and Chief Executive Officer and a Director of the Company. On the same date, the Company announced a net loss for the fourth quarter of 1997 of $840.8 million, which included one-time pre-tax charges totaling $647 million. See "-- Recent Developments" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". Having acquired the critical mass attendant to a company with $6.3 billion in annual net revenue, the Company's new leadership intends to concentrate on further integration of its existing operations in order to generate internal growth and capture the opportunities that exist within and across the Company's three divisions. The Company has identified three business objectives: (i) operational integration within existing business lines; (ii) business integration across divisional lines to capitalize on internal opportunities; and (iii) strategic relationship development, on a regional or national basis, with payors, providers, suppliers and other related businesses. While it is anticipated that the Company will continue to make selected, strategic acquisitions to continue growing the Company during this period of consolidation, the primary focus of management and the Company's 29,000 employees will be on improving the Company's existing operations. The Company was incorporated under the laws of Delaware in August 1995 as "MedPartners/Mullikin, Inc." to be the surviving corporation in the combination of the businesses of the original MedPartners, Inc., incorporated under the laws of Delaware in 1993, and MME. In September 1996, the Company changed its name to "MedPartners, Inc." The executive offices of the Company are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244, and its telephone number is (205) 733-8996. RECENT DEVELOPMENTS The Company experienced several adverse events in the fourth quarter of 1997 and in January 1998, including: (i) a fourth quarter pretax charge of $646.7 million related primarily to the restructuring and impairment of selected assets of certain of its clinic operations within the Physician Practice Services Division; (ii) a fourth quarter after-tax charge from discontinued operations of approximately $15.3 million; (iii) a fourth quarter after-tax charge of $30.9 million related to the cumulative effect of a change in accounting principle; (iv) a fourth quarter net loss from continuing operations; (v) the termination of the merger agreement with PhyCor, Inc.; (vi) a steep drop in the price of its Common Stock following the announcement 2 5 of the termination of the PhyCor merger and (vii) the filing of various stockholder class action lawsuits against the Company and certain of its officers and directors in the aftermath of these events alleging violations of federal securities laws. See Item 3. "Legal Proceedings". In response to certain of these setbacks, assembly of a new management team began in January 1998 when Richard M. Scrushy was named Chairman of the Board and acting Chief Executive Officer. Another step was taken in March 1998 when Edwin M. Crawford was named President and Chief Executive Officer. Mr. Scrushy will remain Chairman of the Board and brings his extensive healthcare experience, most recently his 13 years as Chairman of the Board and Chief Executive Officer of HEALTHSOUTH Corporation, to this position. Mr. Crawford has been credited with successfully turning around Magellan's operations, transforming the company from a psychiatric provider operation into a managed care company and expanding the company into the rapidly growing market of specialty disease management. In addition to these management changes, the Company reorganized and streamlined its PPM organizational structure to strengthen management, speed integration, improve operations and facilitate communications. HEALTHCARE SERVICES INDUSTRY OVERVIEW The Health Care Financing Administration ("HCFA") estimates that national healthcare spending in 1996 was in excess of $1 trillion, or 9% of the gross domestic product ("GDP"). HCFA projects that annual healthcare spending will increase at a compound annual growth rate of over 8% to $1.5 trillion, or 16% of the GDP by year 2000. The American Medical Association reports that approximately 613,000 physicians are actively involved in patient care in the United States, and that these physicians control more than 80% of the overall healthcare industry expenditures. Expenditures directly attributable to physicians are estimated at $246 billion, of which approximately $20 billion were revenues for emergency physician services. Expenditures related to pharmaceuticals are estimated at $90 billion, or 9% of overall expenditures. Concerns over the cost of healthcare have resulted in the rapid growth of managed care in the past several years. From 1991 to 1996, HMO enrollment in the United States increased from 37 million to 60 million. As markets evolve from traditional fee-for-service medicine to managed care, HMOs and healthcare providers confront market pressures to provide high quality healthcare in a cost-effective manner. Employer groups have begun to bargain collectively in an effort to reduce premiums and to bring about greater accountability of HMOs and providers with respect to accessibility, choice of provider, quality of care and other matters that are fundamental to consumer satisfaction. At the same time, the industry's emphasis on cost efficient treatment alternatives, in addition to continuing advances in both medical technology and new drug development, has produced and is expected to continue to produce significant increases in drug utilization and related costs. These trends have increased the existing need for more appropriate, efficient and cost-effective provider management and drug delivery management. PHYSICIAN PRACTICE SERVICES The Company's Physician Practice Services Division is the largest PPM in the United States based on revenues. As of December 31, 1997, this Division had net revenue of $3.0 billion; had affiliated with 3,588 group physicians and 7,467 independent practice association ("IPA") physicians in 42 states; and provided services to 1,168,032 professional and 895,980 globally capitated enrollees. The Company's Physician Practice Services Division affiliates with physicians who are seeking the resources necessary to function effectively in healthcare markets that are evolving from fee-for-service to managed care payor systems. This Division enhances clinic operations by centralizing administrative functions and introducing management tools, such as clinical guidelines and medical management processes. The Company provides affiliated physicians with access to capital and to advanced management information systems. In addition, the Company contracts with HMOs, hospitals and outside providers on behalf of its affiliated physicians. These relationships provide physicians with the opportunity to operate under a variety of payor arrangements and to increase their patient flow. The Physician Practice Services Division's revenues are derived from contracts with HMOs that compensate the Company and its affiliated physicians on a prepaid basis and from providing fee-for-service 3 6 medical services. In the prepaid arrangements, the Company, through its affiliated physicians, typically is paid by HMOs a fixed amount per member ("enrollee") per month ("professional capitation") or a percentage of the premium per enrollee per month ("percent of premium") paid to the HMOs by employer groups and other purchasers of healthcare coverage. In return, the Company, through its affiliated physicians, is responsible for substantially all of the medical services required by enrollees. In many instances, the Company and its affiliated physicians accept financial responsibility for hospital and ancillary healthcare services in return for payments from HMOs on a capitated or percent of premium basis ("institutional capitation"). In exchange for these payments (collectively, "global capitation"), the Company, through its affiliated physicians, provides the majority of covered healthcare services to enrollees and contracts with hospitals and other healthcare providers for the balance of the covered services. In March 1996, the California Department of Corporations ("DOC") issued a healthcare service plan license (the "Restricted License") to MedPartners Provider Network, Inc. ("MPN") (formerly Pioneer Provider Network, Inc.), in accordance with the requirements of the Knox-Keene Act which authorizes MPN to operate as a healthcare service plan in the state of California. The Company utilizes the Restricted License for a broad range of healthcare services. See "-- Government Regulation". Physician Practice Management Industry Cost-containment initiatives, including reduced reimbursement, have hindered physician practice profitability while demands for increased clinical documentation, cost, quality and utilization data have increased physicians' administrative duties. Small and mid-sized practices generally do not have the market presence, expertise or cost accounting and management systems required, and may not have the time necessary, to evaluate and enter into capitated risk-sharing arrangements or to continue practicing profitably under reduced reimbursement. In addition, these practices often lack the capital required to purchase new medical equipment and information systems necessary to enhance the efficiency and quality of their practices. As a result, individual physicians and small group practices are increasingly consolidating, either by affiliating with larger group practices and physician practice management entities or by forming networks or independent practice associations. By consolidating into larger organizations, physicians can achieve lower administrative costs, gain leverage in negotiating with managed care organizations and position themselves to attract needed capital resources. Additionally, as HMO enrollment and physician membership in group medical practices have continued to increase, healthcare providers have sought to reorganize themselves into healthcare delivery systems that are better suited to the managed care environment. Physician groups and IPAs are joining with hospitals, pharmacies and other institutional providers in various arrangements to create vertically integrated delivery systems that provide medical and hospital services ranging from community-based primary medical care to specialized inpatient services. These healthcare delivery systems contract with HMOs to provide hospital and medical services to enrollees pursuant to full risk contracts. Under these contracts, generally called global capitation, providers assume the obligation to provide a broad range of covered healthcare services to HMO enrollees, including professional, institutional and other healthcare services such as home healthcare and pharmaceuticals. While the acceptance of greater responsibility and risk affords the opportunity to retain and enhance market share and to operate at a higher level of profitability, the acceptance of global capitation carries with it significant requirements for capital, enhanced infrastructure, information systems, network resources and financial and medical management. Physicians are increasingly abandoning traditional individual or small group private practice in favor of affiliations with larger organizations such as the Company that offer skilled and innovative management, sophisticated information systems and significant capital resources. Many payors and their intermediaries, including governmental entities and HMOs, are also looking to outside providers of physician and pharmacy services to develop and maintain healthcare delivery systems. As a result, physicians are turning to organizations such as the Company to provide the resources necessary to function effectively in a managed care environment. 4 7 Strategy The strategy of the Physician Practice Services Division is to develop locally prominent, integrated healthcare delivery networks that provide high quality, cost-effective healthcare in selected geographic markets. The key elements of this strategy include: (i) having affiliated physicians maintain responsibility for decisions relating to patient care, thus ensuring the quality of healthcare services; (ii) developing and implementing effective population health management tools to improve patient health; (iii) analyzing and developing best practices and procedures for patients and utilizing them throughout the Company; (iv) taking the lead in developing and implementing disease management programs that improve care and control costs for patients with chronic illnesses; (v) assuming greater responsibility for the entire spectrum of healthcare services (including hospital care and pharmaceuticals) provided to patients to ensure they are best coordinated and managed; and (vi) benefiting from the medical information systems, capital resources, administrative support, economies-of-scale and sophisticated negotiating capabilities that the Company develops and offers. The Company believes it has built strong positions in key sectors of the healthcare industry, because its strategy addresses two principal needs in the healthcare marketplace. First is the need of employers, employees and their families for quality treatment at an affordable price. The Company's ability to meet this need is evidenced by the fact that in 1997 MedPartners, through its affiliated physicians, provided primary and specialty healthcare services to approximately 2.1 million prepaid managed care enrollees and over 5.0 million fee-for-service patient encounters. Second is the need by physicians for solutions that allow them to focus on and improve patient care, while at the same time enhancing the administration of their practices. The Company has developed a unique management structure in which physicians work side-by-side with business managers to ensure the physicians' voices are heard and their issues addressed at decision-making levels. This management model is called paired-physician leadership, and the Company believes that it is the most effective mechanism for driving meaningful change. The Company will attempt to profit from increased revenues and operational efficiencies and synergies produced by the exchange of ideas among physicians and managers across geographic boundaries and varied areas of specialization. The Physician Practice Services Division has established medical management committees that meet monthly to discuss implementation of the best medical management techniques to assist the Company's affiliated physicians in delivering the highest quality of care at lower costs in a consistent fashion. The Physician Practice Services Division has also created a medical advisory committee, which is developing procedures for the identification, packaging and dissemination of the best clinical practices within the Company's medical groups. The medical advisory committee also provides the Company's affiliated physicians a forum to discuss innovative ways to improve the delivery of healthcare. By leveraging the intellectual capital and knowledge of, and providing appropriate tools and resources to, its affiliated physicians, MedPartners allows physicians to drive changes in healthcare. Operations To meet payor demand for price competitive, quality services, the Company utilizes a market-based approach that incorporates primary care and specialty physicians into a network of providers serving a targeted geographic area. The Company engages in research and market analysis to determine the best network configuration for a particular market. Primary care includes family practice, internal medicine, pediatrics and obstetrics/gynecology. Key specialties include orthopedics, cardiology, oncology, radiology, neurosciences, urology, surgery, ophthalmology and ear, nose and throat. At certain locations, affiliated physicians and support personnel operate centers for diagnostic imaging, urgent care, cancer management, mental health treatment and health education. Network physicians also treat fee-for-service patients on a per-occurrence basis. After-hours care is available in several of the Company's clinics. The Company markets its networks to managed care and third-party payors, referring physicians and hospitals. Under its global capitation contracts, the Company, through its affiliated medical practices or Knox-Kneene licensee, is obligated to pay for inpatient hospitalization and related services for covered enrollees. The Company has contracted with a network of hospitals in its service area to provide hospital services to covered enrollees. The Company operates U.S. Family Care Medical Center ("USFMC"), a 102-bed acute care hospital in Montclair, California, and Friendly Hills Hospital ("Friendly Hills"), a 274-bed acute care hospital in La 5 8 Habra, California. Many of the physicians on the professional staff rosters of these hospitals are either employed by an affiliated professional corporation or are under contract with the Company's IPAs. Other physicians who are traditionally hospital-based, such as emergency physicians, anesthesiologists, pathologists, radiologists and cardiologists, provide services through contractual arrangements with the Company. Several of the Company's medical clinics are located sufficiently close to hospitals where these physicians are based to allow enrollees who use the clinics also to use those hospitals. Approximately 85% of USFMC's and approximately 87% of Friendly Hills' daily censuses are made up of the Company's affiliated medical group enrollees. Affiliated Physicians. The Company offers medical group practices and independent physicians a range of affiliation models. In all instances, the Company enters into long-term practice management agreements that provide for the Company's management of the affiliated physician practices while assuring the clinical independence of the physicians. Under these various types of agreements, revenue is assigned to the Company by the physician practice. The Company is responsible for the billing and collection of all revenue for services provided at its clinics, as well as for paying all expenses, including physician compensation. The Company is not reimbursed for the clinic expenses, rather it is responsible and at risk, with its affiliated physicians, for all such expenses. See Note 1 of the accompanying audited Consolidated Financial Statements. IPAs. The Company's networks include 7,467 primary care and specialist IPA physicians serving approximately 358,000 HMO enrollees. An IPA allows individual practitioners to access patients in their respective areas through contracts with HMOs without having to join a group practice. An IPA also coordinates utilization review and quality assurance programs for its affiliated physicians. Additionally, an IPA offers other benefits to physicians seeking to remain independent, including economies of scale in the marketplace, enhanced risk-sharing arrangements and access to other strategic alliances. The Company identifies IPAs that need access to capitated HMO contracts, and such IPA organizations typically agree to assign their existing HMO contracts to the Company. HMOs. The Company, through its affiliated physicians, began contracting with HMOs to provide healthcare on a capitated reimbursement basis in 1975 (through predecessors). Under these contracts, the Company provides virtually all covered medical services and receives a fixed monthly capitation payment from HMOs for each member who chooses an affiliate physician as his or her primary care physician. The capitation amount may be fixed, based upon a percentage of premium, or adjustable based on the age and sex of the HMO enrollee. Contracts for prepaid healthcare with HMOs accounted for approximately 32% of the Company's consolidated net revenue for 1997. MedPartners currently has relationships with Pacificare, Foundation, CIGNA, PCA and California Care which account for approximately 17.5% of net revenue of MedPartners for the year ended December 31, 1997. To the extent that enrollees require more care than is anticipated or require supplemental medical care that is not otherwise reimbursed by HMOs or other payors, aggregate capitation payments may be insufficient to cover the costs associated with the treatment of enrollees. Stop-loss coverage is maintained for catastrophic events. At December 31, 1997, approximately 2.1 million prepaid HMO enrollees were covered beneficiaries for services in the Company's networks. These patients are covered under either commercial (typically employer-sponsored) or senior (Medicare-funded) HMOs. Higher capitation rates are typically received for senior patients because their medical needs are generally greater. Consequently, the cost of their covered care is higher. As of December 31, 1997, the Company's HMO enrollees comprised approximately 1.7 million commercial enrollees and approximately 0.2 million senior (over 65) enrollees and approximately 0.2 million Medicaid and other enrollees. As of December 31, 1997, the Company was receiving institutional capitation payments for approximately 1.0 million enrollees. PHARMACEUTICAL SERVICES The Company's Pharmaceutical Services Division is a national leader in providing PBM and therapeutic pharmaceutical services to patients with certain chronic conditions. Annual net revenue for the year ended December 31, 1997, for this line of business was approximately $2.4 billion. The Division provides PBM services to approximately 2,194 customer groups representing approximately 15 million managed lives in all 50 6 9 states and therapeutic pharmaceutical services to approximately 13,400 patients with long-term, chronic or genetic diseases. Pharmaceutical Services Industry PBMs initially emerged in the early 1980s primarily to provide cost effective drug claims processing for the healthcare industry. In the mid-1980s they evolved to include pharmacy networks and drug utilization review to address the need to manage the total cost of pharmaceutical services. Through volume discounts, retail pharmacy networks, mail pharmacy services, formulary administration, claims processing and drug utilization review, PBMs created an opportunity for health benefit plan sponsors to deliver drugs to their members in a more cost-effective manner, while improving physician and patient compliance with recommended guidelines for safe and effective drug use. The PBM industry continues to demonstrate substantial growth both in terms of revenues and lives covered. According to industry sources, PBM market revenues have grown at an annual rate of approximately 35% for the last three years. Approximately 50% of the U.S. population was covered by a PBM in 1995, more than double the lives covered in 1990. PBMs have focused on cost containment by: (i) obtaining discounted prescription services through retail pharmacy networks, and from drug wholesalers and pharmaceutical manufacturers for mail distribution; (ii) establishing drug utilization review programs to reduce the risk of inappropriate drug complications; (iii) encouraging substitution of generic for branded medications; and (iv) generating rebates from pharmaceutical companies. Over the last several years, in response to increasing payor demand, PBMs have begun to develop sophisticated formulary management capabilities and comprehensive, on-line customer decision support tools in an attempt to better manage the delivery of healthcare and, ultimately, costs. Simultaneously, to lower overall healthcare costs, health benefit plan sponsors have begun to focus on the quality and efficiency of care, emphasizing disease prevention, or wellness, and care management. This has resulted in a rapidly growing demand among payors for comprehensive disease management programs. By effectively managing appropriate prescription use, PBMs can positively affect both overall medical costs and improve clinical outcomes. The Company believes that future growth in the PBM industry will be driven by (i) increased use of PBM services currently provided to existing PBM clients, (ii) a continuing trend toward outsourcing of pharmacy management services by managed care entities, insurance companies, corporations, labor unions, government entities, other benefit plan sponsors and physician practice management entities, (iii) increasing penetration by managed care entities, which are large consumers of PBM services, into the growing Medicare and Medicaid market and (iv) demand for comprehensive pharmacy benefit, medication management and disease management services as healthcare service providers and physician practice management entities assume medical care risk from managed care entities. The distribution of prescription drug therapies to patients with specialized, long-term, chronic diseases is another area where the competitive forces in the healthcare environment are challenging providers. In addition to the Company, home healthcare companies, hospitals and other providers offer disease management services and programs to these patients. Competitive pricing, customer service and patient education are factors influencing the competition for these patients. Strategy The strategy of the Pharmaceutical Services Division is to provide innovative pharmaceutical solutions, quality customer service and clinical excellence in order to enhance patient outcomes and better manage overall healthcare costs. The Company intends to increase its market share and extend its leadership in the pharmaceutical services industry. The Company believes that its independence from ownership by any pharmaceutical manufacturer is a competitive advantage, as it is able to make decisions regarding its formularies free of any potential conflicts of interest. 7 10 Operations The Division manages outpatient PBM programs throughout the United States for corporations, managed care organizations, insurance companies, unions, coalitions, federal and state agencies and other funded benefit plans, as well as for the Company's affiliated physicians and clinics. Prescription drug benefit management involves the design and administration of programs for reducing the costs and improving the safety, effectiveness and convenience of prescription drugs. The Company dispenses prescription drugs to patients through a network of approximately 53,000 pharmacies (approximately 95% of all retail pharmacies in the United States) and through three mail service pharmacies. The Division negotiates discounts and rebates with pharmaceutical manufacturers and drug wholesalers and assembles preferred product lists, or formularies, which help staff and network pharmacists manage customers' pharmaceutical expense. All prescriptions are analyzed, processed and recorded by the Company's proprietary prescription management information system and database. This system assists staff and network pharmacists in processing prescription requests for member eligibility, authorization, early refills, duplicate dispensing, appropriateness of dosage, drug interactions or allergies, over-utilization or potential fraud, and other information. The system collects comprehensive prescription utilization information data valuable to pharmaceutical manufacturers, managed care payors and customers. With this information, the Company offers a full range of drug cost reporting services, including clinical case management, drug utilization review, formulary management and customized prescription programs for senior citizens. The retail pharmacy program allows a member to obtain pharmaceuticals at any of more than 53,000 pharmacies nationwide. When a member submits a prescription request, the network pharmacist sends prescription data electronically to the Company, which sends back a report including relevant patient data, co-payment information and confirmation that the pharmacy will receive payment for the prescription. In 1997, the Company processed 39.3 million retail prescriptions. The Company operates three automated mail order service centers in San Antonio, Chicago and Ft. Lauderdale. Patients send prescriptions via mail, telephone and fax to staff pharmacists who review them with the assistance of the prescription management information systems. This review often involves a call to the prescribing physician and can result in generic substitution or other actions to affect cost or to improve quality of treatment. Mail service is typically less expensive to clients because of these clinical management strategies and favorable pricing from manufacturers. In 1997, the Company filled 11.3 million mail service prescriptions, representing $964 million in revenue. Under the Company's PBM quality assurance program, the Company maintains rigorous quality assurance and regulatory policies and procedures. Each mail service prescription undergoes a sequence of safety and accuracy checks and is reviewed and verified by a registered pharmacist before shipment. A panel of physician specialists who are affiliated with the Company advise it on the clinical analyses of its intervention strategies and on cost-effective clinical procedures. The Company's therapeutic pharmaceutical services include comprehensive long-term support for high-cost, chronic illnesses in an effort to improve outcomes for patients and to lower costs. The Company provides therapies and services to patients with such conditions as hemophilia, growth disorders, multiple sclerosis, immune deficiencies, and cystic fibrosis. These services are rendered at the patient's home, office or travel destination and generally include ongoing injections of bio-pharmaceutical drugs. These drugs are distributed from the Company's 23 specialty pharmacies throughout the country, all of which have been accredited by the Joint Commission on Accreditation of Healthcare Organizations. The programs utilize advanced protocols and offer the patient greater convenience in working with insurers. Extensive patient education information is provided to patients through individual instruction and monitoring, written materials, and around-the-clock availability of customer assistance via toll-free telephone. The largest components of this business come from individuals with hemophilia and growth disorders. In 1997, growth came from the implementation of a new program for multiple sclerosis patients. Major initiatives such as Care Patterns(R) for disease management and Caremark Consent(TM) for quick and easy patient access strengthen the Company's leadership position in these markets. 8 11 CONTRACT MEDICAL SERVICES The Company's Contract Medical Services Division includes Team Health, which manages one of the largest hospital-based physician groups in the country, and the Government Services Division, one of the country's largest correctional and government services healthcare delivery businesses. These groups produced combined contract medical services revenue of $806 million in 1997. Team Health organizes and manages physicians and other healthcare professionals engaged in the delivery of emergency, radiology and teleradiology, hospital-based primary care and temporary staffing and support services to hospitals, clinics, managed care organizations and physician groups throughout the United States. Government Services provides similar services to medical facilities at correctional institutions and Department of Defense facilities. As of December 31, 1997, the Company had 2,476 physicians in 39 states affiliated with its Contract Medical Services Division. Contract Medical Services Industry Hospitals have been greatly affected by changes in the United States healthcare industry during the last several years, including the increasing use of capitation and other fixed payment systems that shift financial risk from payors to providers. The evolving managed care environment requires hospitals to be more cost-effective in all aspects of their operations, including the recruiting, scheduling, retaining and managing of physicians, and billing and collecting for their services. Hospitals have found it increasingly difficult to recruit, retain and schedule the required emergency physician specialists and to manage their emergency departments ("EDs") for unscheduled primary care. Furthermore, the Company believes that EDs, in combination with primary care clinics, which are often the first point of contact with patients, will play an increasingly important role as 24-hour gatekeepers of the healthcare system. As a result, many hospitals have turned to outside contract management organizations like the Company as a more cost-effective and reliable alternative to the development of in-house emergency physician staffing. Hospitals also look to other hospital-based physicians, including radiologists, anesthesiologists and pathologists to help control cost and improve quality in the new healthcare environment. Smaller local groups of emergency or other hospital based physicians find it increasingly difficult to meet these growing expectations, which requires hospitals to seek alternatives that result in these groups seeking affiliation and consolidation opportunities. There are approximately 5,200 hospitals in the United States that operate EDs. Approximately 80% of these hospitals use outsourced physicians to staff their EDs. The groups to which ED services are outsourced are either national groups, regional groups, or small local groups. The national groups serve approximately 20% of the market. Approximately 40% of EDs use local physician groups that manage only one or two EDs. The Company believes that these groups are encountering increasing difficulty in controlling costs and satisfying recordkeeping and other administrative and management requirements as demanded in today's evolving health care industry. As a result, the Company believes that there are significant consolidation opportunities within the emergency physician practice management industry. An additional opportunity for consolidation of contract medical services exists in the area of government-owned facilities such as correctional facilities and military bases. There are approximately 1.6 million inmates in correctional facilities in the United States, and this population is growing at an estimated rate of 5-8% per year. Difficulties in recruiting and managing physicians and other healthcare professionals have compelled governmental agencies to contract with management organizations to deliver on-site healthcare services to inmates. Only approximately 30% of these facilities currently contract with private companies to manage the delivery of healthcare. Trends such as cost containment through managed care, increasing inmate populations and pressure on government agencies to be more efficient are driving more of these facilities to seek management services from organizations like the Company. The outsourcing of such healthcare services allows governmental agencies to shift the financial risk associated with the delivery of medical services to inmates to private management organizations, which have greater experience in managing such risks. Also, physician management companies have experience in meeting federal and state mandated healthcare requirements. 9 12 Strategy The strategy of the Contract Medical Services Division consists of: (i) growth through marketing to new hospitals and government entities; (ii) the expansion of services offered to emergency facilities and departments; (iii) assisting customers in controlling costs in their emergency facilities and departments; (iv) assisting contracted physicians within developing managed care environments; and (v) growth through acquisition of selected hospital and government facility-based physician practice management entities. Operations Under contracts with hospitals and other clients, the Contract Medical Services Division identifies and recruits physicians and other healthcare professionals for admission to a client's medical staff and coordinates the ongoing scheduling of staff physicians and other healthcare professionals who provide clinical coverage in designated areas of care and facilitates changes to improve clinical and financial performance in client facilities. To fulfill these obligations, the Contract Medical Services Division retains the services of physicians and other healthcare professionals who agree to provide the necessary clinical coverage. The management services provided by Team Health and Government Services under contracts with hospitals, correctional institutions and other clients include: (i) the identification and recruitment of physicians and other healthcare professionals, (ii) utilization review of services and administrative overhead; (iii) case management to assist medical directors and physicians in the delivery of quality care and proper utilization of services; and (iv) scheduling of staff physicians and other healthcare professionals who provide clinical coverage in designated areas of care. The Contract Medical Services Division also provides support and administrative services including billing and collection of fees for professional services. Physician recruitment services provided by the Division include a comprehensive series of interviews and reference checks. Physicians are licensed to practice medicine and are generally either board certified or board eligible. As part of the services provided under its management contracts, the Contract Medical Services Division surveys physician compensation patterns and programs to ensure that physician compensation is competitive in the geographic area being serviced. Emergency Departments. Team Health currently recruits physicians and other healthcare professionals, coordinates staff scheduling and provides administrative support services, such as billing and collection, to 263 EDs in 30 states. Team Health generally contracts with a particular ED to provide all necessary physician coverage 24-hours-a-day throughout the year. Team Health believes that it has the ability to control ED expenses through cost-effective staffing, treatment protocols designed to reduce unnecessary testing and the coordination of EDs and affiliated outpatient primary care clinics to direct patients to the most appropriate level of care. When providing services to EDs, Team Health contracts, directly or through affiliated entities, with physicians and other healthcare professionals who provide all emergency department medical services. Team Health provides the ED with a medical director who works directly with the hospital medical staff and administration on such matters as quality assurance, risk management and departmental accreditation to enhance the quality and operational success of the ED. Radiology. Team Health provides physician management services, including recruiting and retention, management, temporary physician staffing, quality assurance and billing and collection of professional services to hospital radiology departments and outpatient imaging centers. Team Health believes that hospitals will increasingly utilize contract management firms to solve problems associated with the management of radiology departments, particularly as managed care trends dictate more cost effective services. Team Health has contracts to provide physician management services in 58 radiology departments of hospitals in 14 states. Team Health believes a key component in the successful management of many radiology departments is the use of teleradiology technology. In teleradiology, images are converted into a high-quality digital format and sent over telephone lines or via satellite to distant locations for interpretation by radiologists. Technological advances in teleradiology have improved the quality, while decreasing the expense of required equipment, to the extent that the technology is now affordable for reliable interpretations in small hospitals. 10 13 Correctional Care. Government Services provides comprehensive medical services, including mental health and dental services, to inmates in various state and local correctional institutions. The Company provides primary care physician services directly and typically subcontracts other services with hospitals and medical specialists on either a capitated or discounted fee-for-service basis. At December 31, 1997, the Company had contracts with correctional institutions and managed the healthcare services provided to approximately 57,372 inmates at 52 facilities. Under correctional care contracts, the Company is typically paid monthly on the basis of each correctional institution's average daily inmate population. The Company is also entitled to additional reimbursement for any healthcare related expenditures incurred above a certain dollar amount of outside medical expenses per inmate per year, as well as reimbursement for the cost of treating inmates in connection with certain extraordinary events. Department of Defense. Government Services also provides physicians, nurse and clerical support services for active duty and retired military personnel and their dependents in emergency departments, ambulatory care centers and primary care clinics operated by the Department of Defense. Under Department of Defense contracts, the Company is generally paid a fixed amount, per patient visit or per hour of service, without regard to the scope of professional services provided. Under per patient fixed fee arrangements, the Company assumes the risk if patient volume is below expectations. At December 31, 1997, the Company's military medical services were provided under contracts with 15 facilities generating approximately 300,000 annual patient visits. INFORMATION SYSTEMS The Company's overall information systems design is open, modular and flexible. Given the diversity which has resulted from the Company's growth through acquisitions, the Company has established an overall integrated information systems architecture which guides capital investment and operational improvement. In this effort, the establishment of an integrated eligibility repository, the implementation of electronic medical record (EMR) functionality, the commitment to a small number of strategic physician practice management systems, the selection of an integrated claims management/managed care package and the development of a patient centric integrated data warehouse are the key elements of successful operations in the future. Support for the Pharmaceutical Services Division is provided by an information system currently in its second year of operation. This integrated client/server system provides the basis for both mail and retail prescription benefits management. Its integrated architecture allows all requests for service (mail order prescription, retail pharmacy claim or customer service contact) to operate against a complete history of the patient's prescription activity. Information from this system is then integrated into a data repository, which allows the merging of prescription claims with medical claims, laboratory results and eventually clinical records. Effective and efficient access to key clinical patient and pharmaceutical data is critical in obtaining quality outcomes and improving costs as the Company enters into more capitation contracts. The Company uses its existing information system to measure patient satisfaction and outcomes, improve productivity, manage complex reimbursement procedures and integrate information from multiple facilities throughout the healthcare spectrum. These systems allow the Company to analyze clinical and cost data to determine thresholds of profitability under various capitation arrangements. The Company utilizes a number of different computer software programs and environments in its business, many of which were designed and developed without considering the impact of the upcoming turn of the century (the "Year 2000 Issue"). MedPartners has assessed the potential impact and costs of addressing the Year 2000 Issue and is in the process of implementing a plan of action to address the Year 2000 Issue. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". 11 14 COMPETITION The healthcare industry is highly competitive and is subject to continuing changes in the provision of services and the selection and compensation of providers. The Company competes with national, regional and local entities including PPMs, ED groups and hospital contract management companies. In addition, certain companies, including hospitals and insurers, are expanding their presence in the PPM market. The Company also competes with prescription drug benefit programs, prescription drug claims processors, regional claims processors, providers of disease management services and insurance companies. GOVERNMENT REGULATION General. As a participant in the healthcare industry, the Company's operations and relationships are subject to extensive and increasing regulation by a number of governmental entities at the federal, state and local levels. The Company believes its operations are in material compliance with applicable laws. Nevertheless, because the structure of the relationship with the physician groups is unique and the PPM industry as a whole is relatively young, many aspects of the Company's business operations have not been the subject of state or federal regulatory interpretation. Thus, there can be no assurance that a review of the Company's or the affiliated physicians' businesses by courts or regulatory authorities will not result in a determination that could adversely affect the operations of the Company or of its affiliated physicians. Nor can there be any assurance that the healthcare regulatory environment will not change so as to restrict the Company's or the affiliated physicians' existing operations or their growth. Any significant restriction could have a material adverse effect on the operating results and financial condition of the Company. Federal Reimbursement, Fraud and Abuse and Referral Laws. Approximately 7% of the net revenue of the Company's affiliated physician practices are derived from payments made by government-sponsored healthcare programs (principally, medicare and state reimbursed programs). As a result, the Company is subject to the laws and regulations that govern reimbursement under Medicare and Medicaid. Any change in reimbursement regulations, policies, practices, interpretations or statutes could adversely affect the operations of the Company. There are also state and federal civil and criminal statutes imposing substantial penalties (including civil penalties and criminal fines and imprisonment) on healthcare providers that fraudulently or wrongfully bill governmental or other third-party payors for healthcare services. The Company believes it is in material compliance with such laws, but there can be no assurance that the Company's activities will not be challenged or scrutinized by governmental authorities or that any such challenge or scrutiny would not have a material adverse effect on the operating results and financial condition of the Company. Certain provisions of the Social Security Act, commonly referred to as the "Anti-Kickback Statute", prohibit the offer, payment, solicitation, or receipt of any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by Medicare or state health programs. Many states have adopted similar prohibitions against payments intended to induce referrals of Medicaid and other third-party payor patients. The Anti-Kickback Statute contains provisions prescribing civil and criminal penalties to which individuals or providers who violate such statute may be subjected. The criminal penalties include fines up to $25,000 per violation and imprisonment for five years or more. Additionally, the United States Department of Health and Human Services (the "DHHS") has the authority to exclude anyone, including individuals or entities, who has committed any of the prohibited acts from participation in the Medicare and Medicaid programs. If applied to the Company or any of its subsidiaries or affiliated physicians, such exclusion could result in a significant loss of reimbursement for the Company, up to a maximum of the approximately 7% of revenues of the Company's affiliated physician groups, which could have a material adverse effect on the operating results and financial condition of the Company. Although the Company believes that it is not in violation of the Anti-Kickback Statute or similar state statutes, its operations do not fit within any of the existing or proposed federal safe harbors. Federal law prohibits, with some exceptions, an entity from filing a claim for reimbursement under the Medicare or Medicaid programs for certain designated services if the entity has a financial relationship with the referring physician. Federal law (the "Medicare Referral Payments Law") also prohibits the solicitation 12 15 or receipt of remuneration in exchange for, or the offer or payment of remuneration to induce, the referral of Medicare or Medicaid beneficiaries. Significant prohibitions against physician referrals were enacted by the United States Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain exemptions, a physician is prohibited from referring Medicare or Medicaid patients to an entity providing "designated health services" in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement. The provisions of the Anti-Kickback Statute and the Medicare Referral Payments Law are complex, and the future interpretations of these provisions and their applicability to the Company's operations cannot be predicted or analyzed in such a way as to predict with certainty the effect of such rules and regulations on the Company. Although the Company seeks to arrange its business relationships to comply with these healthcare rules and regulations, its operations do not fit within any of the existing or published proposed federal safe harbors. As a result, there can be no assurance that the Company's present or future operations will not be challenged under such provisions. The Company does not believe it is in violation of the Anti-Kickback Statute or the Medicare Referral Payment law and associated regulations because the revenues which are assigned to the Company pursuant to the management agreements between the Company and its affiliated physician practices represent payments made by the HMO to satisfy claims submitted through the Company on behalf of the affiliated physician for the furnishing of healthcare services by the physician to an individual. The monies retained by the Company do not exceed the aggregate amount due the Company for the reasonable and necessary physician practice management services provided by the Company pursuant to the management agreement between the Company and the affiliated physician or physician practice, i.e., transfer agreement or management services agreement. The Company believes that such payments do not fall within the scope or the intent of such rules and regulations. Further, the Company does not believe it is in violation of the Anti-Kickback Statute and the Medicare Referral Payment Law because the Company does not refer, or influence the referral of, patients or services reimbursed under governmental programs to the physician practices. While the Company believes it is in compliance with such legislation, future regulations and interpretations of existing regulations could require the Company to modify the form of its relationship with physician groups which could have a material adverse effect on the operating results and financial condition of the Company. The Office of the Inspector General of DHHS (the "OIG") has promulgated regulatory "safe harbors" under the Medicare Referral Payments Law that describe payment practices between healthcare providers and referral sources that will not be subject to criminal prosecution and that will not provide the basis for exclusion from the Medicare and Medicaid programs. The Company retains healthcare professionals to provide advice and non-medical services to the Company in return for compensation pursuant to employment, consulting or service contracts. The Company also enters into contracts with hospitals under which the Company provides products and administrative services for a fee. Many of the parties with whom the Company contracts refer or are in a position to refer patients to the Company. The breadth of these federal laws, the paucity of court decisions interpreting these laws, the limited nature of regulatory interpretations and the absence of court decisions interpreting the safe harbor regulations have resulted in ambiguous and varying interpretations of these federal laws and regulations. The OIG or the United States Department of Justice (the "DOJ") could seek a determination that the Company's past or current policies and practices regarding contracts and relationships with healthcare providers violate federal law. In such event, no assurance can be given that the Company's interpretation of these laws will prevail, except with respect to those matters that were the subject of the OIG investigation. See Item 3. "Legal Proceedings" and Note 13 of the accompanying audited Consolidated Financial Statements. If the Company's interpretation of these laws should not prevail it could materially adversely affect the operating results and financial condition of the Company. Caremark agreed, in its settlement agreement with the OIG and DOJ prior to the Caremark Acquisition, to continue to enforce certain compliance-related oversight procedures. Should the oversight procedures reveal violations of federal law, Caremark would be required to report such violations to the OIG and DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the event that Caremark commits legal or regulatory violations, it may be subject to an increased risk of sanctions or penalties, including disqualification as a provider of Medicare or Medicaid services which could have a material adverse effect on the operating results and financial condition of the Company. See Item 3. "Legal Proceedings" and Note 13 of the accompanying audited Consolidated Financial Statements. 13 16 State Referral Payment Laws. The Company is also subject to state statutes and regulations that prohibit payments for referral of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. State statutes and regulations generally apply to services reimbursed by both governmental and private payors. Violations of these laws may result in prohibition of payment for services rendered, loss of pharmacy or health provider licenses as well as fines and criminal penalties. State statutes and regulations that may affect the referral of patients to healthcare providers range from statutes and regulations that are substantially the same as the federal laws and the safe harbor regulations to a simple requirement that physicians or other healthcare professionals disclose to patients any financial relationship the physicians or healthcare professionals have with a healthcare provider that is being recommended to the patients. These laws and regulations vary significantly from state to state, are often vague, and, in many cases, have not been interpreted by courts or regulatory agencies. Management believes the Company's operations are in material compliance with existing law, but there can be no assurance that the Company's existing business arrangements will not be successfully challenged in one or more states. The Company is not materially dependent upon revenues derived from any single state. Adverse judicial or administrative interpretations of such laws in several states, taken together, could, however, have a material adverse effect on the operating results and financial condition of the Company. In addition, expansion of the Company's operations to new jurisdictions could require structural and organizational modifications of the Company's relationships with physician groups in order to comply with new or revised state statutes. Such structural and organizational modifications could have a material adverse effect on the operating results and financial condition of the Company. Corporate Practice of Medicine Laws. The laws of many states prohibit physicians from splitting fees with non-physicians and prohibit non-physician entities from practicing medicine. These laws and their interpretations vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. The Company believes that it has perpetual and unilateral control over the assets and operations of the various affiliated professional corporations. However, there can be no assurance that regulatory authorities will not take the position that such control conflicts with state laws regarding the practice of medicine or other federal restrictions. Although the Company believes its operations as currently conducted are in material compliance with existing applicable laws, there can be no assurance that the existing organization of the Company and its contractual arrangements with affiliated physicians will not be successfully challenged as constituting the unlicensed practice of medicine or that the enforceability of the provisions of such arrangements, including non-competition agreements, will not be limited. There can be no assurance that review of the business of the Company and its affiliates by courts or regulatory authorities will not result in a determination that could adversely affect their operations or that the healthcare regulatory environment will not change so as to restrict existing operations or expansion thereof. In the event of action by any regulatory authority limiting or prohibiting the Company or any affiliate from carrying on its business or from expanding the operations of the Company and its affiliates to certain jurisdictions, structural and organizational modifications of the Company may be required, which could have a material adverse effect on the operating results and financial condition of the Company. Antitrust Laws. In connection with the corporate practice of medicine laws referred to above, the physician practices with which the Company is affiliated necessarily are organized as separate legal entities. As such, the physician practice entities may be deemed to be persons separate both from the Company and from each other under the antitrust laws and, accordingly, subject to a wide range of laws that prohibit anticompetitive conduct among separate legal entities. The Company believes it is in compliance with these laws and intends to comply with any state and federal laws that may affect its development of integrated healthcare delivery networks. There can be no assurance, however, that a review of the Company's business by courts or regulatory authorities would not adversely affect the operations of the Company and its affiliated physician groups. Insurance Laws. The assumption of risk on a prepaid basis by health provider networks is occurring with increasing frequency, and the practice is being reviewed by various state insurance commissioners as well as the National Association of Insurance Commissioners ("NAIC") to determine whether the practice constitutes the business of insurance. The Company believes that it is currently in material compliance with 14 17 the insurance laws in the states where it is operating, and it intends to comply with interpretative and legislative changes as they may develop. There can be no assurance, however, that the Company's activities will not be challenged or scrutinized by governmental authorities or that future interpretations of the insurance laws by such governmental authorities will not require licensure or restructuring of some or all of the Company's operations in any such state. In the event that the Company is required to become licensed under these laws, the licensure process can be lengthy and time consuming and, unless the regulatory authority permits the Company to continue to operate while the licensure process is progressing, the Company could experience a material adverse change in its operating results and financial condition while the licensure process is pending. In addition, many of the licensing requirements mandate strict financial and other requirements which the Company may not be able to meet. Further, once licensed, the Company would be subject to continuing oversight by, and reporting to, the respective regulatory agency. The NAIC recently adopted the Managed Care Plan Network Adequacy Model Act (the "Model Act") which is intended to establish standards for the creation and maintenance of networks by health carriers. The Model Act is also intended to establish requirements for written agreements between health carriers offering managed care plans, participating providers and intermediaries, like the Company, which negotiate provider contracts. An NAIC model insurance act does not carry the force of law unless it is adopted by applicable state legislatures. The Company does not know which states, if any, will adopt the Model Act. There can be no assurance that the Company will be able to comply with the Model Act if it is adopted in any state in which the Company does business or that any inability of the Company to so comply would not have a material adverse effect on the operating results and financial condition of the Company. Other State and Local Regulation. In March 1996, the DOC issued the Restricted License to MPN in accordance with the requirements of the Knox-Keene Act. The Restricted License authorizes MPN to operate as a healthcare service plan in the State of California. The Company, through MPN, utilizes the Restricted License to contract with HMOs for a broad range of healthcare services, including both institutional and professional medical services. The Knox-Keene Act and the regulations promulgated thereunder subject entities that are licensed as healthcare service plans in California to substantial regulation by the DOC. In addition, licensees under the Knox-Keene Act must file periodic financial data and other information (that generally become available to the public), maintain substantial tangible net equity on their balance sheets and maintain adequate levels of medical, financial and operational personnel dedicated to fulfilling the licensee's statutory and regulatory requirements. The DOC is empowered to take enforcement actions against licensees that fail to comply with such requirements. The operation of USFMC and Friendly Hills is highly regulated, and each is accredited by the Joint Commission on Accreditation of Healthcare Organizations. Accreditation from the Joint Commission on Accreditation of Healthcare Organizations allows USFMC and Friendly Hills to serve Medicare patients and provides authorization from the California Department of Health Services and the Los Angeles County Department of Health to operate as licensed hospital facilities. Both USFMC and Friendly Hills are licensed and regulated as general acute care hospitals by the State of California Department of Health Services. Additionally, each of USFMC and Friendly Hills have a clinical laboratory license from the State of California Department of Health Services, a clinical laboratory license for its cardio-pulmonary laboratory and a pharmacy license for its inpatient pharmacy. Pharmacy Licensing and Operation. The PBM and therapeutic pharmaceutical services of the Company are subject to state and federal statutes and regulations governing the operation of pharmacies, repackaging of drug products, dispensing of controlled substances, reimbursement under federal and state medical assistance programs, financial relationships between healthcare providers and potential referral sources, medical waste disposal, risk sharing by non-insurance companies and workplace health and safety. The Company's operations may also be affected by changes in ethical guidelines and changes in operating standards of professional and trade associations and private accreditation commissions such as the American Medical Association, the National Committee for Quality Assurance and the Joint Commission on Accreditation of Healthcare Organizations. Federal controlled substance laws require the Company to register its pharmacies with the United States Drug Enforcement Administration and comply with security, record-keeping, inventory control and labeling standards in order to dispense controlled substances. State controlled 15 18 substance laws require registration and compliance with the licensing, registration or permit standards of the state pharmacy licensing authority. State pharmacy licensing, registration and permit laws impose standards on the qualifications of an applicant's personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists employed by each branch must also satisfy state licensing requirements. Several states have enacted legislation that requires mail service pharmacies located outside such state to register with the state board of pharmacy prior to mailing drugs into the state and to meet certain operating and disclosure requirements. These statutes generally permit a mail service pharmacy to operate in accordance with the laws of the state in which it is located. In addition, various pharmacy associations and state boards of pharmacy have promoted enactment of laws and regulations directed at restricting or prohibiting the operation of out-of-state mail service pharmacies by, among other things, requiring compliance with all laws of certain states into which the mail service pharmacy dispenses medications whether or not those laws conflict with the laws of the state in which the pharmacy is located. To the extent that such laws or regulations are found to be applicable to the Company's operations, the Company would be required to comply with them. Some states have enacted laws and regulations which, if successfully enforced, would effectively limit some of the financial incentives available to plan sponsors that offer mail service prescription programs. The United States Department of Labor has commented that such laws and regulations are preempted by the Employee Retirement Income Security Act of 1974, as amended. The Attorney General in one state has reached a similar conclusion and has raised additional constitutional issues. Finally, the Bureau of Competition of the Federal Trade Commission ("FTC") has concluded that such laws and regulations may be anticompetitive and not in the best interests of consumers. To date, there have been no formal administrative or judicial efforts to enforce any of such laws against the Company. To the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to the Company, they could have an adverse effect on the Company's prescription mail service operations. While United States Postal Service regulations expressly permit the transmission of prescription drugs through the postal system, the United States Postal Service has authority to restrict such transmission. Future Legislation, Regulation and Interpretation. As a result of the continued escalation of healthcare costs and the inability of many individuals to obtain health insurance, numerous proposals have been or may be introduced in the United States Congress and state legislatures relating to healthcare reform. There can be no assurance as to the ultimate content, timing or effect of any healthcare reform legislation, nor is it possible at this time to estimate the impact of potential legislation, which may be material, on the Company. Further, although the Company exercises care in structuring its arrangements with physicians to comply in all material respects with the above-referenced laws, there can be no assurance that (i) government officials charged with responsibility for enforcing such laws will not assert that the Company or certain transactions in which the Company is involved are in violation thereof and (ii) such laws will ultimately be interpreted by the courts in a manner consistent with the Company's interpretation. Therefore, it is possible that future legislation, regulation and the interpretation thereof could have a material adverse effect on the operating results and financial condition of the Company. CORPORATE LIABILITY AND INSURANCE The Company's business entails an inherent risk of claims of medical professional liability. In recent years, participants in the healthcare industry have become increasingly subject to large claims based on theories of medical malpractice that entail substantial defense costs. Through the ownership and operation of USFMC and Friendly Hills, both acute care hospitals, the Company could also be subject to allegations of negligence and wrongful acts. To protect its overall operations from such potential liabilities, the Company has a multi-tiered corporate structure and preserves the operational integrity of each of its operating subsidiaries. In addition, the Company maintains professional liability insurance, general liability and other customary insurance on a claims-made and modified occurrence basis, in amounts deemed appropriate by management based upon historical claims and the nature and risks of the business, for many of the affiliated physicians, practices and operations. The Company has accrued for or purchased "tail" coverage for claims against the Company's affiliated medical organizations to cover incidents which were or are incurred but not reported 16 19 during the periods for which the related risk was covered by "claims made" insurance. There can be no assurance that a future claim will not exceed the limits of available insurance coverage or that such coverage will continue to be available. Moreover, the Company requires each physician group with which it affiliates to obtain and maintain professional liability insurance coverage. Such insurance would provide coverage, subject to policy limits, in the event the Company were held liable as a co-defendant in a lawsuit for professional malpractice against a physician. In addition, generally, the Company is indemnified under the practice management agreements by the affiliated physician groups for liabilities resulting from the performance of medical services. However, there can be no assurance that any future claim or claims will not exceed the limits of these available insurance coverages or that indemnification will be available for all such claims. EMPLOYEES As of December 31, 1997, the Company employed a total of 29,256 persons and was affiliated with 13,531 physicians. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES. The Company leases approximately 150,000 square feet at its corporate headquarters located at 3000 Galleria Tower in Birmingham, Alabama. Additionally, the Company has corporate offices in Long Beach, California, (approximately 73,040 square feet in 5000 Airport Plaza Drive and 49,065 square feet in 5001 Airport Plaza Drive), Knoxville, Tennessee (approximately 35,000 square feet) and Northbrook, Illinois (approximately 199,116 square feet). The Company currently owns or leases facilities providing medical services, including two hospitals, in 42 states, Puerto Rico and two foreign countries. These facilities range in size from 500 square feet to large multi-story buildings which house medical clinics. The Company also leases, subleases or occupies, pursuant to certain acquisition agreements, the clinic facilities of the affiliated physician groups. The Company anticipates that as the affiliated practices continue to integrate their operations, existing corporate facilities should be adequate for the immediate future. ITEM 3. LEGAL PROCEEDINGS. The Company is party to certain legal actions arising in the ordinary course of business. MedPartners is named as a defendant in various legal actions arising primarily out of services rendered by physicians and others employed by its affiliated physician entities and the two hospitals it owns, as well as personal injury and employment disputes. In addition, certain of its affiliated medical groups are named as defendants in numerous actions alleging medical negligence on the part of their physicians. In certain of these actions, MedPartners' and/or the medical group's insurance carrier has either declined to provide coverage or has provided a defense subject to a reservation of rights. Management does not view any of these actions as likely to result in an uninsured award that would have a material adverse effect on the operating results and financial condition of MedPartners. In June 1995, Caremark agreed to settle an investigation with certain agencies of the U.S. government and related state investigative agencies in all 50 states and the District of Columbia (the "OIG Settlement"), as described in Note 13 of the audited Consolidated Financial Statements. The OIG Settlement allows Caremark to continue participating in Medicare, Medicaid and other government healthcare programs. In its agreement with the OIG and the DOJ, Caremark agreed to continue to maintain certain compliance-related oversight procedures. Should these oversight procedures reveal credible evidence of legal or regulatory violations, Caremark is required to report such violations to the OIG and DOJ. Caremark is, therefore, subject to increased regulatory scrutiny and, in the event it commits legal or regulatory violations, Caremark may be subject to an increased risk of sanctions or penalties, including disqualification as a provider of Medicare or Medicaid services, which would have a material adverse effect on the operating results and financial condition of MedPartners. In connection with the matters described above relating to the OIG Settlement, Caremark is the subject of various non-governmental claims and may in the future become subject to additional OIG-related claims. 17 20 Caremark is the subject of, and may be in the future subjected to, various private suits and claims being asserted in connection with matters relating to the OIG Settlement by Caremark's stockholders, patients who received healthcare services from Caremark and such patients' insurers. MedPartners cannot determine at this time what costs or liabilities may be incurred in connection with future disposition of non-governmental claims or litigation. Such additional costs or liabilities, if incurred, could have a material adverse effect on the operating results and financial condition of MedPartners. In May 1996, three home infusion companies, purporting to represent a class consisting of all of Caremark's competitors in the alternate site infusion therapy industry, filed a complaint against Caremark Inc. and Caremark International Inc., as well as two other corporations, in the United States District Court for the District of Hawaii (Case No. 96-00474 ACK) alleging violations of the federal antitrust laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO") and California's unfair business practices statute. In this action, styled Phamacare, et al. v. Caremark Inc., Caremark International Inc., et al., the plaintiffs seek unspecified treble damages and attorneys' fees and expenses. MedPartners intends to defend this case vigorously. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners, there can be no assurance that the ultimate resolution of the matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of MedPartners. In March 1998, a group of 22 private payors filed an action styled Blue Cross and Blue Shield of Alabama et al. v. Caremark Inc. and Caremark International Inc. (Case No. 98C-1285) in the United States District Court for Northern District of Illinois seeking recovery for losses allegedly suffered by the plaintiffs during the period 1986-1995 as a result of an allegedly fraudulent scheme conceived and implemented by the defendants to submit and cause other providers to submit fraudulent claims for payment of healthcare benefits by the plaintiffs related to Caremark's home infusion business. Caremark sold its home infusion business in 1995. The plaintiffs allege that Caremark failed to disclose to the plaintiffs the existence and nature of certain relationships that Caremark had with various physicians and the fact that certain funds were paid to such physicians without the plaintiffs' knowledge or approval. The action prays for an unspecified amount in damages and for trebled damages under RICO and other related fraud claims. Caremark intends to defend this lawsuit vigorously. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners, there can be no assurance that the ultimate resolution of this matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of MedPartners. In late August 1994, certain patients of a physician who prescribed human growth hormone distributed by Caremark and the sponsor of the health insurance plan of one of those patients filed complaints against Caremark, employees of Caremark and others in the United States District Court for the District of Minnesota. The complaint alleged violations of the federal mail and wire fraud statutes, RICO and the state consumer fraud statute, as well as conspiracy to breach a fiduciary duty, negligence and fraud. The complaint sought unspecified treble damages, and attorney's fees and expenses. In July 1996, these plaintiffs also filed a separate purported class action lawsuit in the Minnesota State Court in the County of Hennepin against Caremark alleging all of the claims contained in the federal complaint and sought unspecified damages, attorneys' fees and expenses and an award of punitive damages. In November 1996, in response to a motion by the plaintiffs, the Court dismissed the United States District Court cases without prejudice. On March 28, 1997, the Minnesota state court lawsuit was dismissed with prejudice, which decision was affirmed by the Minnesota Court of Appeals on November 4, 1997. On December 31, 1997, the Minnesota Supreme Court denied plaintiffs' petition for further reconsideration. This lawsuit is concluded because plaintiffs have no further avenue of appeal. In July 1995, another patient of this same physician filed a separate complaint in the District Court of South Dakota against the physician, Caremark and another corporation alleging violations of the federal laws prohibiting payment of remuneration to induce referral of Medicare and Medicaid beneficiaries, the federal mail fraud statutes and RICO. The complaint also alleges the intentional infliction of emotional distress and seeks trebling of at least $15.9 million in general damages, attorney's fees and costs, and 18 21 an award of punitive damages. In August 1995, the parties agreed to a stay of all proceedings until final judgment was entered in a criminal case that was then pending against this physician. All charges against the physician have been dismissed. Caremark has moved for the dismissal of the South Dakota case or transfer of the case to Minnesota. Management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners. In December 1997, a class action was filed in the United States District Court for the Central District of California styled, Padilla, et al. v. MedPartners, Inc., et al. (Case No. SACV 97-978). The action purports to be a class action on behalf of all of the shareholders of Talbert which was acquired by MedPartners in a cash tender offer transaction closed in September 1997, pursuant to which each outstanding share of Talbert was acquired for $63 cash per share. The action alleges that MedPartners violated Rule 14d-10 under the Securities Exchange Act of 1934, the so-called "all holder, best price" rule, by reason of provisions in the employment agreements of two senior officers of Talbert, which provided for a certain contingent payment under certain circumstances. The complaint requests class certification and claims damages and interest. The defendants have filed a Motion to Dismiss this action on a number of grounds, asserting that the complaint fails to state a claim upon which relief can be granted. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners, there can be no assurance that the ultimate resolution of the matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of MedPartners. On January 7, 1998, MedPartners issued a press release announcing the termination of its proposed merger with PhyCor, Inc. On that date, MedPartners also issued another press release announcing certain fourth quarter 1997 charges and negative earnings estimates, which have since been revised downward. On January 8, 1998, there was a decline in the market prices for MedPartners' publicly traded securities. Since then, certain persons claiming to be stockholders of MedPartners have filed complaints in either state or federal court against MedPartners and certain officers and directors of MedPartners. To date, there are two state court actions and 14 federal court actions, all filed in Birmingham, Alabama. In each of these lawsuits, the plaintiffs purport to represent a class and generally alleges violations of the Securities Exchange Act of 1934, fraud and various state law claims in connection with the public disclosure by MedPartners of the termination of the PhyCor merger and the fourth quarter 1997 charges and earnings estimates. Four of the lawsuits, one filed in the Circuit Court of Jefferson County, Alabama, and three filed in the United States Federal Court for the Northern District of Alabama, were filed against MedPartners and certain of its officers and directors, purportedly on behalf of all persons who purchased MedPartners' Threshold Appreciation Price Securities(TM) in the offering occurring on or about September 16, 1997. The state complaint also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as well as Sections 8-6-17(a)(2) and 8-6-19 of the Alabama Code. Collectively, these complaints seek class certification, damages and interest, as well as costs and expenses. Exhibit 99-1 attached to this Annual Report on Form 10-K is a schedule of the stockholder suits of which the Company has knowledge. MedPartners' management believes that it and MedPartners have acted properly throughout and intends to defend each of these cases vigorously. All of these cases are in the most preliminary stages, and their ultimate resolution cannot be known at this time. Therefore, there can be no assurance that the ultimate resolution of these matters will not have a material adverse effect on the operating results and financial condition of MedPartners. Beginning in September 1994, Caremark was named as a defendant in a series of lawsuits added to a pending group of actions (including a class action) brought in 1993 under the antitrust laws by local and chain retail pharmacies against brand name pharmaceutical manufacturers, wholesalers and prescription benefit managers other than Caremark. The lawsuits, filed in federal district courts in at least 38 states (including the United States District Court for the Northern District of Illinois), allege that at least 24 pharmaceutical manufacturers provided unlawful price and service discounts to certain favored buyers and conspired among themselves to deny similar discounts to the complaining retail pharmacies (approximately 3,900 in number). The complaints charge that certain defendant prescription benefit managers, including Caremark, were favored buyers who knowingly induced or received discriminatory prices from the manufacturers in violation 19 22 of the Robinson-Patman Act. Each complaint seeks unspecified treble damages, declaratory and equitable relief and attorney's fees and expenses. All of these actions have been transferred by the Judicial Panel for Multi-district Litigation to the United States District Court for the Northern District of Illinois for coordinated pretrial procedures. Caremark was not named in the class action. In April 1995, the Court entered a stay of pretrial proceedings as to certain Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act claims brought against Caremark, pending the conclusion of a first trial of certain of such claims brought by a limited number of plaintiffs against five defendants not including Caremark. On July 1, 1996, the district court directed entry of a partial final order in the class action approving an amended settlement with certain of the pharmaceutical manufacturers. The amended settlement provides for a cash payment by the defendants in the class action (which does not include Caremark) of approximately $351.0 million to class members in settlement of conspiracy claims as well as a commitment from the settling manufacturers to abide by certain injunctive provisions. All class action claims against non-settling manufacturers as well as all opt out and other claims generally, including all Robinson-Patman Act claims against Caremark, remain unaffected by the settlement. The district court has scheduled a trial of the remaining class action claims for the fall of 1998. It is expected that trials of the remaining individual conspiracy claims will also precede the trial of any Robinson-Patman Act claims. MedPartners intends to defend these cases vigorously. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners, there can be no assurance that the ultimate resolution of this matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of MedPartners. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of stockholders of the Company during the fourth quarter of 1997. 20 23 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York Stock Exchange (the "NYSE") under the symbol "MDM". The following table sets forth, for the calendar periods indicated, the range of high and low sales prices from January 1, 1996. Prior to February 21, 1996, the Company's Common Stock traded on the NASDAQ National Market System.
HIGH LOW ------- ------- 1996 First Quarter (from February 21)............................ $34.75 $28.50 Second Quarter.............................................. 30.25 20.13 Third Quarter............................................... 23.13 16.63 Fourth Quarter.............................................. 24.50 19.88 1997 First Quarter............................................... $25.00 $18.00 Second Quarter.............................................. 23.50 17.375 Third Quarter............................................... 24.188 19.813 Fourth Quarter.............................................. 28.375 20.00 1998 First Quarter (through March 30)............................ $22.375 $ 7.125
On March 30, 1998, the closing sale price of the Company's Common Stock on the NYSE was $10.50. There were 42,109 holders of record of the Company's Common Stock as of March 1, 1998. The Company has never paid a cash dividend on its Common Stock. Future dividends, if any, will be determined by the Company's Board of Directors in light of circumstances existing from time to time, including the Company's growth, profitability, financial condition, results of operations, continued existence of the restrictions described below and other factors deemed relevant by the Company's Board of Directors. Restrictions contained in the Credit Facility (as defined in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations") limit the payment of non-stock dividends on the Company's Common Stock. 21 24 UNREGISTERED SALES OF SECURITIES The following table indicates all unregistered sales of the Company's Common Stock during the last fiscal year that have not previously been reported on a Quarterly Report on Form 10-Q:
MARKET TRANSACTION PURPOSE DATE VALUE - ----------- ----------------- ----------------- ----------- Summit Medical Group, P.A. Merger January 31, 1997 $49,965,496 Georgia Urology, P.A. Contract January 2, 1997 5,250,000 Modification SOUTHVIEW Medical Group, P.C. Merger January 2, 1997 10,750,000 Hirsch, Strassberg, Kenward & Vizoso, M.D.s, Inc. Acquisition January 27, 1997 787,500 North Carolina Medical Associates, P.A. Contract February 14, 1997 1,724,800 Modification Chase Dennis Medical Group, Inc. Asset Acquisition February 14, 1997 17,330,000 IMHC Management, Inc. Merger May 14, 1997 7,809,381 Pacific Medical Group Acquisition May 14, 1997 1,573,669 Obstetric & Gynecologic Associates of Columbus, P.C. Contract May 16, 1997 916,000 Modification Northwest Diagnostic Clinic, P.A. Asset Acquisition May 30, 1997 290,996 Aldine Women's Clinic, P.A. Asset Acquisition May 30, 1997 49,999 L. Stayton Halberdler, Jr., M.D., P.A. Asset Acquisition May 30, 1997 25,010 Alan G. Moore, M.D., P.A. Asset Acquisition May 30, 1997 59,995 Jeffrey C. Lambert, M.D., P.A. Asset Acquisition May 30, 1997 25,010 Herschel Fischer, Inc. Merger July 11, 1997 17,999,980 Karl G. Mangold, Inc. Merger July 11, 1997 26,999,981 Doctor's Essential Services, Inc. Asset Acquisition July 11, 1997 1,000,000 Suburban Heights Medical Center, S.C. Asset Acquisition July 28, 1997 9,700,000 Doctors Medical Associates, Pinola, Inc. Asset Acquisition October 30, 1997 9,600 Health First Medical Group, P.C. Merger December 16, 1997 6,255,052 Kelsey-Seybold Contingent Stock Right Exercises through Stock Right through December 1,576,598 December 31, 1997 Exercises 31, 1997
None of these sales was underwritten, and all of the shares issued were taken for investment by the entity or individual to whom they were issued. The Company believes all of the securities issued were exempt from registration under Section 4(2) of the Securities Act. Approximately 63% of the shares issued in the above transactions have been registered subsequently, or the Rule 144 one year holding period restricting the sale of the shares has lapsed. 22 25 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data for the Company derived from the Company's Consolidated Financial Statements. The selected financial data should be read in conjunction with the accompanying Consolidated Financial Statements and the related Notes thereto.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenue.......................... $1,980,967 $2,909,024 $3,908,717 $5,222,019 $6,331,151 Income (loss) from continuing operations......................... 55,017 63,510 32,189 (76,790) (693,742) Income (loss) from discontinued operations......................... 30,808 25,902 (136,528) (68,698) (95,988) ---------- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of a change in accounting principle.......................... 85,825 89,412 (104,339) (145,488) (789,730) Cumulative effect of a change in accounting principle............... -- -- -- -- (30,885) ---------- ---------- ---------- ---------- ---------- Net income (loss).................... $ 85,825 $ 89,412 $ (104,339) $ (145,488) $ (820,615) ========== ========== ========== ========== ========== Earnings (loss) per common share outstanding(1): Income (loss) from continuing operations......................... $ 0.42 $ 0.49 $ 0.21 $ (0.45) $ (3.73) Income (loss) from discontinued operations......................... 0.24 0.20 (0.90) (0.40) (0.52) Cumulative effect of a change in accounting principle............... -- -- -- -- (0.17) ---------- ---------- ---------- ---------- ---------- Net income (loss) per share.......... $ 0.66 $ 0.69 $ (0.69) $ (0.85) $ (4.42) ========== ========== ========== ========== ========== Weighted average common shares outstanding........................ 130,903 130,435 152,453 169,897 185,830 Diluted earnings (loss) per common share outstanding(2): Income (loss) from continuing operations......................... $ 0.42 $ 0.43 $ 0.20 $ (0.45) $ (3.73) Income (loss) from discontinued operations......................... 0.24 0.18 (0.86) (0.40) (0.52) Cumulative effect of a change in accounting principle............... -- -- -- -- (0.17) ---------- ---------- ---------- ---------- ---------- Net income (loss) per share.......... $ 0.66 $ 0.61 $ (0.66) $ (0.85) $ (4.42) ========== ========== ========== ========== ========== Weighted average common and dilutive equivalent shares outstanding...... 130,903 146,773 158,109 169,897 185,830 BALANCE SHEET DATA: Cash and cash equivalents............ $ 44,852 $ 101,101 $ 87,581 $ 127,397 $ 215,801 Working capital...................... 251,736 180,198 286,166 226,409 75,747 Total assets......................... 1,117,557 1,682,345 1,964,130 2,423,120 2,890,529 Long-term debt, less current portion............................ 177,141 394,811 541,391 715,996 1,470,622 Total stockholders' equity........... 491,039 644,918 674,442 837,408 90,854
- --------------- (1) Earnings (loss) per share is computed by dividing net income (loss) by the number of common shares outstanding during the periods presented in accordance with the applicable rules of the Commission. (2) For the computation of diluted earnings (loss) per share, no incremental shares related to options are included for years with net losses from continuing operations. 23 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The purpose of the following discussion is to facilitate the understanding and assessment of significant changes and trends related to the results of operations and financial condition of the Company, including changes arising from recent acquisitions by the Company, the timing and nature of which have significantly affected the Company's results of operations and financial condition. This discussion should be read in conjunction with the audited Consolidated Financial Statements and the Notes thereto. Unless the context otherwise requires, as used herein, the term "MedPartners" or the "Company" refers collectively to MedPartners, Inc. and its subsidiaries and affiliates. GENERAL MedPartners is one of the largest healthcare companies in the United States, with net revenue of approximately $6.3 billion for the year ended December 31, 1997. The Company operates three separate business divisions: Physician Practice Services, Pharmaceutical Services and Contract Medical Services. The Physician Practice Services Division is larger than any other PPM in the United States, based on annual revenues in that business of approximately $3.0 billion for the year ended December 31, 1997. The Pharmaceutical Services Division operates one of the largest independent PBM and therapeutic pharmaceutical services programs in the United States, with revenues of approximately $2.4 billion for the year ended December 31, 1997. The Contract Medical Services Division operates one of the largest hospital-based physician management services and one of the largest corrections and government services managed care businesses, with combined revenues of approximately $806 million for the year ended December 31, 1997. The Company's Physician Practice Services Division affiliates with physicians who are seeking the resources necessary to function effectively in healthcare markets that are evolving from fee-for-service to managed care payor systems. MedPartners also affiliates with physicians who seek greater efficiencies in operations of traditional fee-for-service practices. The Company enhances clinic operations by centralizing administrative functions and introducing management tools, such as clinical guidelines and medical management processes. The Company provides affiliated physicians with access to capital and to advanced management information systems. In addition, the Company contracts with health maintenance organizations (and other third-party payors that compensate the Company and its affiliated physicians on a prepaid basis (collectively, "HMOs")), hospitals and outside providers on behalf of its affiliated physicians. These relationships provide physicians with the opportunity to operate under a variety of payor arrangements and to increase their patient flow. The Company offers medical group practices and independent physicians a range of affiliation models which are described in Note 1 of the accompanying audited Consolidated Financial Statements. These affiliations are carried out by the acquisition of PPM entities or practice assets, either for cash or equity, or by affiliation on a contractual basis. In all instances, the Company enters into long-term practice management agreements with the affiliated physicians that provide for both the management of their practices by the Company and the clinical independence of the physicians. The Company also manages PBM programs for more than 2,194 clients throughout the United States, including corporations, insurance companies, unions, government employee groups and managed care organizations. The Company dispenses an average of 44,800 prescriptions daily through three mail service pharmacies and manages patients' immediate prescription needs through a network of approximately 53,000 retail and other pharmacies. The Company's therapeutic pharmaceutical services are designed to meet the healthcare needs of individuals with certain chronic diseases or conditions. These services include the design, development and management of comprehensive programs comprising drug therapy, physician support and patient education. The Company currently provides therapies and services for individuals with such conditions as hemophilia, growth disorders, immune deficiencies, cystic fibrosis and multiple sclerosis. The Company is in the process of integrating the pharmaceutical services program with the PPM business by providing pharmaceutical services to affiliated physicians, clinics and HMOs. The Contract Medical Services Division organizes and manages physicians and other healthcare professionals engaged in the delivery of emergency, radiology and teleradiology services, primary care and 24 27 temporary staffing and support services. Through its Team Health subsidiary the Company provides these services to hospitals, clinics and managed care organizations, and the Company's Government Services unit provides these services to correctional facilities, Department of Defense facilities and government-affiliated physician groups throughout the United States. The Division also provides occupational health services to corporate industrial clients. Under contracts with hospitals and other clients, the Contract Medical Services Division identifies and recruits physicians and other healthcare professionals for admission to a client's medical staff and coordinates the ongoing scheduling of staff physicians and other healthcare professionals who provide clinical coverage in designated areas of care. The Company experienced several adverse events in the fourth quarter of 1997 and the month of January 1998, including: (i) a fourth quarter pretax charge of $646.7 million related primarily to the restructuring and impairment of selected assets of certain of its clinic operations within the physician practice management division; (ii) a fourth quarter after-tax charge from discontinued operations of approximately $15.3 million; (iii) a fourth quarter after-tax charge of $30.9 million related to a cumulative effect of a change in accounting principle; (iv) a fourth quarter net loss from continuing operations, excluding the impact of restructuring and asset impairment charges of $190.0 million; (v) the termination of the merger agreement with PhyCor, Inc.; (vi) a steep drop in the price of its Common Stock following the announcement of the termination of the PhyCor merger; and (vii) the filing of various stockholder class action lawsuits against the Company and certain of its officers and directors in the aftermath of these events alleging violations of federal securities laws. See Item 3. "Legal Proceedings". In response to certain of these setbacks, assembly of a new management team began in January 1998 when Richard M. Scrushy was named Chairman of the Board and acting Chief Executive Officer. Another step was taken in March 1998 when Edwin M. Crawford was named President and Chief Executive Officer. Mr. Scrushy will remain Chairman of the Board and brings his extensive healthcare experience, most recently his 13 years as Chairman of the Board and Chief Executive Officer of HEALTHSOUTH Corporation, to this position. Mr. Crawford joins MedPartners from Magellan Health Services, Inc.(formerly Charter Medical Corporation) where he served as Chairman of the Board, President and Chief Executive Officer. Mr. Crawford has been credited with successfully turning around Magellan's operations, transforming the company from a psychiatric provider operation into a managed care company, and expanding the company into the rapidly growing market of specialty disease management. In addition to these management changes, the Company reorganized and streamlined its PPM organizational structure to strengthen management, speed integration, improve operations and facilitate communications. 25 28 RESULTS OF OPERATIONS In June 1997, the Company combined with InPhyNet in a transaction that was accounted for as a pooling of interests. The financial information referred to in this discussion reflects the combined operations of this entity and several other entities accounted for as additional poolings of interests. The following table sets forth the earnings summary by service area for the periods indicated. (Operating income (loss) represents earnings (loss) before interest and income taxes and excludes merger expenses and restructuring and impairment charges.):
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---------- ---------- ---------- (IN THOUSANDS) Physician Practice Services Net revenue................................ $1,646,656 $2,397,120 $3,036,303 Operating income (loss).................... 65,483 102,935 (150,969) Margin..................................... 3.98% 4.29% (4.97)% Pharmaceutical Services Net revenue................................ $1,840,249 $2,159,479 $2,363,404 Operating income........................... 125,484 133,543 122,061 Margin..................................... 6.82% 6.18% 5.16% Contract Medical Services Net revenue................................ $ 342,412 $ 567,042 $ 806,350 Operating income........................... 38,045 55,836 46,905 Margin..................................... 11.11% 9.85% 5.82% International Net revenue................................ $ 79,400 $ 98,378 $ 125,094 Operating income (loss).................... 1,300 (1,749) 620 Margin..................................... 1.64% (1.78)% 0.50% Corporate Services Operating loss............................. $ (30,524) $ (31,555) $ (28,566) Percentage of total net revenue............ (0.78)% (0.60)% (0.45)%
Physician Practice Services The Company's PPM revenues have increased substantially over the past three years primarily due to growth in prepaid enrollment, existing practice growth and new practice affiliations. Of the total 1997 PPM revenue, $0.4 billion can be attributed to acquisitions made during the year. The Company's PPM operations in the western region of the country function in a predominantly prepaid environment. The Company's PPM operations in the other regions of the country are in predominantly fee-for-service environments with limited but increasing managed care penetration. The following table sets forth the breakdown of net revenue for the PPM services area for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 ---------- ---------- ---------- (IN THOUSANDS) Prepaid............................................ $1,030,226 $1,492,672 $1,891,623 Fee-for-Service.................................... 596,804 889,908 1,108,862 Other.............................................. 19,626 14,540 35,818 ---------- ---------- ---------- Total net revenue from PPM service area................................... $1,646,656 $2,397,120 $3,036,303 ========== ========== ==========
26 29 The Company's prepaid revenue reflects the number of HMO enrollees for whom it receives monthly capitation payments. The Company receives professional capitation to provide physician services and institutional capitation to provide hospital care and other non-professional services. The table below reflects the growth in enrollment for professional and global capitation:
AT DECEMBER 31, --------------------------------- 1995 1996 1997 --------- --------- --------- Professional enrollees................................ 603,391 983,543 1,168,032 Global enrollees (professional and institutional)..... 509,720 678,200 895,980 --------- --------- --------- Total enrollees............................. 1,113,111 1,661,743 2,064,012 ========= ========= =========
During 1997, prepaid revenues increased 27% while prepaid enrollees increased 24%. The reason for this difference relates to the mix of professional capitation enrollment to total enrollment (which includes institutional capitation). The percentage of professional capitation enrollment to total enrollment was 57% at December 31, 1997 compared to 59% at December 31, 1996. Revenue per enrollee for professional capitation is substantially lower than global capitation. Therefore, the lower percentage of professional capitation enrollment accounts for the higher percentage increase in prepaid revenue as compared to the percentage increase in total enrollment. The Company will attempt to profit from increased revenues, operational efficiencies and synergies produced by the exchange of ideas among physicians and managers across geographic boundaries and varied areas of specialization. The PPM service area, for example, has established medical management committees that meet monthly to discuss implementation of the best medical management techniques to assist the Company's affiliated physicians in delivering the highest quality of care at lower costs in a consistent fashion. The PPM service area has also created a medical advisory committee, which is developing procedures for the identification, packaging and dissemination of the best clinical practices within the Company's medical groups. The medical advisory committee also provides the Company's affiliated physicians a forum to discuss innovative ways to improve the delivery of healthcare. During the fourth quarter of 1997, the PPM service area began a difficult process of restructuring and reorganization which included practice disassociations, site closings, physician and staff reductions and systems standardization and conversions. Specifically, the Company closed a total of 60 clinic locations, primarily in southern California. Some closings also occurred in Nevada, Arizona and northern California. Most of the locations were redundant in nature due to the rapid acquisition of several group practices in the region. The closings resulted in the elimination of approximately 114 physicians and 600 employees. The Company has also disassociated with 24 smaller practices, all of which were in the eastern area of the country. These practices, which represent approximately 124 physicians, accounted for approximately $54 million in annual revenue. The disassociations were by mutual agreement and were the result of the fact that the economics of the practice management agreements were not in the best interest of the Company or the physicians. As part of the restructuring process, the West Coast operations were restructured into three regions: Southern California, Northwest (Idaho, Oregon, and Washington) and Southwest (Arizona, Nevada, New Mexico, Oklahoma, Texas and Utah). Each region is headed by a leadership team composed of physicians and managers. Additionally, the Company moved to strengthen the financial capability of its West Coast operations, internalize its actuarial capabilities to enhance risk management functions and strengthen the managed care contracting process. The Company recorded a pre-tax charge during the fourth quarter of 1997 of $646.7 million related primarily to the restructuring and impairment of selected assets of certain of its clinic operations within the PPM division. Of the total charge, $39.2 million relates to cash charges including employee and physician severance ($17.1 million), leases ($19.0 million) and other exits costs ($3.1 million), $552.4 million relates to the impairment of goodwill, primarily in the Southern California and Southwestern markets, and $55.1 million relates to the write down of various assets. The impairment of goodwill and write down of other assets are non-cash charges. 27 30 The operating loss for the year ended December 31, 1997, was $151.0 million compared to an operating profit of $102.9 million for the year ended December 31, 1996. The loss was the result of greater than anticipated costs in the Company's PPM operations, primarily related to higher than expected medical utilization, additions to medical claims reserves, additional allowances for uncollectible receivables, recognition of losses on certain contracts, and delays in the implementation of certain integration activities. Pharmaceutical Services Pharmaceutical Services revenues continue to exhibit sustained growth. This growth is entirely internal and has not been supplemented by acquisitions. Key factors contributing to this growth include high customer retention, additional penetration of retained customers, new customer contracts and drug cost inflation. These growth factors were partially offset in 1995, 1996 and 1997 by selective non-renewal of certain accounts not meeting threshold profitability levels. The preponderance of Pharmaceutical Services revenue is earned on a fee-for-service basis through contracts covering one to three-year periods. Revenues for selected types of services are earned based on a percentage of savings achieved or on a per-enrollee or per-member basis; however, these revenues are not material to total revenues. Operating income experienced accelerated growth in 1995 and 1996, and margins decreased slightly from 6.8% in 1995 to 6.2% in 1996. Operating margin fell to 5.2% in 1997, due almost entirely to a $20 million loss recognized on a risk-share contract. This particular contract is the only significant risk-share contract to which the Pharmaceutical Services Division is a party. Operating income and margins in 1997 were enhanced by reduced information systems costs achieved through renegotiations of a contract with an outsource service vendor, continued improvements in the acquisition costs of drugs, increased penetration of higher margin value-oriented services and an overall 13% reduction in selling and administrative expenses. Contract Medical Services The Contract Medical Services Division includes Team Health, which manages one of the largest hospital-based physician groups in the country, and Government Services, one of the largest correctional and government services managed care delivery businesses. These groups produced combined contract medical services revenue of $806 million in 1997. Team Health organizes and manages physicians and other healthcare professionals engaged in the delivery of emergency, radiology and teleradiology services, hospital-based primary care and temporary staffing and support services to hospitals, clinics, managed care organizations and physician groups throughout the United States. Government Services provides similar services to medical facilities at correctional institutions and Department of Defense facilities. As of December 31, 1997, the Company had 2,476 physicians in 39 states affiliated with its Contract Medical Services Division. Team Health. Since becoming part of MedPartners as a result of the PPSI merger in 1996, Team Health has grown into one of the nation's largest providers of hospital-based physician management services. Team Health's growth is based upon a strategy of seeking out high quality, regional hospital-based physician management groups for affiliation. Beginning in 1996, Team Health acquired regional groups in New Jersey (Emergency Physician Associates), Florida (The Emergency Associates for Medicine and Sheer, Ahearn and Associates) and Ohio (Emergency Professional Services). Team Health also assumed management responsibility for a hospital-based group that was already part of PPSI in Washington (Northwest Emergency Physicians) prior to PPSI's acquisition of Team Health. In 1997, Team Health continued to grow by making significant inroads into the strategically important California market with the acquisition of Quantum Plus, followed several months later by the acquisition of Fischer Mangold. During 1997, MedPartners acquired InPhyNet and Team Health assumed responsibility for management of the hospital-based division of InPhyNet. Team Health also continued to expand its radiology line with the acquisition of Reich, Seidelmann, and Janicki in Ohio in late 1997. In addition to growth by acquisition of regional groups, Team Health aggressively seeks internal growth through sales of contract staffing opportunities as well as acquisition of smaller hospital-based groups that "roll in" to existing regional offices. Team Health has determined that timely and successful integration of acquired groups is critical when growing quickly, and places significant emphasis on integration efforts. Additionally, it is crucial to find ways 28 31 to add value to the practices that choose to affiliate with Team Health. Local operations are coordinated out of the regional offices under the guidance of a senior physician leader, but all corporate support functions such as accounting and payroll are centralized in the Team Health corporate office. Common information platforms and databases are developed to facilitate the efficient capture of clinical and operating data. The two major initiatives currently under way involve migration of all Team Health billing onto a common IDX-based billing system and creation of a company-wide physician database and management system. Both initiatives are expected to be significantly complete by the end of 1998. Management effort is also focused on evaluating the best clinical practices and exporting this knowledge throughout all the affiliates of Team Health in order to continually improve the quality of patient care provided by Team Health physicians. Attention is also focused on finding ways to reduce the cost of the clinical support services. For example, during 1997, the operations of Quantum Plus and Fischer Mangold were merged together and now operate from one regional office, thus saving a significant amount of duplicate overhead costs. Team Health is currently affiliated with more than 2,100 emergency physicians and 140 radiologists. As of December 31, 1997, Team Health operates under 362 hospital-based contracts in 31 states compared to 302 contracts at December 31, 1996. Team Health revenue is driven primarily by the number of contracts with hospitals and other providers (such as outpatient imaging centers) that are staffed by hospital based physicians. The revenue under these contracts is almost entirely fee-for-service. Accordingly, the capitated revenue of Team Health is minimal. Under the Team Health staffing contracts, revenue is generated either through direct billing of patients and payors, payments from the hospital or other provider, or a combination of both. Therefore, revenue can be affected by changes in patient volume and reimbursement levels from payors as well as changes in the contracted payment rate between the hospital or other providers and Team Health. Operating income and margins declined in 1997 primarily as a result of increased costs associated with the Company's changes in malpractice programs and other matters associated with the acquisition of InPhyNet. Government Services. Government Services currently has 228 affiliated physicians working in 52 correctional facilities in 15 states with approximately 57,400 globally capitated lives, making the Company the nation's second largest provider of correctional medical services ("Correctional Care"). The contracts with correctional facilities are concentrated mainly on the East Coast (from Florida to Vermont), the Midwest and in California. Another 195 physicians work in 15 military facilities, covering 300,000 annual patient visits ("Military Services"). The revenues under the Correctional Care contracts are generally capitated while some of the Military Services contacts reimburse the Company on an hourly basis. Government Services revenue has increased significantly in the last three years, primarily as a result of Correctional Care contract growth. The Company obtained 34 contracts from year-end 1995 through 1997, and increased globally capitated lives from 21,888 in 1995 to 57,372 in 1997. The stated growth resulted from individual contract awards and the purchase of National Health Services, Inc. in July 1996, which contributed $12.3 million in revenue in 1996. International Internationally, the Company, through Caremark, had established home care businesses in the United Kingdom, Canada, Germany, France, the Netherlands, Puerto Rico and Japan. The international operations are currently in the process of being sold. The home infusion operations in Germany, the Netherlands and Canada have been sold to Fresenius A. G. Other international operations in Puerto Rico, Japan and the Netherlands are being or have been sold to various parties. Revenue from international operations during 1997 totaled $125.1 million. Discontinued Operations During 1995, Caremark divested its Caremark Orthopedic Services, Inc. subsidiary as well as its Clozaril(R) Patient Management System, home infusion business and oncology management services business. The Company's Consolidated Financial Statements present the operating income and net assets of these 29 32 discontinued operations separately from continuing operations. Prior periods have been restated to conform with this presentation. Discontinued operations for 1995 reflect the net after-tax gain on the disposal of the Clozaril(R) Patient Management System, the home infusion business and a $154.8 million after-tax charge for the settlement related to the OIG investigation discussed in Note 13 of the accompanying audited Consolidated Financial Statements. Discontinued operations for 1996 reflects a $67.9 million after-tax charge related to settlements with private payors discussed in Note 13 of the accompanying audited Consolidated Financial Statements and an after-tax gain on disposition of the nephrology services business, net of disposal costs, of $2.5 million. During the second quarter of 1997, the Company settled a dispute with Coram Health Corporation arising from Caremark's sale of its home infusion therapy business to Coram, and, during the third quarter of 1997, the Company settled a class action lawsuit also related to Caremark, both of which are discussed in Note 13 of the accompanying audited Consolidated Financial Statements. During the fourth quarter of 1997, the Company recorded a charge related to amounts due from and due to third parties as well as miscellaneous litigation, all of which resulted from operations previously owned by the Company's Caremark subsidiary. Results of Operations for the Years Ended December 31, 1997 and 1996 For the year ended December 31, 1997, net revenue was $6,331.2 million, compared to $5,222.0 million for 1996, an increase of 21%. The increase in net revenue resulted primarily from affiliations with new physician practices and the increase in Pharmaceutical Services' net revenue, which accounted for $371.3 million and $203.9 million of the increase in net revenue, respectively. The increase in Pharmaceutical Services' net revenue is attributable to pharmaceutical price increases, the addition of new customers, further penetration of existing customers and the sale of new products. The net loss was $820.6 million for the year ended December 31, 1997 compared to a net loss of $145.5 million for the year ended December 31, 1996. The Company incurred a charge of $646.7 million in 1997 related to restructuring and impairment. See Note 15 of the accompanying audited Consolidated Financial Statements. Changes in operations have previously been discussed for each division. Included in the pre-tax loss for 1997 were merger expenses totaling $59.4 million related to the business combinations with InPhyNet and several other entities, the major components of which are listed in Note 11 of the accompanying audited Consolidated Financial Statements. In November 1997, the Emerging Issues Task Force ("EITF") issued EITF 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology" ("EITF 97-13"). EITF 97-13 requires process reengineering costs, as defined, which had been previously capitalized as part of an information technology project to be written off as a cumulative catch-up adjustment in the fourth quarter of 1997. The Company recorded a charge of $30.9 million, net of tax of $18.9 million, as a result of EITF 97-13. The Company incurred such costs primarily in connection with the process reengineering associated with the new operating systems installed for its PBM operations. Under Statement of Financial Accounting Standards 109, "Accounting for Income Taxes" (SFAS 109), the Company is required to record a net deferred tax asset for the future tax benefits of tax loss and tax credit carryforwards, as well as for other temporary differences, if realization of such benefits is more likely than not. In assessing the realizability of deferred tax assets, management has considered reversing deferred tax liabilities, projected future taxable income and tax planning strategies. However, the ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible and net operating losses can be carried forward. Management believes, considering all available information, including the Company's history of earnings from continuing operations (after adjustments for nonrecurring items, restructuring charges, permanent differences and other appropriate adjustments) and after considering appropriate tax planning strategies, it is more likely than not that the Company will generate sufficient taxable income in the appropriate carryforward periods to realize the $247.8 million in net deferred tax assets related to net operating losses and future deductible temporary differences of which $148.3 million was recognized in fiscal year 1997 (includes the 30 33 current tax benefit from discontinued operations of $51.4 million and the tax benefit from the change in accounting methods of $18.9 million). The total net deferred tax assets (both current and noncurrent) have been reduced to the amount management considers realizable by establishing valuation allowances aggregating $109.3 million. The valuation allowances have been established due to the uncertainty associated with forecasting future income. The valuation allowance also includes $9.3 million related to certain net operating losses of non-consolidated entities that can only offset future taxable income generated by those entities. While management expects the Company to be profitable, future levels of operating income are dependent upon general economic conditions, including competitive pressures on sales and profit margins, and other factors beyond the Company's control. Management has considered these factors in reaching its conclusion that it is more likely than not that future taxable income will be sufficient to utilize certain net operating loss carryforwards and other temporary differences prior to their expiration. Results of Operations for the Years Ended December 31, 1996 and 1995 For the year ended December 31, 1996, net revenue was $5,222.0 million, compared to $3,908.7 million for 1995, an increase of 33.6%. The increase in net revenue resulted primarily from affiliations with new physician practices and the increase in PBM net revenue, which accounted for $339.9 million and $352.1 million of the increase in net revenue, respectively. The most significant physician practice acquisition during this period was the CIGNA Medical Group which was acquired in January 1996. This acquisition accounted for 92% of the new practice revenue. The increase in PBM net revenue is attributable to pharmaceutical price increases, the addition of new customers, further penetration of existing customers and the sale of new products. Operating income for the PPM and PBM services areas increased 57.2% and 35.3%, respectively, for 1996 compared to 1995. This growth was the result of higher net revenues in both areas and increases in operating margins resulting from the spreading of fixed overhead expenses over a larger revenue base and continued integration of operations in the PPM services area. Operating income and margins declined in the corresponding periods for the therapeutic services area as a result of lower volumes in the hemophilia business and continued pricing pressures for growth hormone products. Included in the pre-tax loss for 1996 were merger expenses totaling $308.9 million related to the business combinations with Caremark, PPSI and several other entities, the major components of which are listed in Note 11 of the accompanying audited Consolidated Financial Statements. PHYCOR AND AMERICA SERVICE GROUP INC. MERGER AGREEMENTS AND SUBSEQUENT TERMINATIONS On October 29, 1997, the Boards of Directors of the Company and PhyCor, Inc. unanimously approved a merger agreement under which PhyCor would acquire the Company, with the Company's stockholders receiving 1.18 shares of PhyCor common stock for each share of the Company's Common Stock. On January 7, 1998, it was announced that the merger agreement had been terminated by mutual agreement. On October 1, 1997, the Company announced that it entered into an agreement to acquire America Service Group Inc. ("ASG") in a stock transaction valued at approximately $59 million. On February 26, 1998, it was announced that the merger agreement had been terminated by mutual consent of both parties and that a release and settlement agreement had been executed. Due to the exchange of confidential information, the settlement agreement contains customary non-competition and non-solicitation provisions and provides for the payment of certain expenses and costs by the Company. Other Matters Year 2000 Compliance. The Company has assessed the potential impact and costs of addressing the Year 2000 Issue and is in the process of implementing a plan of action to address the Year 2000 Issue. This plan of action is a significant undertaking which is expected to require a significant amount of time and attention of senior management and other personnel to resolve. The Company estimates that the total cost of 31 34 all of the work to be carried out to resolve its Year 2000 Issue will be approximately $47.7 million over the years 1998 and 1999. Of this amount, approximately $31 million was work already budgeted without regard to the Year 2000 Issue. Thus the incremental costs of the Company's efforts to address the Year 2000 Issue will be approximately $16.7 million. The Company's current plan of action projects that the program to be carried out will be completed sometime in mid-1999; however, there can be no assurance that the program will be implemented as planned and that there will not be adverse effects on the Company's operations, financial condition and results of operations not currently anticipated in addressing the Year 2000 Issue. The Year 2000 Issue is also expected to affect the systems of various entities with which the Company interacts, including payors, suppliers and vendors. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely corrected, or that a failure by another company's systems to be year 2000 compliant would not have a material adverse effect on the company. EITF 97-2. In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 97-2 concerning the consolidation of physician practice revenues. PPMs will be required to consolidate financial information of a physician practice where the PPM acquires a "controlling financial interest" in the practice through the execution of a contractual management agreement even though the PPM does not own a controlling equity interest in the physician practice. EITF 97-2 outlines six requirements for establishing a controlling financial interest. EITF 97-2 is effective for the Company's financial statements for the year ended December 31, 1998. The Company does not believe that the implementation of EITF 97-2 will have a material impact on its financial condition or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS The future operating results and financial condition of the Company are dependent on the Company's ability to market its services profitably, successfully increase market share and manage expense growth relative to revenue growth. The future operating results and financial condition of the Company may be affected by a number of additional factors, including: the Company's growth strategy, which involves the ability to raise the capital required to support growth, competition for expansion opportunities, integration risks and dependence on HMO enrollee growth; efforts to control healthcare costs; exposure to professional liability; and pharmacy licensing, healthcare reform and government regulation. Changes in one or more of these factors could have a material adverse effect on the future operating results and financial condition of the Company. The Company completed its acquisition of Caremark in September 1996. There are various Caremark legal matters which, if materially adversely determined, could have a material adverse effect on the Company's operating results and financial condition. See Note 13 to the accompanying audited Consolidated Financial Statements of the Company. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had working capital of $75.7 million and had cash and cash equivalents of $215.8 million. During 1997, the Company generated $80.4 million from operating activities, which was used primarily to fund acquisitions as well as liabilities related to restructuring charges. During 1997 and 1996, the Company incurred cash expenditures in connection with acquisitions of the assets of physician practices of $415.3 million and $160.5 million, respectively, capital expenditures for property and equipment were approximately $123.0 million and $126.9 million, respectively. During 1997 and 1996, the Company paid $120.1 million and $143.3 million, respectively, in cash for merger costs. During 1997, these expenditures were funded by approximately $76.6 million derived from capital contributions and net incremental borrowings of $677.3 million. During 1996, these expenditures were funded by approximately $271.9 million derived from issuance of common stock and net incremental borrowings of $124.4 million. Investments in acquisitions and property and equipment are anticipated to continue to be uses of funds in future periods. Effective September 5, 1996, the Company established a $1 billion unsecured revolving Credit Facility with a final maturity date of September 5, 2001 (the "Credit Facility"). This Credit Facility replaced the Company's then existing Credit Facility. The purpose of the facility is to provide funds for working capital, 32 35 acquisitions and other general corporate purposes. As of December 31, 1997, $524 million was outstanding under the Credit Facility. The Credit Facility contains affirmative and negative covenants which include requirements that the Company maintain certain financial ratios (including minimum net worth, minimum fixed charge coverage ratio and maximum indebtedness to cash flow), and establishes certain restrictions on investments, mergers and sales of assets. Additionally, the Company is required to obtain bank consent for acquisitions with an aggregate purchase price in excess of $75 million and for which more than half of the consideration is to be paid in cash. The Credit Facility is unsecured but provides a negative pledge on substantially all assets of the Company. On January 14, 1998, the Company obtained a waiver of all financial covenants and ratios contained in Section 8.1 of the Credit Facility. The financial covenants are currently waived through May 29, 1998. The Company expects to negotiate an amendment to the Credit Facility or replace it prior to the expiration of the waiver. On September 19, 1997, the Company completed a $420 million senior subordinated note offering. These three year notes carry a coupon rate of 6 7/8%. Interest on the notes is payable semi-annually on March 1 and September 1 of each year. The notes are not redeemable by the Company prior to maturity and are not entitled to the benefit of any mandatory sinking fund. The notes are general unsecured obligations of the Company ranking junior in right of payment to all existing and future senior debt of the Company. In addition, the notes are effectively subordinated to all existing and future indebtedness of the Company's subsidiaries. Net proceeds from the offering were used to reduce amounts outstanding under the Credit Facility. In September 1997, the Company issued 21.7 million 6 1/2% Threshold Appreciation Price Securities ("TAPS") with a stated amount of $22.1875 per security. Each TAPS consists of (i) a stock purchase contract which obligates the holder to purchase common stock from the Company on the final settlement date (August 31, 2000) and (ii) 6 1/4% U.S. Treasury Notes due August 31, 2000. Under each stock purchase contract the Company is obligated to sell, and the TAPS holder is obligated to purchase on August 31, 2000, between 0.8197 of a share and one share of the Company's Common Stock. The exact number of common shares to be sold is dependent on the market value of the Company's Common Stock in August 2000. The number of shares issued by the Company in conjunction with this security will not be more than approximately 21.7 million or less than approximately 17.8 million (subject to certain anti-dilution adjustments). The Treasury Notes forming a part of the TAPS have been pledged to secure the obligations of the TAPS holders under the purchase contracts. Pursuant to the TAPS, TAPS holders receive payments equal to 6 1/2% of the stated amount per annum consisting of interest on the Treasury Notes at the rate of 6 1/4% per annum and yield enhancement payments payable semi-annually by the Company at the rate of 0.25% of the stated amount per annum. Additional paid-in capital has been reduced by $20.4 million for issuance costs and the present value of the annual 0.25% yield enhancement payments payable to the holders of the TAPS. These securities are not included on the Company's balance sheet; an increase in stockholders' equity will be reflected when cash proceeds of $481.4 million are received by the Company on August 31, 2000. On October 8, 1996, the Company completed a $450 million Senior Note offering. The ten year notes carry a coupon rate of 7 3/8%. Interest on the notes is payable semi-annually on April 1 and October 1 of each year. The notes are not redeemable by the Company prior to maturity and are not entitled to the benefit of any mandatory sinking fund. The notes are general unsecured obligations of the Company, ranking senior in right of payment to all existing and future subordinated indebtedness of the Company and pari passu in right of payment with all existing and future unsubordinated and unsecured obligations of the Company. The notes are effectively subordinated to all existing and future secured indebtedness of the Company and to all existing and future indebtedness and other liabilities of the Company's subsidiaries. Net proceeds from the note offering were used to reduce amounts under the Credit Facility. 33 36 QUARTERLY RESULTS (UNAUDITED) The following tables set forth certain unaudited quarterly financial data for 1996 and 1997. In the opinion of the Company's management, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of normal recurring items) necessary to present fairly the information set forth therein. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED -------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1996 1996 1996 1996 1997 1997 ---------- ---------- ------------- ------------ ---------- ---------- (IN THOUSANDS) Net revenue.......... $1,237,715 $1,286,692 $1,313,019 $1,384,593 1,467,933 $1,560,600 Operating expenses... 1,181,064 1,226,971 1,246,846 1,308,128 1,386,301 1,467,029 Net interest expense............ 7,030 4,158 5,395 8,132 9,781 12,549 Merger expenses...... 34,448 250 263,000 11,247 -- 59,434 Restructuring and impairment charges............ -- -- -- -- -- -- Other, net........... (107) 51 328 (1,347) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes....... 15,280 55,262 (202,550) 58,433 71,851 21,588 Income tax expense (benefit).......... 8,878 19,271 (53,423) 28,489 27,454 19,540 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations......... 6,402 35,991 (149,127) 29,944 44,397 2,048 Loss from discontinued operations, net of taxes.............. (68,698) -- -- -- -- (75,434) Cumulative effects of a change in accounting principle.......... -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss).... $ (62,296) $ 35,991 $ (149,127) $ 29,944 $ 44,397 $ (73,386) ========== ========== ========== ========== ========== ========== QUARTER ENDED ---------------------------- SEPTEMBER 30, DECEMBER 31, 1997 1997 ------------- ------------ (IN THOUSANDS) Net revenue.......... $1,614,062 $1,688,556 Operating expenses... 1,512,142 1,975,628 Net interest expense............ 13,969 19,449 Merger expenses...... -- -- Restructuring and impairment charges............ -- 646,651 Other, net........... -- -- ---------- ---------- Income (loss) from continuing operations before income taxes....... 87,951 (953,172) Income tax expense (benefit).......... 33,509 (158,543) ---------- ---------- Income (loss) from continuing operations......... 54,442 (794,629) Loss from discontinued operations, net of taxes.............. (5,273) (15,281) Cumulative effects of a change in accounting principle.......... -- (30,885) ---------- ---------- Net income (loss).... $ 49,169 $ (840,795) ========== ==========
The Company's historical unaudited quarterly financial data have been restated to include the results of all businesses acquired prior to December 31, 1997 that were accounted for as poolings of interests (collectively, the "Mergers"). The Company's Quarterly Reports on Form 10-Q were filed prior to the Mergers and thus, differ from the amounts for the quarters included herein. The differences caused solely by the operation of the merged companies are summarized as follows:
QUARTER ENDED MARCH 31, 1997 ------------------------ FORM 10-Q AS RESTATED ---------- ----------- (IN THOUSANDS) Net revenue................................................. $1,332,271 $1,467,933 Income from continuing operations before income taxes....... 65,411 71,851 Income tax expense.......................................... 24,925 27,454 Net income.................................................. 40,486 44,397
34 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Financial Statements of the Company meeting the requirements of Regulation S-X are filed on the succeeding pages of this Item 8 of this Annual Report on Form 10-K, as listed below:
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 36 Consolidated Balance Sheets as of December 31, 1996 and 1997...................................................... 37 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997.......................... 38 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997.............. 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997.......................... 40 Notes to Consolidated Financial Statements.................. 41
Other financial statements and schedules required under regulation S-X are listed in Item 14(a)(2) of this Annual Report on Form 10-K. 35 38 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors MedPartners, Inc. We have audited the accompanying consolidated balance sheets of MedPartners, Inc. as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MedPartners, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Birmingham, Alabama March 13, 1998 36 39 MEDPARTNERS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 1996 1997 ---------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 127,397 $ 215,801 Accounts receivable, less allowances for bad debts of $143,449 in 1996 and $204,249 in 1997.................. 660,150 763,551 Inventories............................................... 150,586 164,049 Deferred tax assets, net.................................. 52,261 72,203 Income tax receivable..................................... 2,496 10,446 Prepaid expenses and other current assets................. 69,225 86,991 ---------- ---------- Total current assets.............................. 1,062,115 1,313,041 Property and equipment, net................................. 516,769 530,033 Intangible assets, net...................................... 686,975 731,586 Deferred tax assets, net.................................... 18,333 175,619 Other assets................................................ 138,928 140,250 ---------- ---------- Total assets...................................... $2,423,120 $2,890,529 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 288,023 $ 340,106 Other accrued expenses and liabilities.................... 404,334 670,615 Accrued medical claims payable............................ 114,753 208,937 Current portion of long-term debt......................... 28,596 17,636 ---------- ---------- Total current liabilities......................... 835,706 1,237,294 Long-term debt, net of current portion...................... 715,996 1,470,622 Other long-term liabilities................................. 34,010 91,759 Contingencies (Note 13) Stockholders' equity: Common stock, $.001 par value; 400,000 shares authorized, issued-- 183,950 in 1996 and 197,766 in 1997........... 184 198 Additional paid-in capital................................ 855,162 937,233 Notes receivable from stockholders........................ (1,665) (1,367) Unrealized loss on marketable securities.................. -- (5,035) Shares held in trust, 9,317 in 1996 and 1997.............. (150,200) (150,200) Retained earnings (deficit)............................... 133,927 (689,975) ---------- ---------- Total stockholders' equity........................ 837,408 90,854 ---------- ---------- Total liabilities and stockholders' equity........ $2,423,120 $2,890,529 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 37 40 MEDPARTNERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1996 1997 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenue.............................................. $3,908,717 $5,222,019 $6,331,151 Operating expenses: Clinic expenses........................................ 1,785,564 2,683,107 3,690,859 Non-clinic goods and services.......................... 1,688,075 2,019,895 2,254,079 General and administrative expenses.................... 172,896 173,428 275,719 Depreciation and amortization.......................... 62,394 86,579 120,443 Net interest expense................................... 19,114 24,715 55,748 Restructuring and impairment charges (Note 15)......... -- -- 646,651 Merger expenses........................................ 69,064 308,945 59,434 Losses on investments.................................. 86,600 -- -- Other, net............................................. (192) (1,075) -- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes................................. 25,202 (73,575) (771,782) Income tax expense (benefit)............................. (6,987) 3,215 (78,040) ---------- ---------- ---------- Income (loss) from continuing operations....... 32,189 (76,790) (693,742) Discontinued operations: Income (loss) from discontinued operations, net of taxes of $(72,100), $(35,849) and $(51,352) in 1995, 1996 and 1997, respectively......................... (168,342) (71,221) (95,988) Net gains on sales of discontinued operations.......... 31,814 2,523 -- ---------- ---------- ---------- Loss from discontinued operations.............. (136,528) (68,698) (95,988) ---------- ---------- ---------- Loss before cumulative effect of a change in accounting principle......................... (104,339) (145,488) (789,730) Cumulative effect of a change in accounting principle, net of taxes of $(18,930).............................. -- -- (30,885) ---------- ---------- ---------- Net loss................................................. $ (104,339) $ (145,488) $ (820,615) ========== ========== ========== Earnings (loss) per common share outstanding: Income (loss) from continuing operations............... $ 0.21 $ (0.45) $ (3.73) Loss from discontinued operations...................... (0.90) (0.40) (0.52) Cumulative effect of a change in accounting principle........................................... -- -- (0.17) ---------- ---------- ---------- Net loss................................................. $ (0.69) $ (0.85) $ (4.42) ========== ========== ========== Weighted average common shares outstanding............... 152,453 169,897 185,830 ========== ========== ========== Diluted earnings (loss) per common share outstanding: Income (loss) from continuing operations............... $ 0.20 $ (0.45) $ (3.73) Loss from discontinued operations...................... (0.86) (0.40) (0.52) Cumulative effect of a change in accounting principle........................................... -- -- (0.17) ---------- ---------- ---------- Net loss................................................. $ (0.66) $ (0.85) $ (4.42) ========== ========== ========== Weighted average common and dilutive equivalent shares outstanding............................................ 158,109 169,897 185,830 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 38 41 MEDPARTNERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 --------- --------- --------- (IN THOUSANDS) COMMON STOCK: Balance, beginning of year................................ $ 136 $ 165 $ 184 Beginning balance of immaterial poolings of interests entities................................................ 1 6 -- Common stock issued and capital contributions............. 10 10 7 PPSI common stock issued during the two months ended December 31, 1995....................................... -- 1 -- Conversion of preferred stock............................. 7 -- -- Stock issued in connection with acquisitions.............. 2 2 7 Contributions to employee benefit trust................... 9 -- -- --------- --------- --------- Balance, end of year...................................... 165 184 198 ADDITIONAL PAID-IN-CAPITAL: Balance, beginning of year................................ 246,494 541,230 855,162 Beginning balance of immaterial poolings of interests entities................................................ 6 620 2,396 Common stock issued and capital contributions............. 115,027 226,190 -- Exercise of stock options................................. 2,335 46,654 75,964 Stock issued in connection with acquisitions.............. 36,373 39,880 23,466 Issuance costs and present value of yield enhancement payments payable to holders of Threshold Appreciation Price Securities........................................ -- -- (20,417) Contribution to employee benefit trust.................... 150,191 -- -- Conversion of preferred stock............................. 19,994 -- -- Capital distributions..................................... (30,970) -- -- PPSI common stock issued during the two months ended December 31, 1995....................................... -- 588 -- Transfer of predecessor company retained earnings to additional paid-in capital upon conversion from an S to a C corporation......................................... 1,780 -- -- Deferred compensation on issuance of options.............. -- -- 662 --------- --------- --------- Balance, end of year...................................... 541,230 855,162 937,233 NOTES RECEIVABLE FROM STOCKHOLDERS: Balance, beginning of year................................ (2,349) (1,930) (1,665) Net change in notes receivable from stockholders.......... 419 265 298 --------- --------- --------- Balance, end of year...................................... (1,930) (1,665) (1,367) UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES: Balance, beginning of year................................ 17 149 -- Unrealized gain (loss) on marketable securities, net of taxes................................................... 132 (149) (5,035) --------- --------- --------- Balance, end of year...................................... 149 -- (5,035) UNAMORTIZED DEFERRED COMPENSATION: Balance, beginning of year................................ (3,552) (2,682) -- Amortization of deferred compensation..................... 870 2,682 -- --------- --------- --------- Balance, end of year...................................... (2,682) -- -- SHARES HELD IN TRUST: Balance, beginning of year................................ -- (150,200) (150,200) Contribution to employee benefit trust.................... (150,200) -- -- --------- --------- --------- Balance, end of year...................................... (150,200) (150,200) (150,200) RETAINED EARNINGS (DEFICIT): Balance, beginning of year................................ 404,172 287,710 133,927 Beginning balance of immaterial poolings of interests entities................................................ 1,472 (238) (3,287) Net (loss)................................................ (104,339) (145,488) (820,615) Dividends and distributions paid.......................... (11,815) -- -- Transfer of predecessor company retained earnings to additional paid-in capital upon conversion from an S to a C corporation......................................... (1,780) -- -- Net loss for two months ended December 31, 1995 for PPSI.................................................... -- (8,057) -- --------- --------- --------- Balance, end of year...................................... 287,710 133,927 (689,975) --------- --------- --------- Total stockholders' equity......................... $ 674,442 $ 837,408 $ 90,854 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 39 42 MEDPARTNERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1996 1997 --------- ----------- ----------- (IN THOUSANDS) CASH FLOWS FROM CONTINUING OPERATIONS: Net (loss).................................................. $(104,339) $ (145,488) $ (820,615) Adjustments for non-cash items: Net loss from discontinued operations..................... 136,528 68,698 95,988 Cumulative effect of change in accounting principle, net of taxes................................................ -- -- 30,885 Restructuring and impairment charges...................... -- -- 646,651 Depreciation and amortization............................. 62,394 86,579 120,443 Deferred tax(benefit)..................................... (68,422) (36,056) (83,428) Merger expenses........................................... 69,064 308,945 59,434 Loss on sale of investments............................... 86,600 -- -- Other..................................................... 1,505 1,161 (1,513) Changes in operating assets and liabilities, net of effects of acquisitions........................................... (36,337) (107,342) 32,532 --------- ----------- ----------- Net cash and cash equivalents provided by continuing operations............................................ 146,993 176,497 80,377 Investing activities: Cash paid for merger expense.............................. (53,600) (143,285) (120,054) Net cash used to fund acquisitions........................ (212,063) (160,485) (415,329) Additions to intangibles.................................. (7,235) (19,515) (16,969) Purchase of property and equipment........................ (128,428) (126,873) (123,020) Proceeds from sale of property and equipment.............. -- -- 15,332 Proceeds from sale of marketable securities............... 1,636 27,558 -- Other..................................................... 1,964 1,083 136 --------- ----------- ----------- Net cash and cash equivalents used in investing activities............................................ (397,726) (421,517) (659,904) Financing activities: Common stock issued and capital contributions............. 100,380 271,882 76,588 Issuance costs related to Threshold Appreciation Price Securities.............................................. -- -- (18,378) Capital distributions..................................... (37,771) -- -- Net borrowings (repayments) under Credit Facility......... 72,100 (77,000) 311,500 Proceeds from issuance of senior subordinated notes....... -- -- 420,000 Proceeds from issuance of bonds payable................... -- 450,000 -- Net repayment of other debt............................... (2,638) (248,577) (54,165) Dividends and distributions paid.......................... (9,355) -- -- Other..................................................... (3) 266 297 --------- ----------- ----------- Net cash and cash equivalents provided by financing activities............................................ 122,713 396,571 735,842 Cash provided by (used in) discontinued operations.......... 114,500 (115,835) (68,412) --------- ----------- ----------- Net (decrease) increase in cash and cash equivalents........ (13,520) 35,716 87,903 Cash and cash equivalents at beginning of year.............. 101,101 88,386 127,397 Beginning cash and cash equivalents of immaterial poolings of interests entities..................................... -- 3,295 501 --------- ----------- ----------- Cash and cash equivalents at end of year.................... $ 87,581 $ 127,397 $ 215,801 ========= =========== =========== Supplemental Disclosure of Cash Flow Information Cash paid (received) during the period for: Interest................................................ $ 35,204 $ 42,979 $ 62,175 ========= =========== =========== Income taxes............................................ $ 24,939 $ (16,848) $ 4,513 ========= =========== ===========
Non-cash investing activities include notes and other obligations issued for acquisitions of $30.8 million in 1995, and $123.6 million in notes and other securities received from divestitures in 1995. Non-cash financing activities include the issuance of $55.1, $39.9 and $23.5 million of stock for acquisitions in 1995, 1996 and 1997, respectively. See accompanying Notes to Consolidated Financial Statements. 40 43 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ACCOUNTING POLICIES Description of Business MedPartners, Inc. (The "Original Predecessor") was incorporated in January 1993, and affiliated with its initial physician practice in November 1993. Mullikin Medical Enterprises, L.P. ("MME") was formed by the merger of several physician partnerships in 1994, and the original business was organized in 1957. MedPartners/Mullikin, Inc. was formed as a result of the November 1995 business combination between the Original Predecessor and MME. In February and September of 1996, MedPartners/Mullikin, Inc. combined with Pacific Physician Services, Inc. ("PPSI") and Caremark International Inc. ("Caremark"), respectively. These business combinations were accounted for as poolings of interests. The combined companies were renamed MedPartners, Inc. (herein referred to as the "Company" or "MedPartners") in conjunction with the business combination with Caremark. In June 1997, MedPartners combined with InPhyNet Medical Management Inc. ("InPhyNet") in a business combination accounted for as a pooling of interests. The financial information referred to in this discussion reflects the combined operations of these entities and several additional immaterial entities accounted for as poolings of interests. The Company operates three separate business divisions: Physician Practice Services, Pharmaceutical Services and Contract Medical Services. The Physician Practice Services Division is larger than any other physician practice management company ("PPM") in the United States, based on revenues in that business of approximately $3.0 billion for the year ended December 31, 1997. Through its network of affiliated group and independent practice association ("IPA") physicians, the Company provides primary and specialty healthcare services to prepaid enrollees and fee-for-service patients. The Pharmaceutical Services Division operates one of the largest independent prescription benefit management ("PBM") and therapeutic pharmaceutical services programs in the United States, with revenues of approximately $2.4 billion for the year ended December 31, 1997. The Contract Medical Services Division operates one of the largest hospital-based physician management service businesses and one of the largest corrections and government services managed care businesses in the United States, with revenues of approximately $806 million for the year ended December 31, 1997. The Company's Physician Practice Services Division affiliates with physicians who are seeking the resources necessary to function effectively in healthcare markets that are evolving from fee-for-service to managed care payor systems. The Company enhances clinic operations by centralizing administrative functions and introducing management tools, such as clinical guidelines, utilization review and medical management processes. The Company provides affiliated physicians with access to capital and to advanced management information systems. In addition, the Company contracts with health maintenance organizations (and other third-party payors that compensate the Company and its affiliated physicians on a prepaid basis (collectively, "HMOs")), hospitals and outside providers on behalf of its affiliated physicians. These relationships provide physicians with the opportunity to operate under a variety of payor arrangements. The Company offers medical group practices and independent physicians a range of affiliation models. These affiliations are carried out by the acquisition of physician practice services entities or practice assets, either for cash or equity, or by affiliation on a contractual basis. In all instances, the Company enters into long-term practice management agreements that provide for the management of the affiliated physicians by the Company while assuring the clinical independence of the physicians. The Company also manages PBM programs for more than 2,194 clients throughout the United States, including corporations, insurance companies, unions, government employee groups and managed care organizations. The Company dispenses approximately 44,222 prescriptions daily through three mail service pharmacies and manages patients' immediate prescription needs through a network of approximately 53,000 retail and other pharmacies. The Company's therapeutic pharmaceutical services are designed to meet the 41 44 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) healthcare needs of individuals with certain chronic diseases or conditions. These services include the design, development and management of comprehensive programs comprising drug therapy, physician support and patient education. The Company currently provides therapies and services for individuals with such conditions as hemophilia, growth disorders, immune deficiencies, cystic fibrosis and multiple sclerosis. The Company is in the process of integrating the pharmaceutical services program with the PPM business by providing pharmaceutical services to affiliated physicians, clinics and HMOs. The Contract Medical Services Division organizes and manages physicians and other healthcare professionals engaged in the delivery of emergency, radiology and teleradiology services, hospital-based primary care and temporary staffing and support services. Through its Team Health subsidiary the Company provides these services to hospitals, clinics and managed care organizations, and the Company's Government Services unit provides these services to correctional facilities, Department of Defense facilities and government-affiliated physician groups throughout the United States. The Division also provides occupational health services to corporate industrial clients. Under contracts with hospitals and other clients, the Contract Medical Services division identifies and recruits physicians and other healthcare professionals for admission to a client's medical staff, monitors the quality of care and proper utilization of services and coordinates the ongoing scheduling of staff physicians and other healthcare professionals who provide clinical coverage in designated areas of care. Basis of Presentation The Consolidated Financial Statements have been prepared on the accrual basis of accounting and include the accounts of the Company and its subsidiaries. The Company also consolidates professional corporations (PCs) in which it obtains a controlling financial interest by virtue of a long-term practice management agreement (and, in some cases, a transfer agreement) between a wholly-owned subsidiary of the Company and the PC. Where there is a transfer agreement with the PC, it enables the Company to require the stockholder(s) of the PC at any time and for any reason to transfer, at a nominal price, shares of the PC to a transferee selected by the Company. Where such agreements exist, the physician-stockholders of the PC are, as a general rule, designated by the Company and are senior members of the Company's management. Because each stockholder of the PC is the Company's nominee, whom the Company can replace at will, the transfer agreement provides the Company with unilateral control. Contracts with hospitals and payors for the provision of medical services which are entered into directly between the hospitals or the payor (e.g., HMOs and health plans) and the Company or a wholly-owned subsidiary of the Company, contributed approximately 70% of the Company's 1997 PPM revenue (43% of consolidated revenue, since PPM revenue comprised 61% of consolidated revenue). In these cases, the contractual revenue is earned by the Company or a legal subsidiary of the Company. In some cases, the Company contracts with its PCs to provide medical services under these payor or hospital contracts. The Company consolidates these PCs by virtue of its rights under a practice management agreement and, in most cases, a transfer agreement. The PCs do not have any external revenue because, as noted above, all revenue is generated through contracts with the Company. Consolidation of these PCs, therefore, does not materially affect the Company's Consolidated Financial Statements. For PCs that have directly entered into contracts with payors and/or that have the right to receive payment directly from payors for the provision of medical services in the Company's clinics, the Company consolidates these PCs because it obtains a controlling financial interest solely by virtue of a long-term practice management agreement with the PC (the Company generally does not have a transfer agreement with these types of PCs). The revenue earned by these PCs represented 30% of PPM revenue (18% of consolidated revenue) during 1997. Practice management agreements with PCs that hold payor contracts 42 45 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and/or the right to receive payment directly from payors provide three general types of financial arrangements regarding the compensation of the physician-stockholders of those PCs. PCs that contributed 2% of PPM revenue (1% of consolidated net revenue) during 1997 have practice management agreements that provide the physician-stockholders a negotiated fixed dollar amount. At the Company's sole discretion, the physicians are eligible to receive a bonus paid by the Company based on performance criteria and goals. The amount of any discretionary bonus is determined solely by the Company's management and is not directly correlated to clinic revenue or gross profit. To the extent the clinic's net revenue increases or decreases under these practice management agreements, physician compensation will also increase or decrease, pro rata, based on the practice's compensation as a percentage of the clinic net revenue. PCs that contributed 5% of PPM revenue (3% of consolidated net revenue) during 1997 have practice management agreements that compensate the physician-stockholder on a fee-for-service basis. The respective clinics generally earn revenue on a fee for service basis, and physician compensation typically represents between 40 and 70 percent of the clinic's net revenue. PCs that contributed 23% of PPM revenue (14% of consolidated net revenue) during 1997 provided physician-stockholders with a salary, plus bonus, and/or a profit-sharing payment of a percentage of the clinic's net income (i.e., contractual revenue less base physician compensation, bonus and clinic expenses). Under these various types of agreements, revenue is assigned to the Company by the PC. The Company is responsible for the billing and collection of all revenue for services provided at its clinics, as well as for paying all expenses, including physician compensation. The Company compensates the PCs, which in turn compensate the physicians. The Company is not reimbursed for the clinic expenses, rather it is responsible and at risk for all such expenses. In effect, the Company retains any residual from the operations of its PCs (and funds any deficit). No earnings accumulate in its PCs or are available for the payment of dividends to the physician-stockholders. In addition, the legal owners of its PCs do not have a substantive capital investment that is at risk, and the Company has substantially all of the capital at risk. Based on the terms of the practice management agreement, there is no economic value attributable to the capital stock of those PCs. The Company's practice management agreements with its PCs are long-term. The practice management agreements include the following provisions: (i) the initial term is 20 to 40 years; (ii) renewal provisions call for automatic and successive extension periods; (iii) the PCs cannot unilaterally terminate their agreements with the Company unless the Company fails to cure a breach of its contractual responsibilities thereunder within 30 days after notification of such breach; (iv) the Company is obligated to maintain a continuing investment of capital; (v) the Company employs the non-physician personnel of its PCs; and (vi) the Company assumes full responsibility for the operating expenses of the PC in return for an assignment of the PC's revenue. The Company has unilateral control over its PCs because the practice management agreements provide the following: (i) the Company has exclusive authority over all operating decision making (except for the dispensing of medical services); (ii) the Company has the exclusive authority to negotiate and execute contracts on behalf of its PCs: (iii) the Company has the exclusive authority to establish and approve operating and capital budgets of its PCs, including establishing total amounts to be paid to the physicians (budgets are established with the advice of an Advisory Board composed of physicians and members of the Company's management); (iv) the Company has the authority to hire, assign and terminate non-medical personnel employed by its PCs; (v) the practice management agreement establishes guidelines for the selection, hiring and termination of physicians by its PCs, and the Company recruits candidates for physician openings; (vi) the physician-stockholders of its PCs are required to cooperate with the Company to expand their respective practices at the Company's direction; (vii) where the physicians are eligible for bonuses, determination of the amount of the bonus is within the sole discretion of the Company; (viii) the Company 43 46 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) manages and administers all business functions of its PCs, including billing and collecting all medical service revenue, paying all expenses and purchasing all capital assets; (ix) the Company receives an assignment from its PCs of all rights to receive revenue from the provision of medical services; (x) the Company owns all the operational and depository accounts and has total control of all cash deposits related to clinic revenue; (xi) under an assignment, the Company owns all of its PCs' accounts receivable; (xii) the Company contracts for the provision of medical care with each of its PCs and not with individual physicians; and (xiii) the Company performs the negotiations and controls the implementation and administration of all payor contracts. The execution of any contracts on behalf of the Company's PCs by physician-stockholders of those PCs is simply perfunctory. The approval of the physician-stockholders of the PC is required with respect to the financial and operational actions of the PC only in rare and isolated cases. In all circumstances, the rights of the legal owners of the PC are protective in nature and do not allow the legal owners of the PC to participate in the control of the PC in any substantive fashion. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying Consolidated Financial Statements and Notes thereto. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts of all cash and cash equivalents approximate fair value. Marketable Securities Effective August 1, 1994, the Company adopted Statement of Financial Accounting Standard ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments in equity securities that have readily determinable fair values and investments in debt securities be classified in three categories: held-to-maturity, trading and available-for-sale. Based on the nature of the assets held by the Company and management's investment strategy, the Company's investments have been classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity unless a decline in value is judged other than temporary. When this is the case, unrealized losses are reflected in the results of operations. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. The cost of securities sold is based on the specific identification method. Inventories Inventories, which are primarily finished goods, consist of pharmaceutical drugs, medical equipment and supplies and are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are stated at cost, which for the used assets being acquired is usually determined by an independent appraisal. Depreciation of property and equipment is calculated using either the declining balance or the straight-line method over the shorter of the estimated useful lives of the assets or the term of the underlying leases. Estimated useful lives range from 3 to 10 years for equipment, 10 to 20 years for 44 47 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) leasehold improvements and 10 to 40 years for buildings and improvements based on type and condition of assets. Routine maintenance and repairs are charged to expense as incurred, while costs of betterments and renewals are capitalized. Interest costs associated with the construction of certain capital assets are capitalized as part of the cost of those assets. Interest costs approximating $1.5 million were capitalized in 1997. The Company also capitalizes purchased and internally developed software costs to the extent they are expected to benefit future operations. Intangible Assets Excess of cost over fair value of assets acquired (goodwill) is being amortized using the straight-line method over terms of the related practice management agreements, generally 20 to 40 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value of the goodwill is reduced by the estimated shortfall of cash flows. Costs of obtaining practice management agreements are capitalized as incurred and are amortized using the straight-line method. These costs include all direct costs of obtaining such agreements, which include such items as filing fees, legal fees and travel and related development costs. The Company has elected to amortize these costs over a period not to exceed the term of the related practice management agreements. Other intangible assets include costs associated with obtaining long-term financing, which are being amortized, and included in interest expense, systematically over the terms of the related debt agreements. Restatement of Financial Statements The Company has merged with several entities during 1996 and 1997 in transactions that were accounted for as poolings of interests. Accordingly, the financial statements for all periods prior to the effective dates of these mergers have been restated to include these entities (see Note 11). Income Taxes The Company is a corporation subject to federal and state income taxes. Deferred income taxes are provided for temporary differences between financial and income tax reporting (see Note 8). Net Revenue Net revenue is reported at the estimated realizable amounts from patients, third-party payors and others for services rendered. Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. Provisions for estimated third-party payor settlements and adjustments are estimated in the period the related services are rendered and are adjusted in future periods as final settlements are determined. During 1995, 1996 and 1997, approximately 7% of net revenue was received from governmental programs. Governmental programs pay for physician services based on fee schedules which are determined by the related government agency. The Company has contracts with various managed care organizations to provide physician services based on negotiated fee schedules. Under various contracts with HMOs, capitation is received to cover all physicians and hospital services needed by the HMO members. Capitation payments are recognized as revenue on the accrual basis, and represent approximately 28%, 31% and 32% of the Company's total net revenue in 1995, 1996 and 1997, respectively. A total of five HMO's, Pacificare, Foundation, CIGNA, PCA and California Care, represent approximately 17.5% of net revenue of MedPartners for the year ended December 31, 1997. Liabilities for physician services provided and hospital services incurred are accrued in the month services are 45 48 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) rendered. The provision for accrued claims payable, which represents the amount payable for services incurred by patients not yet paid, is validated by actuarial review. Management believes that the provision at December 31, 1997 is adequate to cover claims which will ultimately be paid. Reclassifications Certain prior-year balances have been reclassified to conform with the current year's presentation. Such reclassifications had no material effect on the previously reported consolidated financial position, results of operations or cash flows of the Company. Fiscal Year At January 1, 1996, PPSI changed its fiscal year-end from July 31 to December 31. Amounts consolidated for PPSI prior to January 1, 1996 were based on an October 31 year-end. As a result, the Consolidated Financial Statements for the year ended December 31, 1995 include the 12 months of operations of PPSI for the year ended October 31, 1995. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock-based compensation plans. The Company applies APB 25 and related interpretations in accounting for its plans because the alternative fair value accounting provided for under FASB Statement 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. New Accounting Pronouncements In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128, "Earnings per Share". SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. In February, 1997, SFAS 129 "Disclosure of Information about Capital Structure", was issued by the FASB and is effective for fiscal years beginning after December 15, 1997. The new standard reinstates various securities disclosure requirements previously in effect under Accounting Principles Board ("APB") 15, which has been superseded by SFAS 128. The Company does not expect adoption of SFAS 129 to have a material effect, if any, on its financial condition or results of operations. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS 130 establishes reporting and display requirements with respect to comprehensive income and its components. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This Statement is effective for fiscal years beginning after December 15, 1997 and will require reclassification of financial statements for prior periods for comparative purposes. The Company does 46 49 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) not expect adoption of SFAS 130 to have a material effect, if any, on its financial condition or results of operations. In June 1997, the FASB issued "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The adoption of SFAS 131 will have no impact on the Company's results of operations, financial position or cash flows. The Emerging Issues Task Force ("EITF") issued guidance during 1997, EITF 97-2, on the consolidation of physician practice revenues. Under EITF 97-2 PPMs will be required to consolidate financial information of a physician practice where the PPM acquires a "controlling financial interest" in the practice through the execution of a contractual management agreement even though the PPM does not own a controlling equity interest in the physician practice. EITF 97-2 outlines six requirements for establishing a controlling financial interest. The guidance continued in EITF 97-2 is effective for the Company's financial statements for the year ended December 31, 1998. The Company does not believe that the implementation of this guidance will have a material impact on its financial condition, results of operations or cash flows. In November 1997, the EITF issued EITF 97-13 "Accounting for Costs Incurred in Connection with a Consulting Project or an Internal Project that Combines Business Process Reengineering and Information Technology". EITF 97-13 requires process reengineering costs, as defined, which had been previously capitalized as part of an information technology project to be written off by cumulative catch-up adjustment in the fourth quarter of 1997. The Company incurred such costs primarily in connection with the process reengineering associated with the new operating systems installed for its PBM operations. 2. DISCONTINUED OPERATIONS During 1995, Caremark divested several non-strategic businesses. In accordance with APB 30, which addresses the reporting for disposition of business segments, the Company's Consolidated Financial Statements present the operating results and net assets of discontinued operations separately from continuing operations. Prior periods have been restated to conform with this presentation. Effective March 31, 1995, Caremark sold its Clozaril(R) Patient Management System to Health Management, Inc. for $23.3 million in cash and notes. This business involved managing the care of schizophrenia patients nationwide through the distribution of the Clozaril(R) drug and related testing services to monitor patients for potentially serious side effects. Net revenue of this business was $12.3 million for the three months ended March 31, 1995 and $84.0 million for the year ended December 31, 1994. The after-tax gain on disposition of this business was $11.1 million. Effective April 1, 1995, Caremark sold its home infusion business to Coram Healthcare Corporation ("Coram") for $309 million in cash and securities, subject to post-closing adjustments based on the net assets transferred. The sale included Caremark's home intravenous infusion therapy, women's health services and the Home Care Management System. Certain severance and legal obligations remained with Caremark (see Note 13). Net revenue of this business was $96.1 million for the period ended April 1, 1995 and $441.9 million for the year ended December 31, 1994. The after-tax loss on disposition of this business was $4.0 million. In 1995 net losses from this business reflected in discontinued operations include $154.8 million related to the legal settlement discussed in Note 13. Effective September 15, 1995, Caremark sold its oncology management services business to Preferred Oncology Networks of America, Inc., for securities valued at $3.6 million. The business provides management 47 50 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services to single-specialty oncology practices. Net revenue of this business for the 1995 period up to the date of sale was $8.9 million and $29.4 million for the year ended December 1994. There was no after-tax gain or loss on the disposition. Effective December 1, 1995, Caremark sold its Caremark Orthopedic Services, Inc. subsidiary to HEALTHSOUTH Corporation for $127.0 million in cash, subject to post-closing adjustments. This business provides outpatient physical therapy and rehabilitation services. Net revenue of this business for the 1995 period up to the date of sale was $69.1 million and $55.8 million for the year ended December 31, 1994. The after-tax gain on disposition of this business was $24.7 million. Effective February 29, 1996, Caremark sold its Nephrology Services business to Total Renal Care, Inc. for $49.0 million in cash, subject to certain post-closing adjustments. The after-tax gain on disposition of this business, net of disposal costs, was $2.5 million, which was included in discontinued operations. In March 1996 Caremark agreed to settle all disputes with a number of private payors related to its home infusion business which was sold to Coram in 1995. The settlements resulted in an after-tax charge of $43.8 million. In addition, Caremark agreed to pay $24.1 million after-tax to cover the private payors' pre-settlement and settlement related expenses. An after-tax charge for the above amounts has been recorded in 1996 discontinued operations. In September 1995, Coram filed a complaint in the San Francisco Superior Court against Caremark, its subsidiary, Caremark Inc., and others. The complaint, which arose from Caremark's sale to Coram of Caremark's home infusion therapy business in April 1995 for approximately $209.0 million in cash and $100.0 million in securities, alleged breach of the sale agreement and made other related claims seeking compensatory damages of $5.2 billion, in the aggregate. Caremark filed counterclaims against Coram and also filed a lawsuit in the United States District Court in Chicago against Coram, claiming securities fraud. On July 1, 1997, the parties to the Coram litigation announced that a settlement had been reached pursuant to which Caremark returned for cancellation all of the securities issued by Coram in connection with the acquisition and paid Coram $45 million in cash. The settlement agreement also provided for the termination and resolution of all disputes and issues between the parties and for the exchange of mutual releases. The settlement resulted in a 1997 after-tax charge from discontinued operations of approximately $75.4 million. Also included in discontinued operations for 1997 is a third quarter after-tax charge of $5.3 million related to the settlement of a class action lawsuit filed in August and September 1994 against Caremark. In addition, the Company recorded an after-tax charge from discontinued operations of approximately $15.3 million in the fourth quarter of 1997. This charge relates to changes in estimates of amounts due from and due to third parties as well as various litigation, all of which resulted from operations previously owned by Caremark. 3. FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, investments in marketable and non-marketable securities and debt obligations. The carrying value of marketable and non-marketable securities, which approximated fair value, are not material. The carrying value of debt obligations was $450.0 million and $870.0 million at December 31, 1996 and 1997, respectively. The fair value of these obligations approximated $451.9 million and $858.3 million at December 31, 1996 and 1997, respectively. The fair value of marketable securities is determined using market quotes and rates. The fair value of non-marketable securities are estimated based on information provided by these companies. The fair value of long-term debt has been estimated using market quotes. 48 51 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1995, the Company recorded a pre-tax charge to income of $86.6 million ($52.0 million after tax) to reflect unrealized losses on investments that were judged other than temporary. Interest expense totaled $32.9, $35.6 and $67.6 million in 1995, 1996 and 1997, respectively. Interest income totaled $13.8, $10.9 and $11.9 million in 1995, 1996 and 1997, respectively. 4. INTANGIBLE ASSETS Net intangible assets totaled $687.0 million and $731.6 million at December 31, 1996 and 1997, respectively. As of December 31, 1996 and 1997, accumulated amortization totaled $55.3 million and $68.1 million, respectively. Goodwill, which represents the excess of consideration paid for companies acquired in purchase transactions over the fair value of net assets acquired, and consideration paid clinic service agreements, represent the primary components of intangible assets. During the fourth quarter of 1997 the Company reduced the carrying value of goodwill related to several transactions. See Note 15 for further discussion. 5. PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT CONSISTED OF THE FOLLOWING:
DECEMBER 31, --------------------- 1996 1997 --------- --------- (IN THOUSANDS) Land........................................................ $ 54,340 $ 45,804 Buildings and leasehold..................................... 186,406 191,264 Improvements and equipment.................................. 409,911 482,896 Construction-in-progress.................................... 91,923 83,435 --------- --------- 742,580 803,399 Less accumulated depreciation and amortization.............. (225,811) (273,366) --------- --------- $ 516,769 $ 530,033 ========= =========
The net book value of capitalized lease property approximated $11.1 and $10.4 million at December 31, 1996 and 1997, respectively. Capitalized software costs included in construction-in-progress approximated $56.5 million at December 31, 1996, the majority of which was placed into service on January 1, 1997. 6. LONG-TERM DEBT LONG-TERM DEBT CONSISTED OF THE FOLLOWING:
DECEMBER 31, --------------------- 1996 1997 -------- ---------- (IN THOUSANDS) Advances under Credit Facility, due 2001.................... $213,000 $ 524,500 Bonds Payable with interest at 7 3/8%, interest only paid semi-annually, due in 2006................................ 450,000 450,000 Senior subordinated notes with interest at 6 7/8%, interest only paid semi-annually, due in 2000...................... -- 420,000 Other long-term notes payable............................... 63,339 82,091 Capital lease obligations................................... 18,253 11,667 -------- ---------- 744,592 1,488,258 Less amounts due within one year............................ (28,596) (17,636) -------- ---------- $715,996 $1,470,622 ======== ==========
49 52 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective September 5, 1996, the Company established a $1 billion unsecured revolving Credit Facility with a final maturity date of September 5, 2001 (the "Credit Facility"). This Credit Facility replaced the Company's then existing Credit Facility. The purpose of the facility is to provide funds for working capital, acquisitions and other general corporate purposes. As of December 31, 1997, $524.5 million was outstanding under the Credit Facility. The Credit Facility contains affirmative and negative covenants which include requirements that the Company maintain certain financial ratios (including minimum net worth, minimum fixed charge coverage ratio and maximum indebtedness to cash flow), and establishes certain restrictions on investments, mergers and sales of assets. Additionally, the Company is required to obtain bank consent for acquisitions with an aggregate purchase price in excess of $75 million and for which more than half of the consideration is to be paid in cash. The Credit Facility is unsecured but provides a negative pledge on substantially all assets of the Company. On January 14, 1998, the Company obtained a waiver of all financial covenants contained in the Credit Facility. The financial covenants are currently waived through May 29, 1998. The Company expects to negotiate an amendment to the Credit Facility or replace it prior to the expiration of the waiver. Effective September 19, 1997, the Company completed a $420 million senior subordinated note offering. These three year notes carry a coupon rate of 6 7/8%. Interest on the notes is payable semi-annually on March 1 and September 1 of each year. The notes are not redeemable by the Company prior to maturity and are not entitled to the benefit of any mandatory sinking fund. The notes are general unsecured obligations of the Company ranking junior in right of payment to all existing and future senior debt of the Company. In addition, the notes are effectively subordinated to all existing and future indebtedness of the Company's subsidiaries. Net proceeds from the offering were used to reduce indebtedness outstanding under the Credit Facility. Effective October 8, 1996, the Company completed a $450 million Senior Note offering. The ten year notes carry a coupon rate of 7 3/8%. Interest on the notes is payable semi-annually on April 1 and October 1 of each year. The notes are not redeemable by the Company prior to maturity and are not entitled to the benefit of any mandatory sinking fund. The notes are general unsecured obligations of the Company, ranking senior in right of payment to all existing and future subordinated indebtedness of the Company and pari passu in right of payment with all existing and future unsubordinated and unsecured obligations of the Company. The notes are effectively subordinated to all existing and future secured indebtedness of the Company and to all existing and future indebtedness and other liabilities of the Company's subsidiaries. Net proceeds from the note offering were used to reduce amounts under the Credit Facility. The following is a schedule of principal maturities of long-term debt as of December 31, 1997:
(IN THOUSANDS) -------------- 1998........................................................ $ 18,557 1999........................................................ 19,454 2000........................................................ 455,576 2001........................................................ 530,261 2002........................................................ 5,369 Thereafter.................................................. 461,864 Amounts representing interest and discounts................. (2,823) ---------- Total............................................. $1,488,258 ==========
To manage interest rates and to lower its cost of borrowing, the Company entered into an interest rate swap during 1997. The notional principal amount of the swap is $200 million and is used solely as the basis for which the payment streams are calculated and exchanged. The notional amount is not a measure of the exposure to the company through the use of the swap. The interest rate swap matures in relationship to its existing long-term debt and has a final expiration of October 1, 2006. The purpose of the interest rate swap was 50 53 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to essentially modify the interest rate characteristics of a portion of the Company's debt, from fixed to floating rate. Under the terms of the contract, the Company and a major financial institution agree to pay, on a semi-annual basis, the differential between a fixed rate and a floating rate index, as stipulated in its contracts. Amounts to be paid or received under the contracts are recorded as an adjustment to interest expense. The Company is subject to market risk as interest rates fluctuate and impact the interest payments due on the notional principal amount. The fair value of the interest rate swap contract is determined based on the difference between the contract rate of interest and the rates currently quoted for contracts of similar terms and maturities. The market value of the contract at December 31, 1997 if it were to be sold or unwound was not material. Operating Leases: Operating leases generally consist of short-term lease agreements for professional office space where the medical practices are located and administrative office space. These leases generally have five-year terms with renewal options. The following is a schedule of future minimum lease payments under noncancelable operating leases as of December 31, 1997:
(IN THOUSANDS) -------------- 1998........................................................ $123,225 1999........................................................ 111,797 2000........................................................ 99,235 2001........................................................ 73,576 2002........................................................ 64,980 Thereafter.................................................. 269,010 -------- Total............................................. $741,823 ========
7. CAPITALIZATION The Company's Third Restated Certificate of Incorporation provides that the Company may issue 9.5 million shares of Preferred Stock, par value $0.001 per share, 0.5 million shares of Series C Junior Participating Preferred Stock, par value $0.001 per share, and 400 million shares of Common Stock, par value $0.001 per share. As of December 31, 1997 no shares of the preferred stock were outstanding. On March 13, 1996, the Company completed a secondary public offering of 6.6 million shares of its common stock. The net proceeds of the offering were $194.0 million. Proceeds of the offering were used to pay outstanding indebtedness under the then existing Credit Facility. In April 1996, $69 million of the proceeds were used to repay PPSI's convertible subordinated debentures. The remainder of the net proceeds were used to fund acquisitions of certain assets of physician practices, expansion of physician services, working capital and other general corporate purposes. In September 1997, the Company issued 21.7 million 6 1/2% Threshold Appreciation Price Securities ("TAPS") with a stated amount of $22.1875 per security. Each TAPS consists of (i) a stock purchase contract which obligates the holder to purchase common stock from the Company on the final settlement date (August 31, 2000) and (ii) 6 1/4% U.S. Treasury Notes due August 31, 2000. Under each stock purchase contract the Company is obligated to sell, and the TAPS holder is obligated to purchase on August 31, 2000, between 0.8197 of a share and one share of the Company's common stock. The exact number of common shares to be sold is dependent on the market value of the Company's common shares in August 2000. The number of shares issued by the Company in conjunction with this security will not be more than approximately 21.7 million or less than approximately 17.8 million (subject to certain anti-dilution adjustments). The Treasury Notes forming a part of the TAPS have been pledged to secure the obligations of the TAPS holders under the purchase contracts. Pursuant to the TAPS, TAPS holders receive payments equal to 6 1/2% of the stated amount per annum consisting of interest on the Treasury Notes at the rate of 6 1/4% per annum and yield enhancement payments payable semi-annually by the Company at the rate of 0.25% of the 51 54 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stated amount per annum. Additional paid-in capital has been reduced by approximately $20.4 million for issuance costs and the present value of the annual 0.25% yield enhancement payments payable to the holders of the TAPS. These securities are not included on the Company's balance sheet; an increase in stockholders' equity will be reflected when cash proceeds of $481.4 million are received by the Company on August 31, 2000. The earnings (loss) per common share outstanding computation is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding. For the computation of diluted earnings (loss) per share, no incremental shares related to options are included for the years ended December 31, 1996 and 1997, due to losses from continuing operations. The weighted average common and dilutive equivalent shares outstanding for the year ended December 31, 1995 of 158.1 million includes 4.5 million common shares issuable on exercise of certain stock options and 1.1 million weighted average shares of redeemable preferred stock. 8. INCOME TAX EXPENSE At December 31, 1997, the Company had a cumulative net operating loss ("NOL") carryforward for federal income tax purposes of approximately $645 million available to reduce future amounts of taxable income. If not utilized to offset future taxable income, the net operating loss carryforwards will expire on various dates through 2012. Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows:
DECEMBER 31, ------------------- 1996 1997 ------- --------- (IN THOUSANDS) Deferred tax assets: Merger/acquisition costs.................................. $51,696 $ 22,325 Bad debts................................................. 15,971 14,640 Restructuring............................................. -- 18,900 Malpractice............................................... -- 7,119 Goodwill amortization..................................... -- 128,269 Accrued vacation.......................................... 5,427 9,202 NOL carryforward.......................................... 72,484 215,147 Alternative minimum tax credit carryforward............... 20,195 20,195 Other..................................................... 32,147 55,308 ------- --------- Gross deferred tax assets................................... 197,920 491,105 Valuation allowance for deferred tax assets................. (2,419) (109,278) Deferred tax liabilities Malpractice reserves...................................... -- 16,529 Change in accounting method............................... -- 3,390 Prepaid expenses.......................................... -- 4,339 State taxes............................................... 2,264 5,399 Merger reserves........................................... 4,235 -- Legal reserve............................................. 4,400 -- Shared risk receivable.................................... 7,135 4,423
52 55 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------- 1996 1997 ------- --------- (IN THOUSANDS) Securities write-down..................................... 13,449 -- Excess tax depreciation................................... 30,363 15,546 Goodwill.................................................. 9,648 -- Other amortization........................................ 31,115 71,256 Other..................................................... 22,298 13,123 ------- --------- Gross deferred tax liabilities.............................. 124,907 134,005 ------- --------- Net deferred tax asset...................................... $70,594 $ 247,822 ======= =========
Management believes, considering all available information, including the Company's history of earnings from continuing operations (after adjustments for nonrecurring items, restructuring charges, permanent differences and other appropriate adjustments) and after considering appropriate tax planning strategies, it is more likely than not that the Company will generate sufficient taxable income in the appropriate carryforward periods to realize the $247.8 million in net deferred tax assets. The total net deferred tax assets (both current and noncurrent) have been reduced to the amount management considers realizable by establishing valuation allowances aggregating $109.3 million at December 31, 1997. The valuation allowances have been established due to the uncertainty associated with forecasting future income. The valuation allowances also include $9.3 million related to certain net operating losses of non-consolidated entities that can only offset future taxable income generated by those entities. Income tax expense (benefit) on continuing operations is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1996 1997 -------- -------- -------- (IN THOUSANDS) Current: Federal.............................................. $ 50,768 $ 34,508 $ 294 State................................................ 10,667 4,763 5,094 -------- -------- -------- 61,435 39,271 5,388 Deferred: Federal.............................................. (58,950) (30,054) (72,173) State................................................ (9,472) (6,002) (11,255) -------- -------- -------- (68,422) (36,056) (83,428) -------- -------- -------- $ (6,987) $ 3,215 $(78,040) ======== ======== ========
The differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes were as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 -------- -------- --------- (IN THOUSANDS) Federal tax at statutory rate......................... $ 8,821 $(25,751) $(270,123) Add (deduct): State income tax, net of federal tax benefit........ (713) (401) (3,879) Non deductible amortization......................... -- -- 42,272 Non deductible restructuring........................ -- -- 29,387 Increase (decrease) in valuation allowance.......... (14,240) 1,170 106,859 Non deductible merger expense....................... -- 24,786 16,331 Other............................................... (855) 3,411 1,113 -------- -------- --------- $ (6,987) $ 3,215 $ (78,040) ======== ======== =========
53 56 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK BASED COMPENSATION PLANS The Company offers participation in stock option plans to certain employees and individuals. All of the outstanding options under these plans were granted at 100% of the market value of the stock on the dates of grant. Awarded options typically vest and become exercisable in incremental installments over four years and expire no later than ten years and one day from the date of grant. The number of shares authorized under the various plans was approximately 34.4 million as of December 31, 1997. The following table summarizes stock option activity for the indicated years:
1996 1997 --------------------------- --------------------------- OPTIONS WEIGHTED- OPTIONS WEIGHTED- (IN AVERAGE (IN AVERAGE THOUSANDS) EXERCISE PRICE THOUSANDS) EXERCISE PRICE ---------- -------------- ---------- -------------- Outstanding: Beginning of year............................. 17,008 $13.71 19,294 $14.69 Granted....................................... 12,448 19.11 10,047 19.02 Exercised..................................... (4,281) 10.87 (6,315) 10.26 Canceled/expired.............................. (5,881) 23.98 (1,330) 18.05 ------- ------- End of year................................... 19,294 14.69 21,696 17.50 Exercisable at end of year.................... 12,472 13.57 11,755 15.66 Weighted-average fair value of options granted during the year............................... $12.06 $ 8.19
The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS EXERCISABLE -------------------------------------------------------------------------------------- OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED- OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE AVERAGE EXERCISE PRICE RANGE AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE - -------------------- -------------- ---------------- ---------------- -------------- -------------- (IN THOUSANDS) (YEARS) (IN THOUSANDS) Under $12.00.............. 2,393 3.46 $ 8.77 2,194 $ 9.52 $12.00-$16.99............. 8,090 7.47 16.04 5,446 15.75 $17.00 and above.......... 11,213 9.19 19.15 4,115 18.82
Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its stock-based compensation plans under the fair value method as described in Statement 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
1996 1997 ----- ----- Risk-free interest rates.................................... 6.21% 6.03% Expected volatility......................................... 0.442 0.396 Expected option lives (years)............................... 5.4 5.4
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement 123, the 54 57 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's net loss and loss per share would have been reduced to pro forma net loss from continuing operations of $(123.0) and $(761.1) million and pro forma net losses of $(191.7) and $(888.0) million for the years ended December 31, 1996 and 1997, respectively. Per share amounts would have been reduced to pro forma net loss from continuing operations of $(0.72) and $(4.10) and pro forma net losses per share of $(1.13) and $(4.78) for the years ended December 31, 1996 and 1997, respectively. 10. ACQUISITIONS During the years ended December 31, 1995, 1996 and 1997, the Company, through its wholly-owned subsidiaries, acquired certain operating assets of various medical practices. Simultaneously with each medical practice acquisition, the Company entered into a practice management agreement which generally has a 20-40 year term. (See "Basis of Presentation" in Note 1). In May 1995, Caremark entered into a long-term affiliation agreement with Friendly Hills HealthCare Network ("Friendly Hills"), an integrated health care delivery system headquartered in La Habra, California. Friendly Hills operates 18 medical offices and an acute care hospital. Caremark acquired substantially all of the assets of Friendly Hills for approximately $140 million and agreed to provide various management and administrative services. The transaction has been accounted for by the purchase method of accounting. The Company invested approximately $151.2 million in cash, stock and notes for other acquisitions in 1995. In January 1996, Caremark completed its agreement with CIGNA Healthcare of California, a managed healthcare subsidiary of CIGNA Corporation, to acquire substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los Angeles area staff model delivery system ("CIGNA") for approximately $80.4 million in cash. The transaction has been accounted for by the purchase method of accounting. During the year ended December 31, 1996, $160.5 million in cash and 2 million shares of stock valued at $39.9 million were given in exchange for the net assets of CIGNA and other entities. In May 1997, the Company completed an acquisition of Aetna U.S. Healthcare's PPM business for approximately $56.8 million in cash. The Company's acquisition of Healthways Family Medical Center included 47 health centers located in Atlanta, the Baltimore/D.C. and northern Virginia area, Philadelphia, Dallas, Akron, Chicago and southern California. In September 1997, the Company completed the acquisition of Talbert Medical Management Holdings Corporation ("Talbert") for $187.1 million in cash. Talbert operated 52 health centers in five Southwestern states with approximately 258,000 patients in the network. In December 1997, the Company completed the acquisition of the Health Centers Division of Blue Cross Blue Shield of Massachusetts for $103.1 million in cash. Of this amount, $51.9 million is to be paid in the first quarter of 1998 and is included in other accrued liabilities at December 31, 1997. The transaction includes 10 health centers locations mainly in the Boston and Springfield metropolitan areas. The health centers currently provide services to 80,000 patients enrolled with Blue Cross and Blue Shield. The transaction also includes a 10-year provider agreement that extends to all current and future MedPartners' affiliated physicians in Massachusetts. During the year ended December 31, 1997, $415.3 million in cash and 1.1 million shares of stock valued at $23.5 million were given in exchange for the net assets of these and other entities acquired in purchase transactions. All of the aforementioned acquisitions have been accounted for by the purchase method of accounting. As such, operating results of acquired businesses are included in the Company's Consolidated Financial Statements as of their respective dates of acquisition. 55 58 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. MERGERS Effective February 22, 1996, and September 5, 1996, the Company merged with PPSI and Caremark, respectively, in transactions that were accounted for as poolings of interests. The Company exchanged 11.0 million and 90.5 million shares of its common stock for all of the outstanding common stock of PPSI and Caremark, respectively. During the year ended December 31, 1996, the Company also exchanged 11.3 million shares of its common stock in additional transactions accounted for as poolings of interests. Effective June 27, 1997, the Company merged with InPhyNet in a transaction that was accounted for as a pooling of interests. The Company exchanged approximately 19.3 million shares of its common stock for all outstanding common stock of InPhyNet. The Company's historical financial statements for all periods have been restated to include the results of all material transactions accounted for as poolings of interests.
COMBINED MEDPARTNERS INPHYNET (AS REPORTED) ----------- -------- ------------- (IN THOUSANDS) Year ended December 31, 1995 Net revenue.............................................. $3,583,377 $325,340 $3,908,717 Net (loss) income........................................ (115,627) 11,288 (104,339) Year ended December 31, 1996 Net revenue.............................................. 4,813,499 408,520 5,222,019 Net (loss) income........................................ (158,529) 13,041 (145,488) Year ended December 31, 1997 Net revenue.............................................. 5,728,922 602,229 6,331,151 Net loss................................................. (782,449) (38,165) (820,614)
Included in pre-tax loss for the year ended December 31, 1996 are merger costs totaling $308.9 million. Approximately $32.5 and $251.3 million relate to the mergers with PPSI and Caremark, respectively. The components of this cost are as follows (in thousands): Investment banking fees..................................... $ 30,435 Professional fees........................................... 30,149 Other transaction costs..................................... 30,818 Transition and debt restructuring........................... 27,701 Severance costs for identified employees.................... 53,547 Impairment of assets........................................ 27,373 Abandonment of facilities................................... 13,909 Conforming of accounting policies........................... 39,002 Operational restructuring................................... 42,116 Other charges............................................... 13,895 -------- Total....................................................... $308,945 ========
56 59 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Included in pre-tax loss for the year ended December 31, 1997, are merger costs totaling $59.4 million primarily related to the business combination with InPhyNet. The components of this costs are as follows (in thousands): Brokerage fees, professional fees, filing fees and other transaction costs......................................... $24,739 Conforming of accounting policies........................... 15,971 Severance and related benefits.............................. 5,272 Impairment of assets........................................ 2,824 Operational restructuring................................... 1,500 Transition and debt restructuring........................... 1,112 Other charges............................................... 8,016 ------- Total....................................................... $59,434 =======
Prior to its merger with the Company, PPSI reported on a fiscal year ending on July 31. The restated financial statements for all periods prior to and including December 31, 1995, are based on a combination of the Company's results for its December 31 fiscal year and an October 31 fiscal year for PPSI. Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end; accordingly, all Consolidated Financial Statements for periods after December 31, 1995 are based on a consolidation of all of the Company's subsidiaries on a December 31 year end. PPSI's historical results of operations for the two months ending December 31, 1995 are not included in the Company's consolidated statements of operations or cash flows. An adjustment has been made to stockholders' equity as of January 1, 1996, to adjust for the effect of excluding PPSI's results of operations for the two months ending December 31, 1995. The net loss for the two month period ended December 31, 1995, relates primarily to increases in PPSI's reserves to conform to the Company's methodology of calculating reserves. The following is a summary of operations and cash flow for the two months ending December 31, 1995 (in thousands): Statement of Operations Data: Net revenue............................................... $ 69,850 Net loss.................................................. (8,057) Statement of Cash Flow Data: Net cash used by operating activities..................... (3,569) Net cash provided by investing activities................. 4,455 Net cash used in financing activities..................... (81)
12. RETIREMENT SAVINGS PLAN The Company and certain subsidiaries have employee benefit plans to provide retirement, disability and death benefits to substantially all of their employees and affiliates. The plans primarily are defined contribution plans. Effective January 1, 1998, the Board of Directors approved a Retirement Savings Plan for employees and affiliates. The plan is a defined benefit contribution plan in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Full-time employees and affiliates are eligible to enroll in the plan in the first quarter following two months of service. Individuals on a part-time and per diem basis are eligible to participate in the quarter following completion of one year of service. For employees, the Company makes a matching contribution of 50% of the employee's pretax contribution, up to 6% of the employee's compensation, in any calendar year. Under the plan, no matching contribution is made for affiliates. The various entities that have been acquired or merged into the Company have various retirement plans that will be evaluated for possible termination or incorporation into the Company's Plan. 57 60 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. CONTINGENCIES In June 1995, Caremark agreed to settle an investigation with the Office of the Inspector General of the U.S. Department of Health and Human Services (the "OIG") and the U.S. Department of Justice ("DOJ"), the Veterans Administration, the Federal Employee Health Benefits Program ("FEHBA"), the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS") and related state investigative agencies in all 50 states and the District of Columbia (the "OIG Settlement"). Under the terms of the OIG Settlement, which covered allegations dating back to 1986, a subsidiary of Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and Ohio. The basis of these guilty pleas was Caremark's failure to provide certain information to CHAMPUS and FEHBP, federally funded healthcare benefit programs, concerning financial relationships between Caremark and a physician in each of Minnesota and Ohio. The OIG Settlement allows Caremark to continue participating in Medicare, Medicaid and other government healthcare programs. In its agreement with the OIG and the DOJ, Caremark agreed to continue to maintain certain compliance-related oversight procedures. Should these oversight procedures reveal credible evidence of legal or regulatory violations, Caremark is required to report such violations to the OIG and DOJ. Caremark is, therefore, subject to increased regulatory scrutiny and, in the event it commits legal or regulatory violations, Caremark may be subject to an increased risk of sanctions or penalties, including disqualification as a provider of Medicare or Medicaid services, which would have a material adverse effect on the operating results and financial condition of MedPartners. Caremark took an after-tax charge to discontinued operations of $154.8 million in 1995 for these settlement payments, costs to defend ongoing derivative, security and related lawsuits and other associated costs. In connection with the matters described above relating to the OIG Settlement, Caremark is the subject of various non-government claims and may in the future become subject to additional OIG-related claims. Caremark is the subject of, and may be in the future subjected to, various private suits and claims being asserted in connection with matters relating to the OIG Settlement by Caremark's stockholders, patients who received healthcare services from Caremark and such patients' insurers. The Company does not believe that the above-referenced settlements or suits will materially affect its ability to pursue its long-term business strategy. There can be no assurance, however, that additional costs, claims and damages will not occur or that the ultimate costs related to the settlements will not exceed estimates in the preceding paragraphs. MedPartners cannot determine at this time what costs or liabilities may be incurred in connection with future disposition of non-governmental claims or litigation. Such additional costs or liabilities, if incurred, could have a material adverse effect on the operating results and financial condition of MedPartners. In May 1996, three home infusion companies, purporting to represent a class consisting of all of Caremark's competitors in the alternate site infusion therapy industry, filed a complaint against Caremark, Inc., Caremark International Inc., and two other corporations in the United States District Court for the District of Hawaii alleging violations of the federal antitrust laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the federal antitrust laws and California's unfair business practices statute. The complaint seeks unspecified treble damages, attorneys' fees and expenses. The Company intends to defend this case vigorously. Although management believes, based on information currently available, that the ultimate resolution is not likely to have a material adverse effect on the operating results and financial condition of the Company, there can be no assurance that the ultimate resolution of the matter, if adversely determined would not have a material adverse effect on the operating results and financial condition of the Company. In March 1998, a group of 22 private payors filed an action against Caremark Inc. and Caremark International Inc. seeking recovery for losses allegedly suffered by the plaintiffs during the period 1986-1995 as a result of an allegedly fraudulent scheme conceived and implemented by Caremark Inc. and Caremark International Inc. to submit and cause other providers to submit fraudulent claims for payment of healthcare benefits by the plaintiffs related to Caremark's home infusion business. Caremark sold its home infusion business in 1995. The plaintiffs allege that Caremark failed to disclose to the plaintiffs the existence and 58 61 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) nature of certain relationships that Caremark had with various physicians and the fact that certain funds were paid to such physicians without the plaintiffs' knowledge or approval. The action prays for an unspecified amount in damages and for trebled damages under RICO and other related fraud claims. Caremark intends to defend this lawsuit vigorously. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners, there can be no assurance that the ultimate resolution of this matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of MedPartners. In late August 1994, certain patients of a physician who prescribed human growth hormone distributed by Caremark and the sponsor of a health insurance plan of one of those patients filed complaints against Caremark, employees of Caremark and others in the United States District Court for the District of Minnesota. The complaint alleged violations of the federal mail and wire fraud statutes, RICO and the state consumer fraud statute, as well as conspiracy to breach a fiduciary duty, negligence and fraud. The complaint sought unspecified treble damages, and attorneys' fees and expenses. In July 1996, these plaintiffs also filed a separate purported class action lawsuit in the Minnesota State Court in the County of Hennepin against a subsidiary of Caremark alleging all of the claims contained in the federal complaint and sought unspecified damages, attorneys' fees and expenses and an award of punitive damages. In November 1996, in response to a motion by the plaintiffs, the Court dismissed the United States District Court cases without prejudice. On March 28, 1997, the Minnesota state court lawsuit was dismissed with prejudice, which decision was affirmed by the Minnesota Court of Appeals on November 4, 1997. On December 31, 1997, the Minnesota Supreme Court denied plaintiffs' petition for further reconsideration. This action is concluded because plaintiffs have no further avenue of appeal. In July 1995, another patient of the same physician filed a separate complaint in the District of South Dakota against the physician, Caremark and another corporation alleging violations of the federal laws prohibiting payment of remuneration to induce referral of Medicare and Medicaid beneficiaries, the federal mail fraud statutes and RICO. The complaint also alleges the intentional infliction of emotional distress and seeks trebling of at least $15.9 million in general damages, attorneys' fees and costs, and an award of punitive damages. In August 1995, the parties agreed to a stay of all proceedings until final judgment was entered in a criminal case that was then pending against this physician. All charges against the physician have been dismissed. Caremark has moved for the dismissal of the South Dakota case or transfer of the case to Minnesota. Management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners. In December 1997, a class action was filed in the United States District Court for the Central District of California. The action purports to be a class action on behalf of all of the shareholders of Talbert which was acquired by MedPartners in a cash tender offer transaction closed in September 1997 pursuant to which each outstanding share of Talbert was acquired for $63 cash per share. The action alleges that MedPartners violated Rule 14d-10 under the Securities Exchange Act of 1934, the so-called "all holder, best price" rule, by reason of provisions in the employment agreements of two senior officers of Talbert, which provided for a certain contingent payment under certain circumstances. The complaint requests a class certification and claims damages and interest. The defendants have filed a Motion to Dismiss this action on a number of grounds, asserting that the complaint fails to state a claim upon which relief can be granted. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of MedPartners, there can be no assurance that the ultimate resolution of the matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of MedPartners. On January 7, 1998, MedPartners issued a press release announcing the termination of its proposed merger with PhyCor, Inc. On that date, MedPartners also issued another press release announcing certain fourth quarter 1997 charges and negative earnings estimates, which have since been revised downward. On 59 62 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) January 8, 1998, there was a decline in the market prices for MedPartners' publicly traded securities. Since then, certain persons claiming to be stockholders of MedPartners have filed complaints in either state or federal court against MedPartners and certain officers and directors of MedPartners. To date, there are two state court actions and 14 federal court actions, all filed in Birmingham, Alabama. In each of these lawsuits, the plaintiff purports to represent a class and generally alleges violations of the Securities Exchange Act of 1934, fraud and various state law claims in connection with the public disclosure by MedPartners of the termination of the PhyCor merger and the fourth quarter 1997 charges and earnings estimates. Four of the lawsuits, one filed in the Circuit Court of Jefferson County, Alabama, and three filed in the United States Federal Court for the Northern District of Alabama, were filed against MedPartners and certain of its officers and directors, purportedly on behalf of all persons who purchased MedPartners' Threshold Appreciation Price Securities(TM) in the offering occurring on or about September 16, 1997. The state complaint also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as well as Sections 8-6-17(a)(2) and 8-6-19 of the Alabama Code. Collectively, these complaints seek class certification, damages and interest, as well as costs and expenses. MedPartners' management believes that it and MedPartners have acted properly throughout and intend to defend each of these cases vigorously. All of these cases are in the preliminary stages, and their ultimate resolution cannot be known at this time. Therefore, there can be no assurance that the ultimate resolution of these matters will not have a material adverse effect on the operating results and financial condition of MedPartners. Beginning in September 1994, Caremark was named as a defendant in a series of lawsuits added to a pending group of actions (including a class action) brought in 1993 under the antitrust laws by local and chain retail pharmacies against brand name pharmaceutical manufacturers, wholesalers and prescription benefit managers other than Caremark. The lawsuits, filed in federal district courts in at least 38 states (including the United States District Court for the Northern District of Illinois), allege that at least 24 pharmaceutical manufacturers provided unlawful price and service discounts to certain favored buyers and conspired among themselves to deny similar discounts to the complaining retail pharmacies (approximately 3,900 in number). The complaints charge that certain defendant prescription benefit managers, including Caremark, were favored buyers who knowingly induced or received discriminatory prices from the manufacturers, in violation of the Robinson-Patman Act. Each complaint seeks unspecified treble damages, declaratory and equitable relief, and attorneys' fees and expenses. All of these actions have been transferred by the Judicial Panel for Multidistrict Litigation to the United States District Court for the Northern District of Illinois for coordinated pretrial procedures. Caremark was not named in the class action. In April 1995, the Court entered a stay of pretrial proceedings as to certain Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act claims brought against Caremark, pending the conclusion of a first trial of certain of such claims brought by a limited number of plaintiffs against five defendants not including Caremark. On July 1, 1996, the district court directed entry of a partial final order in the class action approving an amended settlement with certain of the pharmaceutical manufacturers. The amended settlement provides for a cash payment by the defendants in the class action (which does not include Caremark) of approximately $351.0 million to class members in settlement of conspiracy claims as well as a commitment from the settling manufacturers to abide by certain injunctive provisions. All class action claims against non-settling manufacturers as well as all opt out and other claims generally, including all Robinson-Patman Act claims against Caremark, remain unaffected by the settlement. The district court has scheduled a trial of the remaining class action claims for the fall of 1998. It is expected that trials of the remaining individual conspiracy claims will also precede the trial of any Robinson-Patman Act claims. The Company intends to defend these cases vigorously. Although management believes, based on information currently available, that the ultimate resolution of this matter is not likely to have a material adverse effect on the operating results and financial condition of the Company, there can be no assurance that the ultimate resolution of this matter, if adversely determined, would not have a material adverse effect on the operating results and financial condition of the Company. 60 63 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Although the Company cannot predict with certainty the outcome of proceedings described above, based on information currently available, management believes that the ultimate resolution of such proceedings, individually and in the aggregate, is not likely to have a material adverse effect on the Company. The Company is party to various other commitments, claims and routine litigation arising in the ordinary course of business. Management does not believe that the result of such commitments, claims and litigation, individually or in the aggregate, will have a material adverse effect on the Company's business or its results of operations, cash flows or financial condition. 14. REQUIREMENTS OF REGULATORY AUTHORITIES MedPartners Provider Network, Inc. ("MPN"), a wholly-owned subsidiary of the Company, as a licensed Health Care Service Plan is required to comply with the provisions of the Knox-Keene Act and the rules of the Department of Corporations within the State of California. In accordance with the Knox-Keene Act, MPN is required to maintain a minimum amount of depository cash and tangible net equity. Tangible net equity is computed as the greater of: (i) one million dollars; (ii) the sum of two percent of the first $150 million of annualized premium revenues plus one percent of annualized premium revenues in excess of $150 million; or (iii) an amount equal to four percent of annualized hospital expenditures paid on a managed hospital payment basis. As of December 31, 1997, MPN was in compliance with all applicable requirements of the Knox-Keene Act. 15. RESTRUCTURING AND IMPAIRMENT CHARGES The Company recorded a pretax charge during the fourth quarter of 1997 of $646.7 million related primarily to the restructuring and impairment of selected assets of certain of its clinic operations within the PPM division. Of the total charge, $39.2 million relates to cash charges including employee and physician severance ($17.1 million), leases ($19.0 million) and other exits costs ($3.1 million), $552.4 million relates to the impairment of goodwill, primarily in the Southern California and Southwestern markets, and $55.1 million relates to the write down of various assets. The impairment of goodwill and write down of other assets are non-cash charges. The Company has closed or is in the process of closing or disassociating with 84 clinics. The total number of physicians affected by the closings is 238, leaving the Company with 13,531 affiliated physicians at December 31, 1997. Many of the closed locations are the result of combinations of adjacent or nearby clinic locations, primarily in the Southern California market. Others are the result of agreements with a number of MedPartners' smaller affiliated groups, primarily in Eastern United States markets, where the economics of going forward under the existing practice management agreements were determined to be not in the best interest of MedPartners or the affected groups. The total number of employees included in the severance and restructuring approximates 800. Significant adverse changes in the Company's business climate and operations, primarily the substantial operating loss in the fourth quarter of 1997 in the Southern California and Southwestern markets, became apparent at the end of 1997 and continued to be evidenced by factors subsequent to year end. The substantial operating losses and other factors led to the conclusion that there was a permanent impairment in the recorded value of goodwill. Accordingly, the Company wrote off $552.4 million of goodwill during the fourth quarter of 1997, primarily related to the Southern California and Southwestern markets. Management estimated the impairment based on an analysis of discounted cash flows and projected operating earnings. 16. CORPORATE LIABILITY AND INSURANCE The Company maintains professional liability insurance, general liability and other customary insurance on a claims-made and modified occurrence basis, in amounts deemed appropriate by management based upon 61 64 MEDPARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) historical claims and the nature and risks of the business, for many of the affiliated physicians, practices and operations. The Company has accrued for or purchased "tail" coverage for claims against the Company's affiliated medical organizations to cover incidents which were or are incurred but not reported during the periods for which the related risk was covered by "claims made" insurance. There can be no assurance that a future claim will not exceed the limits of available insurance coverage or related accrual or that such coverage will continue to be available. Moreover, the Company requires each physician group with which it affiliates to obtain and maintain professional liability insurance coverage. Such insurance would provide coverage, subject to policy limits, in the event the Company were held liable as a co-defendant in a lawsuit for professional malpractice against a physician. In addition, generally, the Company is indemnified under the practice management agreements by the affiliated physician groups for liabilities resulting from the performance of medical services. However, there can be no assurance that any future claim or claims will not exceed the limits of these available insurance coverages or that indemnification will be available for all such claims. 17. SUBSEQUENT EVENTS On October 29, 1997, the Boards of Directors of the Company and PhyCor, Inc. unanimously approved a definitive agreement under which PhyCor would acquire the Company, with the Company's stockholders receiving 1.18 shares of PhyCor common stock for each share of the Company's common stock. Extensive due diligence was conducted on and by both companies, and after a lengthy review and planning process, both boards determined that effective integration of the two companies would have been extremely difficult due to significant operational and strategic differences. The termination of the merger was approved by the Boards of Directors of both companies on January 7, 1998. On October 1, 1997, the Company announced that it entered into an agreement to acquire America Service Group Inc. ("ASG") in a stock transaction valued at approximately $59 million. On February 26, 1998, it was announced that the merger agreement had been terminated by mutual consent of both parties and that a release and settlement agreement had been executed. Due to the exchange of confidential information, the settlement agreement contains customary non-competition and non-solicitation provisions and provides that certain expenses and costs be paid by the Company. 62 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has not changed independent accountants within the twenty-four months prior to December 31, 1997. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS. 1. Financial Statements. The Consolidated Financial Statements of the Company and its subsidiaries filed as a part of this Annual Report on Form 10-K are listed in Item 8 of the Annual Report on Form 10-K, which listing is hereby incorporated herein by reference. 2. Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Commission have been omitted because they are not required under the related instructions, or are inapplicable, or because the information has been provided in the consolidated financial statements or the Notes thereto. 3. Exhibits. The Exhibits filed as a part of this Annual Report are listed in Item 14(c) of this Annual Report on Form 10-K, which is hereby incorporated herein by reference. (B) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during the fourth quarter of 1997: (a) Current Report on Form 8-K (Item 5) filed November 3, 1997, reporting the agreement with PhyCor, Inc. related to a proposed merger, since terminated. 63 66 (C) EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ----------- (3)-1 -- MedPartners, Inc. Third Restated Certificate of Incorporation, filed as Exhibit (3)-1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, is hereby incorporated herein by reference. (3)-2 -- MedPartners, Inc. Second Amended and Restated Bylaws, filed as Exhibit (3)-2 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference. (4)-1 -- MedPartners, Inc. Rights Plan, filed as Exhibit (4)-1 to the Company's Registration Statement on Form S-4 (Registration No. 33-00774), is hereby incorporated herein by reference. (4)-2 -- Amendment No. 1 to the Rights Plan of MedPartners, Inc., filed as Exhibit (4)-2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, is hereby incorporated herein by reference. (4)-3 -- Amendment No. 2 to the Rights Plan of MedPartners, Inc., filed as Exhibit (4)-2 to the Company's Registration Statement on Form S-3 (Registration No. 333-17339), is hereby incorporated herein by reference. (10)-1 -- Consulting Agreement, dated as of August 7, 1996, by and among Caremark International Inc., MedPartners, Inc. and C.A. Lance Piccolo, filed as Exhibit (10)-1 to the Company's Registration Statement on Form S-4 (Registration No. 333-09767), is hereby incorporated herein by reference. (10)-2 -- Consulting Agreement, dated as of November 29, 1995, by and between MedPartners, Inc. and Walter T. Mullikin, M.D., filed as Exhibit (10)-1 to the Company's Registration Statement on Form S-1 (Registration No. 333-1130), is hereby incorporated herein by reference. (10)-3 -- Termination Agreement, dated as of November 29, 1995, by and between MedPartners/Mullikin, Inc. and Walter T. Mullikin, M.D., filed as Exhibit (10)-2 to the Company's Registration Statement on Form S-1 (Registration No. 333-1130), is hereby incorporated herein by reference. (10)-4 -- Consulting Agreement, dated as of November 29, 1995, by and between MedPartners/Mullikin, Inc. and John S. McDonald, filed as Exhibit (10)-3 to the Company's Registration Statement on Form S-1 (Registration No. 333-1130), is hereby incorporated herein by reference. (10)-5 -- Termination Agreement, dated as of November 29, 1995, by and between MedPartners/Mullikin, Inc. and John S. McDonald, filed as Exhibit (10)-4 to the Company's Registration Statement on Form S-1 (Registration No. 333-1130), is hereby incorporated herein by reference. (10)-6 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and Larry R. House, filed as Exhibit (10)-7 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference. (10)-7 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and Mark L. Wagar, filed as Exhibit (10)-8 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference. (10)-8 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and Harold O. Knight, Jr., filed as Exhibit (10)-9 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference. (10)-9 -- Employment Agreement, dated July 24, 1996, by and between MedPartners, Inc. and Tracy P. Thrasher, filed as Exhibit (10)-10 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference.
64 67
EXHIBIT NO. DESCRIPTION - ------- ----------- (10)-10 -- Credit Agreement, dated September 5, 1996, by and among MedPartners, Inc., NationsBank, National Association (South), as administrative agent for the Lenders, The First National Bank of Chicago, as Documentation Agent for the Lenders, and the Lenders thereto, filed as Exhibit (10)-17 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference. (10)-11 -- Amendment No. 1 to Credit Agreement and Consent, dated September 5, 1996, by and among MedPartners, Inc., NationsBank, National Association (South), as Administrative agent for the Lenders, The First National Bank of Chicago, as Documentation Agent for the Lenders, and the Lenders thereto, filed as Exhibit (10)-18 to the Company's Registration Statement on Form S-1 (Registration No. 333-12465), is hereby incorporated herein by reference. (10)-12 -- Amendment No. 2 to Credit Agreement, dated July 22, 1997 by and between MedPartners, Inc., NationsBank, National Association (successor by merger of NationsBank, National Association (South)), as Administrative Agent for Lenders, The First National Bank of Chicago, as Documentation Agent for Lenders, and the Lenders thereto filed as Exhibit (10)-1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1997, is hereby incorporated herein by reference. (10)-13 -- Amended and Restated MedPartners, Inc. Incentive Compensation Plan. (10)-14 -- MedPartners, Inc. 1994 Non-Employee Director Stock Option Plan. (10)-15 -- MedPartners, Inc. 1994 Stock Incentive Plan. (10)-16 -- Amended and Restated MedPartners, Inc. 1993 Stock Option Plan. (10)-17 -- Amended and Restated MedPartners, Inc. 1995 Stock Option Plan. (10)-18 -- MedPartners, Inc. 1997 Long Term Incentive Compensation Plan. (10)-19 -- Consent to Waiver of Sections 8.1 and 8.4(h)(1) of Credit Agreement dated March 27, 1998, by and between MedPartners, Inc and NationsBank, National Association, as Administrative Agent for the Lenders. (21) -- Subsidiaries of MedPartners, Inc. (23) -- Consent of Ernst & Young LLP. (27) -- Financial Data Schedule. (99)-1 -- Schedule of Class Action Lawsuits against the Company.
65 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDPARTNERS, INC. By /s/ HAROLD O. KNIGHT, JR. ------------------------------------ Harold O. Knight, Jr. Executive Vice President and Chief Financial Officer Date: March 31, 1997 Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ RICHARD M. SCRUSHY Chairman of the Board March 31, 1998 - ----------------------------------------------------- Richard M. Scrushy /s/ EDWIN M. CRAWFORD President, Chief Executive March 31, 1998 - ----------------------------------------------------- Officer and Director Edwin M. Crawford /s/ HAROLD O. KNIGHT, JR. Chief Financial Officer March 31, 1998 - ----------------------------------------------------- Harold O. Knight, Jr. /s/ LARRY D. STRIPLIN, JR. Director March 31, 1998 - ----------------------------------------------------- Larry D. Striplin, Jr. /s/ CHARLES W. NEWHALL III Director March 31, 1998 - ----------------------------------------------------- Charles W. Newhall III /s/ TED H. MCCOURTNEY Director March 31, 1998 - ----------------------------------------------------- Ted H. McCourtney /s/ WALTER T. MULLIKIN, M.D. Director March 31, 1998 - ----------------------------------------------------- Walter T. Mullikin, M.D. /s/ JOHN S. MCDONALD, J.D. Director March 31, 1998 - ----------------------------------------------------- John S. McDonald, J.D. /s/ MICHAEL D. MARTIN Director March 31, 1998 - ----------------------------------------------------- Michael D. Martin /s/ ROSALIO J. LOPEZ, M.D. Director March 31, 1998 - ----------------------------------------------------- Rosalio J. Lopez, M.D. /s/ C.A. LANCE PICCOLO Director March 31, 1998 - ----------------------------------------------------- C.A. Lance Piccolo
66 69
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ ROGER L. HEADRICK Director March 31, 1998 - ----------------------------------------------------- Roger L. Headrick /s/ HARRY M. JANSEN KRAEMER, JR. Director March 31, 1998 - ----------------------------------------------------- Harry M. Jansen Kraemer, Jr.
67 EX-10.13 2 AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN 1 EXHIBIT (10)-13 AMENDED AND RESTATED MEDPARTNERS, INC. INCENTIVE COMPENSATION PLAN The Amended and Restated MedPartners, Inc. Incentive Compensation Plan (the "Incentive Compensation Plan") is the result of the assumption and adoption by MedPartners, Inc., a Delaware corporation, of the Caremark International Inc. 1992 Incentive Compensation Plan (the "Caremark Plan"), pursuant to the provisions of that certain Plan and Agreement of Merger, dated as of May 13, 1996, by and among MedPartners, Inc., PPM Merger Corporation and Caremark International Inc. 1. PURPOSE The purpose of this Incentive Compensation Plan is to increase stockholder value and to advance the interests of MedPartners, Inc. and its subsidiaries (collectively, "MedPartners" or the "Company") by awarding equity and performance based incentives designed to attract, retain and motivate employees. As used in this Incentive Compensation Plan, the term "subsidiary" means any business, whether or not incorporated, in which MedPartners has an ownership interest. 2. ADMINISTRATION 2.1 ADMINISTRATION BY THE COMMITTEE. The Incentive Compensation Plan shall be administered by the Compensation Committee of the Board of Directors of MedPartners or by any other committee appointed by the Board of Directors of MedPartners (the "Committee"), which Committee shall consist solely of two or more Non- Employee Directors ("Non-Employee Directors") as such are defined in Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision. 2.2 AUTHORITY. Subject to the provisions of this Incentive Compensation Plan, the Committee shall have the authority to: (a) manage and control the operation of this Incentive Compensation Plan; (b) interpret and construe the provisions of this Incentive Compensation Plan, and prescribe, amend and rescind rules and regulations relating to this Incentive Compensation Plan; 2 (c) make awards under this Incentive Compensation Plan, in such forms and amounts and subject to such restrictions, limitations and conditions as it deems appropriate, including, without limitation, awards which are made in combination with or in tandem with other awards (whether or not contemporaneously granted) or compensation in lieu of current or deferred compensation; (d) modify the terms of, cancel and reissue, or repurchase outstanding awards; (e) prescribe the form of agreement, certificate, or other instrument evidencing any award under this Incentive Compensation Plan; (f) correct any defect or omission and reconcile any inconsistency in this Incentive Compensation Plan or in any award hereunder; and (g) make all other determinations and take all other actions as it deems necessary or desirable for the implementation and administration of this Incentive Compensation Plan. The determination of the Committee on matters within its authority shall be conclusive and binding on MedPartners and all other persons. 3. PARTICIPATION Subject to the terms and conditions of this Incentive Compensation Plan, the Committee shall determine and designate from time to time the employees, directors and consultants of MedPartners who shall receive awards under this Incentive Compensation Plan ("Participants"). 4. SHARES SUBJECT TO THE INCENTIVE COMPENSATION PLAN 4.1 NUMBER OF SHARES RESERVED. Shares of common stock, $.001 par value per share, of MedPartners ("Common Stock") shall be available for awards under this Incentive Compensation Plan. To the extent provided by resolution of the Committee, such shares may be uncertificated. Subject to adjustment in accordance with Sections 4.2 and 4.3, the aggregate number of shares of Common Stock available for awards under this Incentive Compensation Plan shall be 13,771,964 shares. 4.2 REUSAGE OF SHARES. (a) In the event of the exercise or termination (by reason of forfeiture, expiration, cancellation, surrender or otherwise) of any award under this Incentive Compensation Plan, that - 2 - 3 number of shares of Common Stock that was subject to the award but not delivered to the Participant shall again be available for awards under this Incentive Compensation Plan. (b) In the event that shares of Common Stock are delivered under this Incentive Compensation Plan as Restricted Stock, as described in Section 6 hereof, or pursuant to a stock award and are thereafter forfeited or reacquired by the Company pursuant to rights reserved upon the award thereof, such forfeited or reacquired shares shall again be available for awards under this Incentive Compensation Plan. (c) Notwithstanding the provisions of paragraphs (a) or (b) of this Section 4.2, the following shares shall not be available for reissuance under this Incentive Compensation Plan: (i) shares with respect to which the Participant has received the benefits of ownership (other than voting rights), either in the form of dividends or otherwise; (ii) shares which are withheld from any award or payment under this Incentive Compensation Plan to satisfy tax withholding obligations (as described in Section 7.5(e)); (iii) shares which are surrendered to fulfill tax obligations (as described in Section 7.5(e)); and (iv) shares which are surrendered in payment of the Option Price (as defined in Section 5.2) upon the exercise of a Stock Option, as described in Section 5 hereof. 4.3 ADJUSTMENTS TO SHARES RESERVED. In the event of any merger, consolidation, reorganization, recapitalization, spin-off, stock divi dend, stock split, reverse stock split, exchange or other distribution with respect to shares of Common Stock or other change in the corporate structure or capitalization affecting the Common Stock, the type and number of shares of stock which are or may be subject to awards under this Incentive Compensation Plan and the terms of any outstanding awards (including the price at which shares of stock may be issued pursuant to an outstanding award) shall be equitably adjusted by the Committee, in its sole discretion, to preserve the value of benefits awarded or to be awarded to Participants under this Incentive Compensation Plan. 5. STOCK OPTIONS 5.1 AWARDS. Subject to the terms and conditions of this Incentive Compensation Plan, the Committee shall designate the employees to whom options to purchase shares of Common Stock ("Stock Options") are to be awarded under this Incentive Compensation Plan and shall determine the number, type and terms of the Stock Options to be awarded to each of them; provided, however, that each Stock Option designated as an "Incentive Stock Option" (as defined below) shall expire on the earlier of the date provided by the option terms or the date which is ten years after the date of grant. In addition, each Stock Option awarded to any person who owns, directly or indirectly (or is treated as owning by reason of attribution rules, currently set forth in Section 424 of the Internal Revenue Code of 1986, as amended (the "Code")), stock of the Company constituting more than 10% of - 3 - 4 the total combined voting power of the Company's outstanding stock, or the stock of any of its corporate subsidiaries, shall expire on the earlier of the date provided by the option terms or the date which is five years after the date of the grant. Each Stock Option awarded under this Incentive Compensation Plan shall be a "nonqualified stock option" for tax purposes, unless the Stock Option satisfies all of the requirements of Section 422 of the Code and the Committee designates such Stock Option as an "Incentive Stock Option". 5.2 MANNER OF EXERCISE. A Stock Option may be exercised, in whole or in part, by giving proper notification to the Corporate Secretary of MedPartners prior to the date on which the Stock Option expires; provided, however, that a Stock Option may only be exercised with respect to whole shares of Common Stock. Such notice shall specify the number of shares of Common Stock to be purchased and shall be accompanied by payment of the Option Price for such shares (the "Option Price"). The Option Price of a Stock Option shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the Fair Market Value (as defined in Section 7.11) of the stock covered by the Stock Option at the date of the grant; provided, however, that the Option Price of a Stock Option granted to any person who owns, directly or indirectly (or is treated as owning by reason of attribution rules, currently set forth in Section 424 of the Code), stock of the Company constituting more than 10% of the total combined voting power of all classes of outstanding stock of the Company or of any affiliate of the Company, shall in no event be less than 110% of such Fair Market Value. 5.3 PAYMENT OF OPTION PRICE. No shares of Common Stock shall be issued on the exercise of a Stock Option unless paid for in full at the time of exercise. Payment of the Option Price shall be made in cash, which may be paid by check or other instrument, acceptable to the Company. In addition, subject to compliance with applicable laws and regulations and such conditions as the Committee may impose, the Committee may elect to accept payment in shares of Common Stock of the Company which are already owned by the Participant, valued at the Fair Market Value thereof on the date of exercise. The Committee may also allow a Participant to exercise a Stock Option by use of proceeds to be received from the sale of Common Stock issuable pursuant to the Stock Option being exercised. 6. RESTRICTED STOCK 6.1 AWARDS. Subject to the terms and conditions of this Incentive Compensation Plan, the Committee shall designate the Participants to whom shares of "Restricted Stock" shall be awarded under this Incentive Compensation Plan and determine the number of shares and the terms and conditions of - 4 - 5 each such award; provided, however, that newly issued shares shall be issued as Restricted Stock only to the extent that the Committee determines that past services of the Participant constitute adequate consideration for at least the par value thereof. Each Restricted Stock award shall entitle the Participant to receive shares of Common Stock upon the terms and conditions specified by the Committee and subject to the following provisions of this Section 6. 6.2 RESTRICTIONS. All shares of Restricted Stock transferred or sold hereunder shall be subject to such restrictions as the Committee may determine, including, without limitation, any or all of the following: (a) a required period of employment with the Company, as determined by the Committee, prior to the vesting of the shares of Restricted Stock; (b) a prohibition against the sale, assignment, transfer, pledge, hypothecation or other encumbrance of the shares of Restricted Stock for a specified period as determined by the Committee; (c) a requirement that the holder of shares of Restricted Stock forfeit (or in the case of shares sold to a Participant, resell back to the Company at his cost) all or a part of such shares in the event of termination of his employment during any period in which such shares are subject to restrictions; and (d) a prohibition against employment of the holder of such Restricted Stock by any competitor of the Company or against such holder's dissemination of any secret or confidential information belonging to the Company. All restrictions on shares of Restricted Stock awarded pursuant to this Incentive Compensation Plan shall expire at such time or times as the Committee shall specify. 6.3 REGISTRATION OF SHARES. Shares of Restricted Stock awarded pursuant to this Incentive Compensation Plan shall be registered in the name of the Participant and, if such shares are certificated, at the discretion of the Committee, may be deposited in a bank designated by the Committee or with MedPartners. The Committee may require a stock power endorsed in blank with respect to shares of Restricted Stock whether or not certificated. 6.4 STOCKHOLDER RIGHTS. Subject to the terms and conditions of this Incentive Compensation Plan, during any period in which shares of Restricted Stock are subject to forfeiture or restrictions on transfer, each Participant who has been awarded shares of Restricted Stock shall have such rights of a - 5 - 6 stockholder with respect to such shares as the Committee may designate at the time of the award, including the right to vote such shares and the right to receive all dividends paid on such shares. Unless otherwise provided by the Committee, stock dividends or dividends in kind and, except as otherwise provided by Section 7.10, any other securities distributed with respect to Restricted Stock shall be restricted to the same extent and subject to the same terms and conditions as the Restricted Stock to which they are attributable. 6.5 LAPSE OF RESTRICTIONS. Subject to the terms and conditions of this Incentive Compensation Plan, at the end of any time period during which the shares of Restricted Stock are subject to forfeiture or restrictions on transfer, such shares will be delivered free of all restrictions to the Participant (or to the Participant's legal representative, beneficiary or heir). 6.6 SUBSTITUTION OF CASH. The Committee may, in its sole discretion, substitute cash equal to the Fair Market Value (as described in Section 7.11) (determined as of the date of the distribution) of shares of Common Stock otherwise required to be distributed to a Participant in accordance with this Section 6. 7. GENERAL 7.1 EFFECTIVE DATE. This Incentive Compensation Plan became effective the date that the Caremark Plan was adopted by the Board of Directors of the former parent corporation of Caremark International Inc. 7.2 DURATION. This Incentive Compensation Plan shall remain in force and effect until all awards made under this Incentive Compensation Plan have either been satisfied by the issuance of shares of Common Stock or the payment of cash or been terminated in accordance with the terms of this Incentive Compensation Plan or the award and until all restrictions imposed on shares of Common Stock issued under this Incentive Compensation Plan have lapsed. No Incentive Stock Option award may be made under this Incentive Compensation Plan after the tenth anniversary of the date that the Caremark Plan was adopted by the Board of Directors of the former parent corporation of Caremark International Inc. - 6 - 7 7.3 NON-TRANSFERABILITY OF INCENTIVES. (a) No share of Restricted Stock under this Incentive Compensation Plan may be transferred, pledged or assigned by the holder thereof (except, in the event of the holder's death, by will or the laws of descent and distribution), and the Company shall not be required to recognize any attempted assignment of such rights by any Participant. During a Participant's lifetime, awards may be exercised only by him or by his guardian or legal representative. (b) (1) Incentive Stock Options. No Incentive Stock Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Incentive Stock Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. (2) Nonqualified Stock Options. The Committee may, in its discretion, authorize all or a portion of nonqualified stock options granted to a Participant to be on terms which permit transfer by such Participant to (i) the spouse, children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the award agreement pursuant to which such nonqualified stock options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred nonqualified stock options shall be prohibited except those by will or the laws of descent and distribution. Following transfer, any such nonqualified stock options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of this Plan, the term "Participant" shall be deemed to refer to the transferee. The events of termination of employment shall continue to be applied with respect to the original Participant, following which the options shall be exercisable by the transferee only to the extent, and for the periods specified at Section 7.4. Notwithstanding the foregoing, should the Committee provide that nonqualified stock options granted be transferable, the Company by such action incurs no obligation to notify or otherwise provide notice to a transferee of early termination of the nonqualified stock option. In the event of a transfer, as set forth above, the original Participant is and will remain subject to and responsible for any applicable withholding taxes upon the exercise of such nonqualified stock options. 7.4 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH. (a) If Participant's association with the Company as an officer, director, consultant or employee is terminated with cause during the term of any Stock Option granted pursuant to this Incentive Compensation Plan, such Stock Option shall cease to be exercisable on the date of such termination. - 7 - 8 (b) If Participant's association with the Company as an officer, director, consultant or employee is terminated without cause during the term of any Stock Option granted pursuant to this Incentive Compensation such Stock Option shall expire ninety days after the date of such termination. (c) Notwithstanding the foregoing, if termination is due to the permanent disability or death of Participant, Participant's personal representative or any other person who acquires option rights from Participant by will or the applicable laws of descent and distribution, may, within twelve (12) months after the date of termination, but in no event later than the expiration date specified pursuant to Section 2, exercise such option rights to the extent they were exercisable on the date of termination. 7.5 COMPLIANCE WITH APPLICABLE LAW AND WITHHOLDING. (a) Notwithstanding any other provision of this Incentive Compensation Plan, MedPartners shall have no obligation to issue any shares of Common Stock under this Incentive Compensation Plan if such issuance would violate any applicable law or any applicable regulation or requirement of any securities exchange or similar entity. (b) Prior to the issuance of any shares of Common Stock under this Incentive Compensation Plan, MedPartners or the Company may require a written statement that the recipient is acquiring the shares for investment and not for the purpose or with the intention of distributing the shares and will not dispose of them in violation of the registration requirements of the Securities Act of 1933. (c) With respect to any person who is subject to Section 16(a) of the Exchange Act, the Committee may, at any time, add such conditions and limitations to any award under this Incentive Compensation Plan that it deems necessary or desirable to comply with the requirements of Rule 16b-3. (d) If, at any time, MedPartners, in its sole discretion, determines that the listing, registration or qualification (or any updating of any such document) of any type of award, or the shares of Common Stock issuable pursuant thereto, is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, any award, the issuance of shares of Common Stock pursuant to any award, or the removal of any restrictions imposed on shares subject to an award, such award shall not be made and the shares of Common Stock shall not be issued or such restrictions shall not be removed, as the case may be, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to MedPartners. (e) All awards and payments under this Incentive Compensation Plan are subject to withholding of all applicable taxes and the Company shall have the right to withhold from any - 8 - 9 award under this Incentive Compensation Plan or to collect as a condition of any payment under this Incentive Compensation Plan, as applicable, any taxes required by law to be withheld. To the extent provided by the Committee, a Participant may elect to have any distribution otherwise required to be made under this Incentive Compensation Plan to be withheld or to surrender to the Company shares of Common Stock already owned by the Participant to fulfill any tax withholding obligation. 7.6 NO CONTINUED EMPLOYMENT. The Incentive Compensation Plan does not constitute a contract of employment or continued service, and participation in this Incentive Compensation Plan will not give any employee or Participant the right to be retained in the employ of the Company or the right to continue as a director of the Company or any right or claim to any benefit under this Incentive Compensation Plan unless such right or claim has specifically accrued under the terms of this Incentive Compensation Plan or the terms of any award under this Incentive Compensation Plan. 7.7 TREATMENT AS A STOCKHOLDER. Any award to a Participant under this Incentive Compensation Plan shall not create any rights in such Participant as a stockholder of MedPartners until shares of Common Stock are registered in the name of the Participant. 7.8 DEFERRAL PERMITTED. Payment of cash to a Participant or distribution of any shares of Common Stock to which a Participant is entitled under any award shall be made as provided in the terms of the award. Payment may be deferred at the option of the Participant to the extent provided in the award. 7.9 AMENDMENT OF THE INCENTIVE COMPENSATION PLAN. The Committee may, at any time and in any manner, amend, suspend, or terminate this Incentive Compensation Plan or any award outstanding under this Incentive Compensation Plan; provided, however, that no such amendment or discontinuance shall: (a) be made without stockholder approval: (1) to the extent such approval is required by law, agreement or the rules of any exchange or automated quotation system upon which the Common Stock is listed or quoted or (2) to the extent that any outstanding Stock Option is canceled and regranted or repriced; (b) adversely alter or impair the rights of Participants with respect to awards previously made under this Incentive Compensation Plan without the consent of the holder thereof; or - 9 - 10 (c) make any change that would disqualify any provision of this Incentive Compensation Plan, intended to be so qualified, from the exemption provided by Rule 16b-3. 7.10 IMMEDIATE ACCELERATION OF INCENTIVES. Notwithstanding any provision in this Incentive Compensation Plan to the contrary or the normal terms of vesting under any award: (a) the restrictions on all shares of Restricted Stock awarded shall lapse immediately; (b) all outstanding Stock Options will become exercisable immediately if a Change in Control (as defined below) occurs. For purposes of this Incentive Compensation Plan, a "Change in Control" shall have occurred if: (1) any "Person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than MedPartners, any corporation owned, directly or indirectly, by the stockholders of MedPartners in substantially the same proportions as their ownership of stock of MedPartners, and any trustee or other fiduciary holding securities under an employee benefit plan of MedPartners or such proportionately owned corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of MedPartners representing 15% or more of the combined voting power of MedPartners's then outstanding securities having the right to vote for the election of directors; (2) during any 24-month period, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a Person who has entered into an agreement with MedPartners to effect a transaction described in paragraph (1), (3) or (4) of this Section 7.10) whose election by the Board of Directors or nomination for election by MedPartners's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (3) the stockholders of MedPartners approve a merger or consolidation of MedPartners with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of MedPartners outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of MedPartners or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of MedPartners (or similar transaction) in which no Person acquires more than 15% of MedPartners's then outstanding securities having the right to vote for the election of directors; or - 10 - 11 (4) the stockholders of MedPartners approve a plan of complete liquidation of MedPartners or an agreement for the sale or disposition by MedPartners of all or substantially all of MedPartners's assets (or any transaction having a similar effect). 7.11 DEFINITION OF FAIR MARKET VALUE. Except as otherwise determined by the Committee, the "Fair Market Value" of a share of Common Stock as of any date shall be equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on The New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) (the "Composite Tape"), on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). - 11 - EX-10.14 3 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1 EXHIBIT (10)-14 MEDPARTNERS, INC. 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN The MedPartners, Inc. 1994 Non-Employee Director Stock Option Plan is the result of the assumption and adoption by MedPartners, Inc., a Delaware corporation, of the InPhyNet Medical Management Inc. 1994 Non-Employee Director Stock Option Plan, pursuant to the provisions of that certain Plan and Agreement of Merger, dated as of June 26, 1997, by and among MedPartners Inc. and InPhyNet Medical Management Inc. 1. Purpose. The MedPartners, Inc. 1994 Non-Employee Director Stock Option Plan (the "Plan") is intended to promote the interests of MedPartners, Inc. (the "Company") by providing an inducement to obtain and retain the services of qualified persons who are neither employees nor officers of the Company or any affiliate to serve as members of the Board of Directors of the Company (the "Board") and to provide for a portion of their annual compensation to be tied directly to shareholder return. 2. Rights to be Granted. Under the Plan, options are granted that give an optionee the right for a specified time period to purchase a specified number of shares of common stock, par value $.001, of the Company (the "Common Stock"). The option price is determined in each instance in accordance with the terms of the Plan. Options granted under the Plan are not intended to be "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 3. Available Shares. The total number of shares of Common Stock for which options may be granted shall not exceed 236,000, subject to adjustment in accordance with Section 13 hereof. Shares subject to the Plan are authorized but unissued shares or shares that were once issued and subsequently reacquired by the Company. If any options granted under the Plan are surrendered before exercise or lapse without exercise, in whole or in part, the shares reserved therefor revert to the option pool and continue to be available for grant under the Plan. 4. Administration. The Plan shall be administered by the Compensation Committee of the Board or by any other Committee appointed by the Board (the "Committee"). The Committee shall, subject to the provisions of the Plan, have the power to construe the Plan, to determine all questions thereunder, and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. 5. Option Agreement. Each option granted under the provisions of the Plan shall be evidenced by an Option Agreement, in such form as may be approved by the Board or Committee, which Agreement shall be duly executed and delivered on behalf of the Company and by the individual to whom such option is granted. The Agreement shall contain such terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Committee. 2 6. Eligibility and Limitations. Options may be granted pursuant to the Plan only to members of the Board who are not employees of the Company or an affiliate at the time of grant ("Non-Employee Directors"). 7. Option Price. The purchase price of the Common Stock under each option shall be the "Fair Market Value" of the Common Stock on the date of grant. Except as otherwise determined by the Committee, the "Fair Market Value" of a share of Common Stock as of any date shall be equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on The New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) (the "Composite Tape"), on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). 8. Automatic Grant of Options. When any person first becomes a Non-Employee Director, such person shall be granted an option to purchase 10,000 shares of Common Stock during the first quarter of the calendar year following the date such person becomes a Non-Employee Director. Thereafter, for the remainder of the term of the Plan and provided he or she remains a director of the Company, during the first quarter of each successive calendar year, each Non-Employee Director shall be granted an option to purchase 2,500 shares of Common Stock of the Company. 9. Term of Plan and Options. The options granted hereunder shall expire on a date which is ten years after the date of grant of the options and the Plan shall terminate on May 7, 2004. 10. Exercise of Option. Options shall be exercised by the delivery to the Company at its principal office or at such other address as may be established by the Committee (Attention: Corporate Secretary) of proper notification of the number of shares of Common Stock with respect to which the option is being exercised accompanied by payment in full of the purchase price of such shares. Unless otherwise determined by the Committee at the time of grant, payment for such shares may be made (i) in cash, (ii) by certified check or bank cashier's check payable to the order of the Company in the amount of such purchase price, (iii) by delivery to the Company of Common Stock having a Fair Market Value equal to such purchase price, (iv) by irrevocable instruction to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay such purchase price and to sell the Common Stock to be issued upon exercise of the Option and deliver the cash proceeds less commissions and brokerage fees to the optionee or to deliver the remaining shares of the Common Stock to the optionee, or (v) by any combination of the methods of payment described in (i) through (iv) above. Except as provided in Section 12 hereof, no option may be exercised unless the holder thereof is then a director of the Company. An option holder shall have none of the rights of a stockholder with respect to the 2 3 Common Stock subject to the option until such Common Stock shall be transferred to the holder upon the exercise of his option. 11. Non-Transferability of Options. (a) Legend on Certificates. The certificates representing shares of Common Stock acquired under the Plan shall carry such appropriate legend, and such written instructions shall be given to the Company's transfer agent, as may be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933 or any state securities laws. (b) Non-Transferability. Options granted pursuant to the Plan shall not be assignable or transferable other than by will or the laws of descent and distribution, and shall be exercisable during an optionee's lifetime only by him. 12. Termination of Option Rights. (a) If the optionee's association with the Company as director is terminated with cause during the term of any option granted pursuant to this Plan, such Option shall cease to be exercisable on the date of such termination. (b) If the optionee's association with the Company as director is terminated without cause during the term of any option granted pursuant to this Plan, such option shall expire ninety days after the date of such termination. (c) Notwithstanding the foregoing, if termination is due to the permanent disability or death of optionee, optionee's personal representative or any other person who acquires option first from optionee by will or the applicable laws of descent and distribution, may, within twelve months after the date of termination, but in no event later than the expiration date specified pursuant to Section 9, exercise such option rights to the extent they were exercisable on the date of termination. 13. Adjustments Upon Changes in Capitalization and Other Matters. Options and any agreements evidencing such options shall be subject to adjustment or substitution, as determined by the Committee in its sole discretion, as to the number, price or kind of a share of Common Stock or other consideration subject to such options or as otherwise determined by the Committee to be equitable (i) in the event of changes in the outstanding Common Stock or in the capital structure of the Company, by reason of stock dividends, stock splits, recapitalization, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant of any such option or (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, Non-Employee Directors, or which otherwise warrants equitable adjustment because it interferes with the intended 3 4 operation of the Plan. In addition, in the event of any such adjustments or substitution, the aggregate number of shares of Common Stock available under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any adjustment under this Section 13 shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act. The Company shall give each Non-Employee Director notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes. 14. Effect of Change in Control. (a) In the event of a Change in Control (as defined below), notwithstanding any vesting schedule provided for hereunder or by the Committee with respect to an award of options, such options shall become immediately exercisable with respect to 100% of the shares subject to such option. (b) "Change in Control" shall, unless the Board otherwise directs by resolution adopted prior thereto, be deemed to occur if (i) any "person" (as that term is used in Sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the voting Stock or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least one-half of the directors still in office who were directors at the beginning of the period. Any merger, consolidation or corporate reorganization in which the owners of the Company's capital stock entitled to vote in the election of directors ("Voting Stock") prior to said combination, own 50% or more of the resulting entity's Voting Stock shall not, by itself, be considered a Change in Control. (c) The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. The Company agrees that it will make appropriate provisions for the preservation of Participant's rights under the Plan in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets. 15. Restrictions on Issuance of Shares. Notwithstanding the provisions of Section 10 hereof, the Company shall have no obligation to deliver any certificate or certificates upon exercise of an option until the following conditions shall be satisfied: (a) The shares with respect to which the option has been exercised are at the time of the issue of such shares effectively registered under applicable federal and state securities acts as now in force or hereafter amended; or 4 5 (b) Counsel for the Company shall have given an opinion that such shares are exempt from registration under federal and state securities acts as now in force or hereafter amended; and the Company has complied with all applicable laws and regulations, including without limitation all regulations required by any stock exchange upon which the Common Stock are then listed. The Company shall use its best efforts to bring about compliance with the above conditions within a reasonable time, except that the Company shall be under no obligation to cause a registration statement or a post-effective amendment to any registration statement to be prepared at its expense solely for the purpose of covering the issue of shares in respect of which any option may be exercised. 16. Representation of Optionee. The Company may require the optionee to deliver written warranties and representations upon exercise of the option that are necessary to show compliance with federal and state securities laws including to the effect that a purchase of shares under the option is made for investment and not with a view to their distribution (as that term is used in the Securities Act of 1933). 17. Withholding and Employment Taxes. At the time of exercise of an Option, the optionee shall remit to the Company in cash all applicable federal and state withholding and employment taxes. If and to the extent authorized and approved by the Committee in its sole discretion, an optionee may elect, by means of a form of election to be prescribed by the Committee, to have shares which are acquired upon exercise of an Option withheld by the Company or tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time the amount of such taxes is determined in order to pay the amount of such tax obligations, subject to the following limitations: (a) such election shall be irrevocable; (b) such election shall be subject to the disapproval of the Committee at any time. Any Common Stock or other securities so withheld or tendered will be valued by the Company as of the date they are withheld or tendered. Unless the Committee otherwise determines, the optionee shall pay to the Company in cash, promptly when the amount of such obligations become determinable, all applicable federal and state withholding taxes resulting from the lapse of restrictions imposed on exercise of an Option, from a transfer or other disposition of shares acquired upon exercise of an Option or otherwise related to the Option or the shares acquired upon exercise of the Option. 18. Termination and Amendment of Plan. The Committee may at any time terminate the Plan or make such modification or amendment thereof as it deems advisable, provided, however, that (i) the Committee may not, without approval by the affirmative vote of the holders of a majority 5 6 of the shares present in person or by proxy and entitled to vote at the meeting, (a) increase the maximum number of shares for which options may be granted under the Plan or the number of shares for which an option may be granted to any Non-Employee Director hereunder; (b) change the provisions of the Plan regarding the termination of the options or the time when they may be exercised; (c) change the period during which any options may be granted or remain outstanding or the date on which the Plan shall terminate; (d) change the designation of the class of persons eligible to receive options; (e) change the price at which options are to be granted; or (f) materially increase benefits accruing to option holders under the Plan. Termination or any modification or amendment of the Plan shall not, without consent of a Non-Employee Director, affect his rights under an option previously granted to him. * * * As adopted by the Committee by unanimous written consent as of June 27, 1997 6 EX-10.15 4 1994 STOCK INCENTIVE PLAN 1 EXHIBIT (10)-15 MEDPARTNERS, INC. 1994 STOCK INCENTIVE PLAN The MedPartners, Inc. 1994 Stock Incentive Plan is the result of the assumption and adoption by MedPartners, Inc., a Delaware corporation, of the 1994 Stock Incentive Plan of InPhyNet Medical Management Inc., pursuant to the provisions of that certain Plan and Agreement of Merger, dated as of June 26, 1997, by and among MedPartners Inc. and InPhyNet Medical Management Inc. 1. PURPOSE. The purpose of the MedPartners, Inc. 1994 Stock Incentive Plan (the "Plan") is to provide a means through which the Company and its Subsidiaries and Affiliates may attract able persons to enter and remain in the employ of the Company and its Subsidiaries and Affiliates, and to provide a means whereby those key persons upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, thereby strengthening their commitment to the welfare of the Company and promoting an identity of interest between stockholders and these key persons. A further purpose of the Plan is to provide such key persons with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. So that the appropriate incentive can be provided, the Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Restricted Stock Awards, or any combination of the foregoing. 2. DEFINITIONS. The following definitions shall be applicable throughout the Plan. "Affiliate" means any affiliate of the Company within the meaning of 17 CFR ss. 230.405. "Award" means, individually or collectively, any Incentive Stock Option, Nonqualified Stock Option or Restricted Stock Award. "Board" means the Board of Directors of the Company. "Cause" means the Company, a Subsidiary or an Affiliate having cause to terminate a Participant's employment under any existing employment agreement between the Participant and the Company, a Subsidiary or an Affiliate or, in the absence of such an employment agreement, upon (i) the determination by the Committee that the Participant has ceased to perform his duties to the Company, or a Subsidiary or an Affiliate (other than as a result of his incapacity due to physical or mental illness or injury), which failure amounts to an intentional and extended neglect of his duties to such party, (ii) the Committee's determination that the Participant has engaged or 1 2 is about to engage in conduct materially injurious to the Company, or a Subsidiary or an Affiliate, or (iii) the Participant having been convicted of a felony. "Change in Control" shall, unless the Board otherwise directs by resolution adopted prior thereto, be deemed to occur if (i) any "person" (as that term is used in Sections 13 and 14(d)(2) of the Securities and Exchange Act of 1934 ("Exchange Act")) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 25% or more of the voting Stock or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least three-quarters of the directors then still in office who were directors at the beginning of the period. Any merger, consolidation or corporate reorganization in which the owners of the Company's capital stock entitled to vote in the election of directors ("Voting Stock") prior to said combination, own 50% or more of the resulting entity's Voting Stock shall not, by itself, be considered a Change in Control. "Code" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. "Committee" means the Compensation Committee of the Board or such other committee as the Board may appoint to administer the Plan. "Common Stock" means the common stock, par value $.001 per share, of the Company. "Company" means MedPartners, Inc. "Date of Grant" means the date on which the granting of an Award is authorized or such other date as may be specified in such authorization. "Disability" means the complete and permanent inability by reason of illness or accident to perform the duties of the occupation at which a Participant was employed when such disability commenced or, if the Participant was retired when such disability commenced, the inability to engage in any substantial gainful activity, as determined by the Committee based upon medical evidence acceptable to it. "Eligible Employee" means any person regularly employed by the Company or a Subsidiary or Affiliate on a full-time salaried basis, and any independent contractor of the Company or a Subsidiary or Affiliate, who satisfies all of the requirements of Section 6. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2 3 "Fair Market Value" means, except as otherwise determined by the Committee, an amount equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on The New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) (the "Composite Tape"), on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). "Holder" means a Participant who has been granted an Option or a Restricted Stock Award. "Incentive Stock Option" means an Option granted by the Committee to a Participant under the Plan which is designated by the Committee as an Incentive Stock Option pursuant to Section 422 of the Code. "Non-Employee Director" means a Director of the Company who (i) is not currently an officer or employee of the Company or any Subsidiary of the Company; (ii) does not directly or indirectly receive any compensation from the Company or any Subsidiary for services rendered as a consultant or in any other non-director capacity that would exceed the $60,000 threshold for which disclosure would be required under Item 404(a) of Regulation S-K; (iii) does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K; and (iv) is not engaged in a business relationship with the Company which would be disclosable under Item 404(b) of Regulation S-K. "Nonqualified Stock Option" means an Option granted by the Committee to a Participant under the Plan which is not designated by the Committee as an Incentive Stock Option. "Normal Termination" means termination: (i) with respect to the Company or a Subsidiary, at retirement (excluding early retirement) pursuant to the Company retirement plan then in effect; (ii) with respect to an Affiliate, at retirement (excluding early retirement) pursuant to the retirement plan of such Affiliate then in effect or, if the Affiliate has no such plan, at retirement upon or after the attainment of age 65; (iii) on account of Disability; (iv) with the written approval of the Committee; or (v) by the Company, a Subsidiary or Affiliate without Cause. 3 4 "Option" means an Award granted under Section 7 of the Plan. "Option Period" means the period described in Section 7(c). "Participant" means an Eligible Employee who has been selected to participate in the Plan and to receive an Award pursuant to Section 6. "Plan" means the MedPartners, Inc. 1994 Stock Incentive Plan. "Reporting Company" means the Company. "Restricted Period" means, with respect to any share of Restricted Stock, the period of time determined by the Committee during which such share of Restricted Stock is subject to the restrictions set forth in Section 8. "Restricted Stock" means shares of Common Stock issued or transferred to a Participant subject to the restrictions set forth in Section 8 and any new, additional or different securities a Participant may become entitled to receive as a result of adjustments made pursuant to Section 10. "Restricted Stock Award" means an Award granted under Section 8 of the Plan. "Securities Act" means the Securities Act of 1933, as amended. "Stock" means the Common Stock or such other authorized shares of stock the Company as the Committee may from time to time authorize for use under the Plan. "Subsidiary" means any subsidiary of the Company as defined in Section 424(f) of the Code. 3. EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL. The Plan became effective on May 7, 1994, and no further Awards may be made after May 7, 2004. The Plan shall continue in effect until all matters relating to the payment of Awards and administration of the Plan have been settled. 4. ADMINISTRATION. The Committee shall administer the Plan. Each member of the Committee shall, at the time he takes any action with respect to an Award under the Plan, be a Non-Employee Director. The acts of a majority of the members present at any meeting at which a quorum is present or acts approved in writing by a majority of the Committee shall be deemed the acts of the Committee. 4 5 Subject to the provisions of the Plan, the Committee shall have exclusive power to: (a) Select the Eligible Employees to participate in the Plan; (b) Determine the nature and extent of the Awards to be made to each Participant; (c) Determine the time or times when Awards will be made; (d) Determine the conditions to which the payment of Awards may be subject; (e) Prescribe the form or forms evidencing Awards; and (f) Cause records to be established in which there shall be entered, from time to time, as Awards are made to Participants, the date of each Award, the number of Incentive Stock Options, Nonqualified Stock Options, and shares of Restricted Stock awarded by the Committee to each Participant, the expiration date, and the duration of any applicable Restricted Period. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee's interpretation of the Plan or any Awards granted pursuant thereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties unless otherwise determined by the Board. 5. GRANT OF OPTIONS AND RESTRICTED STOCK AWARDS; SHARES SUBJECT TO THE PLAN. The Committee may, from time to time, grant Awards of Options and/or Restricted Stock to one or more Participants; provided, however, that: (a) Subject to Section 10, the aggregate number of shares of Stock made subject to Awards may not exceed 2,950,000; (b) Such shares shall be deemed to have been used in payment of Awards whether they are actually delivered or the Fair Market Value equivalent of such shares is paid in cash. In the event any Option or Restricted Stock shall be surrendered, terminate, expire, or be forfeited, the number of shares of Stock no longer subject thereto shall thereupon be released and shall thereafter be available for new Awards under the Plan to the fullest extent permitted by Rule 16b-3 under the Exchange Act (if applicable at the time); and (c) Stock delivered by the Company in settlement of Awards under the Plan may be authorized and unissued Stock or Stock held in the treasury of the Company or may be purchased on the open market or by private purchase at prices no higher than the Fair Market Value at the time of purchase. 5 6 6. ELIGIBILITY. Participants shall be limited to officers, key employees and independent contractors of the Company and its Subsidiaries and Affiliates who have received written notification from the Committee or from a person designated by the Committee, that they have been selected to participate in the Plan. 7. STOCK OPTIONS. One or more Incentive Stock Options or Nonqualified Stock Options may be granted to any Participant; provided, however, that Incentive Stock Options may be granted only to employees of the Company or a Subsidiary. Each Option so granted shall be subject to the following conditions: (a) Option Price. The Option Price ("Option Price") per share of Common Stock shall be set by the Committee at the time of grant but shall not be less than (i) in the case of an Incentive Stock Option, the Fair Market Value of a share of Stock at the Date of Grant, and (ii) in the case of a Nonqualified Stock Option, the par value per share of Stock. (b) Manner of Exercise and Form of Payment. Options which have become exercisable may be exercised by delivery of proper notification of exercise to the Committee. No shares of Common Stock shall be issued on the exercise of an Option unless the Option Price is paid in full at the time of the exercise. Payment shall be made in cash, which may be paid by check or other instrument acceptable to the Company. In addition, subject to compliance with applicable laws and regulations and such conditions as the Committee may impose, the Committee may elect to accept payment of the Option Price in shares of Common Stock of the Company which are already owned by the Holder, valued at the Fair Market Value thereof on the date of exercise. The Committee may also allow a Holder to exercise an Option by the use of proceeds to be received from the sale of Common Stock issuable pursuant to the Option being exercised. (c) Other Terms and Conditions. If the Holder has not died or terminated, the Option shall become exercisable in such manner and within such period or periods ("Option Period"), not to exceed 10 years from its Date of Grant, as set forth in the Stock Option Agreement (as defined below) to be entered into in connection therewith: 6 7 (i) Each Option shall lapse in the following situations: -- ten years after it is granted; -- three months after Normal Termination, except as otherwise provided by the Committee, or -- any earlier time set forth in the Stock Option Agreement. (ii) If the Holder ceases to be an employee, officer or consultant or otherwise affiliated with the Company for Cause, the Option shall lapse at the time of termination. (iii) If the Holder dies within the Option Period or within 3 months after Normal Termination (or such other period as may have been established by the Committee), the Option shall lapse unless it is exercised within the Option Period and in no event later than 12 months after the date of Holder's death by the Holder's legal representative or representatives or by the person or persons entitled to do so under the Holder's last will and testament or, if the Holder shall fail to make testamentary disposition of such Option or shall die intestate, by the person entitled to receive said Option under the applicable laws of descent and distribution. (d) Stock Option Agreement. Each Option granted under the Plan shall be evidenced by a "Stock Option Agreement" between the Company and the Holder of the Option containing such provisions as may be determined by the Committee, but shall be subject to the following terms and conditions: (i) Each Option or portion thereof that is exercisable shall be exercisable for the full amount or for any part thereof, except as otherwise determined by the terms of the Stock Option Agreement. (ii) Each share of Stock purchased through the exercise of an Option shall be paid for in full at the time of the exercise. Each Option shall cease to be exercisable, as to any share of Stock, when the Holder purchases the share or when the Option lapses. (iii) Options shall not be transferable by the Holder except by will or the laws of descent and distribution and shall be exercisable during the Holder's lifetime only by him. (iv) Each Option shall become exercisable by the Holder in accordance with the vesting schedule established by the Committee for the Award. (v) Each Stock Option Agreement may contain an agreement that, upon demand by the Committee for such a representation, the Holder shall deliver to the Committee at the time of any exercise of an Option a written representation that the shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. 7 8 Upon such demand, delivery of such representation prior to the delivery of any shares issued upon exercise of an Option shall be a condition precedent to the right of the Holder or such other person to purchase any shares. In the event certificates for Stock are delivered under the Plan with respect to which such investment representation has been obtained, the Committee may cause a legend or legends to be placed on such certificates to make appropriate reference to such representation and to restrict transfers in the absence of compliance with applicable federal or state securities laws. (e) Grants to 10% Holders of Company Voting Stock. Notwithstanding Section 7(a), if an Incentive Stock Option is granted to a Holder who owns stock representing more than 10% of the voting power of all classes of stock of the Company or of the Company and its Subsidiaries, the period specified in the Stock Option Agreement for which the Option thereunder is granted and at the end of which such Option shall expire shall not exceed five years from the Date of Grant of such Option and the Option Price shall be at least 110%of the Fair Market Value (on the Date of Grant) of the Stock subject to the Option. (f) Limitation. To the extent the aggregate Fair Market Value (as determined as of the Date of Grant) of Stock for which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all plans of the Company and its Subsidiaries) exceeds $100,000, such excess Incentive Stock Options shall be treated as Nonqualified Stock Options. (g) Order of Exercise. Options granted under the Plan may be exercised in any order, regardless of the Date of Grant or the existence of any other outstanding Option. 8. RESTRICTED STOCK AWARDS. (a) Award of Restricted Stock. (i) The Committee shall have the authority (1) to grant Restricted Stock, (2) to issue or transfer Restricted Stock to Participants, and (3) to establish terms, conditions and restrictions applicable to such Restricted Stock, including the Restricted Period, which may differ with respect to each grantee, the time or times at which Restricted Stock shall be granted or become vested and the number of shares or units to be covered by each grant. (ii) The Holder of a Restricted Stock Award shall execute and deliver to the Corporate Secretary of the Company an agreement with respect to Restricted Stock and escrow agreement satisfactory to the Committee and the appropriate blank stock powers with respect to the Restricted Stock covered by such agreements. If a Participant shall fail to execute the agreement, escrow agreement and stock powers within such period, the Award shall be null and void. Subject to the restrictions set forth in Section 8(b), the Holder shall generally have the rights and privileges of a stockholder as to such Restricted Stock, including the right to vote such Restricted Stock. At the discretion of the Committee, cash and stock dividends with respect to the Restricted Stock may be either currently paid or withheld by the Company for the Holder's account, and interest may 8 9 be paid on the amount of cash dividends withheld at a rate and subject to such terms as determined by the Committee. Cash or stock dividends so withheld by the Committee shall not be subject to forfeiture. (iii) In the case of a Restricted Stock Award, the Committee shall then cause stock certificates registered in the name of the Holder to be issued and deposited together with the stock powers with an escrow agent to be designated by the Committee. The Committee shall cause the escrow agent to issue to the Holder a receipt evidencing any stock certificate held by it registered in the name of the Holder. (b) Restrictions. (i) Restricted Stock awarded to a Participant shall be subject to the following restrictions until the expiration of the Restricted Period: (1) the Holder shall not be entitled to delivery of the stock certificate; (2) the shares shall be subject to the restrictions on transferability set forth in the grant; (3) the shares shall be subject to forfeiture to the extent provided in subpara graph (d) and, to the extent such shares are forfeited, the stock certificates shall be returned to the Company, and all rights of the Holder to such shares and as a stockholder shall terminate without further obligation on the part of the Company. (ii) The Committee shall have the authority to remove any or all of the restrictions on the Restricted Stock whenever it may determine that, by reasons of changes in applicable law or other changes in circumstances arising after the date of the Restricted Stock Award such action is appropriate. (c) Restricted Period. The Restricted Period of Restricted Stock shall commence on the Date of Grant and shall expire from time to time as to that part of the Restricted Stock indicated in a schedule established by the Committee in the Award agreement. (d) Forfeiture Provisions. In the event a Holder terminates employment during a Restricted Period, that portion of the Award with respect to which restrictions have not expired ("Non-Vested Portion") shall be treated as follows: (i) Resignation or discharge: The Non-Vested Portion of the Award shall be completely forfeited. (ii) Normal Termination: The Non-Vested Portion of the Award shall be prorated for service during the Restricted Period and shall be received as soon as practicable following termination. (iii) Death: The Non-Vested Portion of the Award shall be prorated for service during the Restricted Period and paid to the Participant's beneficiary as soon as practicable following death. 9 10 (e) Delivery of Restricted Stock. Upon the expiration of the Restricted Period with respect to any shares of Stock covered by a Restricted Stock Award, a stock certificate evidencing the shares of Restricted Stock which have not then been forfeited and with respect to which the Restricted Period has expired (to the nearest full share) shall be delivered without charge to the Holder, or his beneficiary, free of all restrictions under the Plan. (f) SEC Restrictions. Each certificate representing Restricted Stock awarded under the Plan shall bear the following legend: "Transfer of this certificate and the shares represented hereby is restricted pursuant to the terms of a Restricted Stock Agreement, dated as of __________, between MedPartners, Inc. and __________. A copy of such Agreement is on file at the offices of the Company in Birmingham, Alabama." Stop transfer orders shall be entered with the Company's transfer agent and registrar against the transfer of legend securities except in compliance with the Securities Act. 9. GENERAL. (a) Additional Provisions of an Award. The award of any benefit under the Plan may also be subject to such other provisions (whether or not applicable to the benefit awarded to any other Participant) as the Committee determines appropriate. (b) Privileges of Stock Ownership. Except as otherwise specifically provided in the Plan, no person shall be entitled to the privileges of stock ownership in respect of shares of Stock which are subject to Options or Restricted Stock Awards, hereunder until such shares have been issued to that person upon exercise of an Option according to its terms or upon sale or grant of those shares in accordance with a Restricted Stock Award. (c) Government and Other Regulations. The obligation of the Company to make payment of Awards or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. The Company shall be under no obligation to register under the Securities Act any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under the Securities Act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. (d) Withholding and Employment Taxes. At the time of exercise of an Option, the optionee shall remit to the Company in cash all applicable federal and state withholding and employment taxes. If and to the extent authorized and approved by the Committee in its sole discretion, an optionee may elect, by means of a form of election to be prescribed by the Committee, to have shares which are acquired upon exercise of an Option withheld by the Company or tender other shares of Common Stock or other securities of the Company owned by the optionee to the 10 11 Company at the time the amount of such taxes is determined in order to pay the amount of such tax obligations, subject to the following limitations: (1) each election shall be irrevocable; and (2) such election shall be subject to the disapproval of the Committee at any time; Any Common Stock or other securities so withheld or tendered will be valued by the Company as of the date they are withheld or tendered. Unless the Committee otherwise determines, the optionee shall pay to the Company in cash, promptly when the amount of such obligations become determinable, all applicable federal and state withholding taxes resulting from the lapse of restrictions imposed on exercise of an Option, from a transfer or other disposition of shares acquired upon exercise of an Option or otherwise related to the Option or the shares acquired upon exercise of the Option. (e) Claim to Awards and Employment Rights. No employee or other person shall have any claim or right to be granted an Award under the Plan nor, having been selected for the grant of an Award, to be selected for a grant of any other Award. Neither this Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ of the Company or a Subsidiary or Affiliate. (f) Designation and Change of Beneficiary. Each Participant shall file with the Committee a written designation of one or more persons as the beneficiary who shall be entitled to receive the amounts payable with respect to an Award of Restricted Stock, if any, due under the Plan upon his death. A Participant may, from time to time, revoke or change his beneficiary designation without the consent of any prior beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. (g) Payments to Persons Other Than Participants. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment due to such person or his estate (unless a prior claim therefor has been made by a duly appointed legal representative), may, if the Committee so directs the Company, be paid to his spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor. (h) No Liability of Committee Members. No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his behalf in his capacity as a member of the Committee nor for any mistake of judgment made in good faith, 11 12 and the Company shall indemnify and hold harmless each member of the Committee and each other employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith; provided, however, that approval of the Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or ByLaws, as amended, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (i) Governing Law. The Plan shall be governed by and construed in accordance with the internal laws of the State of Delaware without reference to the principles of conflicts of law thereof. (j) Funding. Except as provided under Section 8, no provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Holders shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law. (k) Transferability. (1) Incentive Stock Options. No Incentive Stock Option granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Incentive Stock Options granted to an Eligible Employee under the Plan shall be exercisable during his or her lifetime only by such Eligible Employee. (2) Non-Qualified Stock Options. The Committee may, in its discretion, authorize all or a portion of Non-Qualified Stock Options granted to an Eligible Employee to be on terms which permit transfer by such Eligible Employee to (i) Immediate Family Members, (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the Stock Option Agreement pursuant to which such Options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Options shall be prohibited except those by will or the laws of descent and distribution. Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior 12 13 to transfer, provided that for purposes of this Plan, the term "Eligible Employee" shall be deemed to refer to the transferee. The events of termination of employment shall continue to be applied with respect to the original Eligible Employee following which the Options shall be exercisable by the transferee only to the extent, and for the periods specified in this Section 9(k). Notwithstanding the foregoing, should the Committee provide that Options granted be transferable, the Company by such action incurs no obligation to notify or otherwise provide notice to a transferee of early termination of the Option. In the event of a transfer, as set forth above, the original Eligible Employee is and will remain subject to and responsible for any applicable withholding taxes upon the exercise of such Options. (l) Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying, acting or failing to act, and shall not be liable for having so relied, acted or failed to act in good faith, upon any report made by the independent public accountant of the Company and its Subsidiaries or Affiliates and upon any other information furnished in connection with the Plan by any person or persons other than himself. (m) Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company or any Subsidiary or Affiliate except as otherwise specifically provided. (n) Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries and Affiliates. (o) Pronouns. Masculine pronouns and other words of masculine gender shall refer to both men and women. (p) Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings shall control. 10. CHANGES IN CAPITAL STRUCTURE. Options and Restricted Stock Awards and any agreements evidencing such Awards shall be subject to adjustment or substitution, as determined by the Committee in its sole discretion, as to the number, price or kind of a share of Stock or other consideration subject to such Awards or as otherwise determined by the Committee to be equitable (i) in the event of changes in the outstanding Stock or in the capital structure of the Company by reason of stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the Date of Grant of any such Award or (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, Participants in the Plan, or which otherwise warrants equitable adjustment because it interferes 13 14 with the intended operation of the Plan. In addition, in the event of any such adjustments or substitution, the aggregate number of shares of Stock available under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any adjustment in Incentive Stock Options under this Section 10 shall be made only to the extent not constituting a "modification" within the meaning of Section 424(h)(3) of the Code, and any adjustments under this Section 10 shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act. The Company shall give each Participant notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes. 11. EFFECT OF CHANGE IN CONTROL. (a) In the event of a Change in Control, notwithstanding any vesting schedule provided for hereunder or by the Committee with respect to an Award of Options or Restricted Stock, such Option shall become immediately exercisable with respect to 100% of the shares subject to such Option and the Restricted Period shall expire immediately with respect to 100% of the Restricted Stock subject to Restrictions; provided, however, to the extent that so accelerating the time an Incentive Stock Option may first be exercised would cause the limitation provided in Section 7(f) to be exceeded, such Options shall instead first become exercisable in so many of the next following years as is necessary to comply with such limitation. (b) The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. The Company agrees that it will make appropriate provisions for the preservation of Participant's rights under the Plan in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets. 12. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board nor the submission of this Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under this Plan, and such arrangements may be either applicable generally or only in specific cases. 13. AMENDMENTS AND TERMINATION. The Committee may at any time terminate the Plan. With the express written consent of an individual Participant, the Board may cancel or reduce or otherwise alter the outstanding Awards thereunder if, in its judgment, the tax, accounting, or other effects of the Plan or potential payouts thereunder would not be in the best interest of the Company. The Committee may, at any time, 14 15 or from time to time, amend or suspend and, if suspended, reinstate, the Plan in whole or in part; provided, however, that without further stockholder approval, the Committee shall not: (a) Increase the maximum number of shares of Stock which may be issued on exercise of Options or pursuant to Restricted Stock Awards, except as provided in Section 10; (b) Change the maximum Option Price; (c) Extend the maximum Option term; (d) Extend the termination date of the Plan; (e) Cancel and regrant or reprice any outstanding Option, except as provided in Section 10; or (f) Change the class of persons eligible to receive Awards under the Plan. * * * As adopted, as amended, by the Committee as of June 27, 1997 by unanimous written consent. 15 EX-10.16 5 1993 STOCK OPTION PLAN 1 EXHIBIT (10)-16 AMENDED AND RESTATED MEDPARTNERS, INC. 1993 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purposes of this Amended and Restated MedPartners, Inc. ("MedPartners" or the "Company") 1993 Stock Option Plan (the "Plan") are to: 1.1 furnish incentives to individuals or entities chosen to receive options because they are considered capable of responding by improving operations and increasing profits; 1.2 encourage selected employees to accept or continue employment with the Company or its Affiliates; and 1.3 increase the interest of selected employees, officers, directors and consultants in the Company's welfare through their participation in the growth in value of the common stock, $.001 par value, of the Company ("Common Stock"). To accomplish the foregoing objectives, this Plan provides a means whereby individuals and entities may receive options to purchase Common Stock. Options granted under this Plan ("Options") will be either nonqualified options ("NQOs") or incentive stock options ("ISOs"). 2. ELIGIBLE PERSONS 2.1 General. Every person who at the date on which an Option granted to such person becomes effective (the "Grant Date") is a full-time employee, officer, director or consultant of the Company or of any Affiliate or any individual or entity subject to an acquisition or management agreement with the Company is eligible to receive Options under this Plan. 2.2 Definition of Affiliate. The term "Affiliate," as used in this Plan, means a "parent corporation" or "subsidiary corporation," as defined in Section 424 of the Internal Revenue Code of 1986 (as amended, the "Code"). The term "employee" shall have the meaning ascribed for purposes of Section 3401(c) of the Code and the Treasury Regulations promulgated thereunder and shall include an officer or a director who is also an employee. 1 2 3. STOCK SUBJECT TO THIS PLAN The total number of shares of stock reserved for issuance upon the exercise of Options is 1,555,000 shares of Common Stock, divided into 500,000 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in connection with the acquisition of the assets of or management of physician practices (hereinafter referred to as "Acquisition Options") and 1,055,000 shares of Common Stock reserved for issuance upon the exercise of options granted to employees, officers, consultants and members of the Board of Directors of the Company (hereinafter referred to as "Management Options"). The shares covered by the portion of any grant that expires unexercised under this Plan shall become available again for grants under this Plan; provided, however, that no Management Options may be granted as Acquisition Options and vice versa. The number of shares reserved for issuance under this Plan is subject to adjustment in accordance with the provisions for adjustment in this Plan. 4. ADMINISTRATION 4.1 General. This Plan shall be administered by the Compensation Committee of the Board of Directors or by any other committee appointed by the Board of Directors (the "Committee"), which Committee shall consist solely of two or more Non-Employee Directors ("Non-Employee Directors") as such are defined in Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision. The Committee shall have the authority to select the persons to receive Options under this Plan, to fix the number of shares that each optionee may purchase, to set the terms and conditions of each Option, and to determine all other matters relating to this Plan. Any act approved in writing by a majority of the members of the Committee shall be a valid act of the Committee. All questions of interpretation, implementation and application of this Plan shall be determined by the Committee. Such determinations shall be final and binding on all persons. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under the Plan. 5. GRANTING OF RIGHTS 5.1 Ten Year Limitation on Grants of ISOs. No ISOs shall be granted under this Plan after ten years from the date the Board of Directors first adopts the Plan. 5.2 Written Agreement; Effect. Each Option shall be evidenced by a written agreement (the "Option Agreement"), in form satisfactory to the Committee, executed by the Company and by the person to whom such Option is granted. The Option Agreement shall specify whether each Option it evidences is a NQO or an ISO. Failure of the grantee to execute an Option Agreement shall not void or invalidate the grant of an Option; the Option may not be exercised, however, until the Option Agreement is executed. 2 3 5.3 Annual $100,000 Limitation on ISOs. To the extent required by Section 422(d) of the Code, the aggregate fair market value of shares of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year shall not exceed $100,000. For this purpose, fair market value shall be the fair market value of the shares covered by the ISOs when the ISOs were granted. If by their terms, such ISOs taken together would first become exercisable at a faster rate, this $100,000 limitation shall be applied by deferring the exercisability of those ISOs or portions of ISOs which have the highest per share exercise prices. The ISOs or portions of ISOs, the exercisability of which are so deferred, shall become exercisable on the first day of the first subsequent calendar year during which they may be exercised, as determined by applying these same principles of this Section and all other provisions of this Section and all other provisions of this Plan, including those relating to the expiration and termination of ISOs. 5.4 Advance Approvals. The Committee may approve the grant of Options to persons who are expected to become employees, consultants or members of the Board of Directors, of the Company, but are not employees, consultants or members of the Board of Directors at the date of approval. In such cases, the Option shall be deemed granted, without further approval, on the date the grantee becomes an employee, and must satisfy all requirements of this Plan for Options granted on that date. 6. TERMS AND CONDITIONS OF OPTIONS Each Option shall be designated as an ISO or a NQO and shall be subject to the terms and conditions set forth in Section 6.1. NQOs shall also be subject to the terms and conditions set forth in Section 6.2, but not those set forth in Section 6.3. ISOs shall also be subject to the terms and conditions set forth in Section 6.3, but not those set forth in Section 6.2. 6.1 Terms and Conditions to Which All Options Are Subject. All Options shall be subject to the following terms and conditions: (a) Changes in Capital Structure. Subject to Section 6.1(b), if the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, or recapitalization, or converted into or exchanged for other securities as a result of a merger, consolidation, or reorganization, appropriate adjustments shall be made in (1) the number and class of shares of stock subject to this Plan and each outstanding Option, and (2) the exercise price of each outstanding Option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustment. Each such adjustment shall be determined by the Committee in its sole discretion, which determination shall be final and binding on all persons. (b) Corporate Transactions. New option rights may be substituted for Options granted, or the Company's obligations as to outstanding Options may be assumed, by an employer corporation other than the Company, or an Affiliate thereof, in connection with any merger, consolidation, acquisition, separation, reorganization, dissolution, liquidation, sale, or like 3 4 occurrence in which the Company is involved and which the Committee determines, in its absolute discretion, would materially alter the structure. Substitution shall be done in such manner that the then outstanding Options which are ISOs will continue to be "incentive stock options" within the meaning of Section 422 of the Code to the full extent permitted thereby. Notwithstanding the foregoing or the provisions of Section 6.1(a), if such an event occurs and if such employer corporation, or an Affiliate thereof, does not substitute new option rights for, and substantially equivalent to, the outstanding Options granted hereunder, or assume the outstanding Options granted hereunder, or if there is no employer corporation, or if the Committee determines, in its sole discretion, that outstanding Options should not then continue to be outstanding, the Committee may upon ten days prior written notice to optionees in its absolute discretion (1) shorten the period during which Options are exercisable (provided they remain exercisable, to the extent otherwise exercisable, for at least ten days after the date the notice is given), or (2) cancel Options upon payment to the optionee in cash, with respect to each Option to the extent then exercisable, of an amount which, in the absolute discretion of the Committee, is determined to be equivalent to any excess of the fair market value (at the effective time of the dissolution, liquidation, merger, consolidation, acquisition, separation, reorganization, sale or other event) of the consideration that the optionee would have received if the Option had been exercised before the effective time, over the exercise price of the Option; provided, however, if there is a successor corporation and replacement options are not granted by the successor corporation, all outstanding Options shall become exercisable prior to the consummation of the transaction such that the optionees shall have not less than ten days to exercise their Options and become stockholders of record entitled to receive the consideration paid to the other stockholders of the Company. If an optionee fails to exercise his Option within any exercise period described in this paragraph and the dissolution, liquidation, merger, consolidation, sale or other event is consummated, his Option shall no longer be exercisable. Any unexercised Option shall be canceled and terminated. Notwithstanding anything herein to the contrary, nothing shall extend an optionee's right to exercise an ISO after the expiration of ten years from the date it is granted. The actions described in this Section may be taken without regard to any resulting tax consequences to the optionee. (c) Option Grant Date. Each Option Agreement shall specify the date as of which it shall be effective, which date shall be the Grant Date (determined pursuant to Section 5.4 in the case of advance approvals). (d) Fair Market Value. Except as otherwise determined by the Committee, the "Fair Market Value" of a share of Common Stock as of any date shall be equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on The New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) (the "Composite Tape"), on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). 4 5 (e) Transfer of Option Rights. (1) Incentive Stock Options. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to an optionee under the Plan shall be exercisable during his or her lifetime only by such optionee. (2) Nonqualified Stock Options. The Committee may, in its discretion, authorize all or a portion of NQOs granted to an optionee to be on terms which permit transfer by such optionee to (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the Option Agreement pursuant to which such NQOs are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred NQOs shall be prohibited except those by will or the laws of descent and distribution. Following transfer, any such NQOs shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of this Plan, the term "optionee" shall be deemed to refer to the transferee. The events of termination of employment shall continue to be applied with respect to the original optionee, following which the NQOs shall be exercisable by the transferee only to the extent, and for the periods specified in Section 6.1(g). Notwithstanding the foregoing, should the Committee provide that NQOs granted be transferable, the Company by such action incurs no obligation to notify or otherwise provide notice to a transferee of early termination of the NQO. In the event of a transfer, as set forth above, the original optionee is and will remain subject to and responsible for any applicable withholding taxes upon the exercise of such NQOs. (f) Payment. No shares of Common Stock shall be issued on the exercise of an Option unless paid for in full at the time of exercise. Payment shall be made in cash, which may be paid by check or other instrument acceptable to the Company. In addition, subject to compliance with applicable laws and regulations and such conditions as the Committee may impose, the Committee may elect to accept payment in shares of Common Stock of the Company which are already owned by the optionee, valued at the Fair Market Value thereof on the date of exercise. The Committee may also allow an optionee to exercise an option by use of proceeds to be received from the sale of Common Stock issuable pursuant to the Option being exercised. (g) Termination. (1) Any Option or portion thereof which has not expired or been exercised on or before the date on which an optionee ceases to be an employee, officer, consultant or member of the Board of Directors or otherwise affiliated with the Company ("Termination") for cause, shall expire upon Termination. 5 6 (2) Any Option or portion thereof which has not expired or been exercised on or before the date of Termination without cause, shall expire ninety days after the date of Termination. A leave of absence duly authorized by the Company, shall not be deemed a Termination or a break in continuous employment. (3) Notwithstanding the foregoing, if Termination is due to the permanent disability or death of the optionee, the optionee, the optionee's personal representative or any other person who acquires option rights from the optionee by will or the applicable laws of descent and distribution, may, within twelve months after the date of Termination, exercise such option rights to the extent they were exercisable on the date of Termination. (h) Other Provisions. Each Option Agreement may contain such other terms, provisions, and conditions not inconsistent with this Plan, including rights of repurchase, as may be determined by the Committee, and each ISO granted under this Plan shall include such provisions and conditions as are necessary to qualify such option as an "incentive stock option" within the meaning of Section 422 of the Code. (i) Withholding and Employment Taxes. At the time of exercise of an Option, the optionee shall remit to the Company in cash all applicable federal and state withholding and employment taxes. If and to the extent authorized and approved by the Committee in its sole discretion, an optionee may elect, by means of a form of election to be prescribed by the Committee, to have shares which are acquired upon exercise of an Option withheld by the Company or tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time the amount of such taxes is determined in order to pay the amount of such tax obligations, subject to the following limitations: (1) such election shall be irrevocable; and (2) such election shall be subject to the disapproval of the Committee at any time. Any Common Stock or other securities so withheld or tendered will be valued by the Company as of the date they are withheld or tendered. Unless the Committee otherwise determines, the optionee shall pay to the Company in cash, promptly when the amount of such obligations become determinable, all applicable federal and state withholding taxes resulting from the lapse of restrictions imposed on exercise of an Option, from a transfer or other disposition of shares acquired upon exercise of an Option or otherwise related to the Option or the shares acquired upon exercise of the Option. 6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted under this Plan which are designated as NQOs shall be subject to the following terms and conditions: 6 7 (a) Option Term. Unless a different expiration date is specified by the Committee at the Grant Date in the Option Agreement, each NQO shall expire ten years from its Grant Date. 6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted under this Plan which are designated as ISOs shall be subject to the following terms and conditions: (a) Exercise Price. The exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the fair market value of the stock covered by the ISO at the Grant Date; provided, however, that the exercise price of an ISO granted to any person who owns, directly or indirectly (or is treated as owning by reason of attribution rules, currently set forth in Section 424 of the Code), stock of the Company constituting more than 10% of the total combined voting power of all classes of outstanding stock of the Company or of any Affiliate of the Company, shall in no event be less than 110% of such fair market value. (b) Option Term. Unless an earlier expiration date is specified by the Committee at the Grant Date in the Option Agreement, each ISO shall expire ten years from its Grant Date; except that an ISO granted to any person who owns, directly or indirectly (or is treated as owning by reason of applicable attribution rules currently set forth in Section 424 of the Code) stock of the Company constituting more than 10% of the total combined voting power of the Company's outstanding stock, or the stock of any Affiliate of the Company, shall expire five years from its Grant Date. (c) Disqualifying Dispositions. If stock acquired by exercise of an ISO is disposed of within two years from the Grant Date or within one year after the transfer of the stock to the optionee, the holder of the stock immediately prior to the disposition shall promptly notify the Company in writing of the date and terms of the disposition and shall provide such other information regarding the disposition as the Company may reasonably require. Such holder shall pay to the Company any withholding and employment taxes which the Company in its sole discretion deems applicable. The Company may instruct its stock transfer agent by appropriate means, including placement of legends on stock certificates, not to transfer stock acquired by exercise of an ISO unless it has been advised by the Company that the requirements of this Section have been satisfied. 7. MANNER OF EXERCISE An optionee wishing to exercise an Option shall give proper notification to the Company at its principal executive office, to the attention of the Corporate Secretary, accompanied by a notice of exercise in form and substance satisfactory to the Company, by payment of the exercise price for such shares in a form and manner as the Committee may from time to time approve and by such other documents as the Committee may request. The date the Company receives proper notification of an exercise hereunder accompanied by payment of the exercise price and all such other documents will be considered the date the Option was exercised. Promptly after receipt of proper notification of exercise of an Option, the Company shall, without stock issue or transfer taxes to the optionee or any other person entitled to exercise the Option, deliver to the optionee or such other person a 7 8 certificate or certificates for the requisite number of shares of stock. An optionee or transferee of an Option shall not have any privileges as stockholder with respect to any stock covered by the Option until the date of issuance of a stock certificate. 8. RELATIONSHIP WITH THE COMPANY Nothing in this Plan or any Option granted hereunder shall interfere with or limit in any way the right of the Company to terminate any optionee's employment, affiliation or other relationship with the Company at any time, nor confer upon any optionee any right to continue in the employ of, as a consultant to, as a director of, or otherwise affiliated in any way with, the Company. 9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN The Committee may, at any time and in any manner, amend, suspend, or termination this Plan or any award outstanding under this Plan; provided, however, that no such amendment or discontinuance shall: (a) be made without stockholder approval: (1) to the extent such approval is required by law, agreement or the rules of any exchange or automated quotation system upon which the Common Stock is listed or quoted or (2) to the extent that any outstanding Option is canceled and regranted or repriced; (b) adversely alter or impair the rights of Participants with respect to awards previously made under this Plan without the consent of the holder thereof; or (c) make any change that would disqualify any provision of this Plan intended to be so qualified, from the exemption provided by Rule 16b-3. 10. LIABILITY AND INDEMNIFICATION OF COMMITTEE No member of the Committee shall be liable for any act or omission on such member's own part, including but not limited to the exercise of any power or discretion given to such member under this Plan, except for those acts or omissions resulting from such member's own gross negligence or willful misconduct. The Company shall indemnify each present and future member of the Committee against, and each member of the Committee shall be entitled without further act on his or her part to indemnity from the Company for, all expenses (including attorneys' fees and the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by such person in connection with or arising out of any action, suit, or proceeding to which the Committee or any member of the Committee may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted or not granted under the Plan to the full extent permitted by law and by the Certificate of Incorporation and Bylaws of the Company, as amended. The right of indemnity described in this Section 10 shall be in addition to such other rights of 8 9 indemnification as the members of the Committee shall otherwise be entitled because of their serving on the Board of Directors of the Company or as an employee of the Company. 11. EFFECTIVE DATE OF THIS PLAN This Plan first became effective upon adoption by the Board of Directors on December 16, 1993. This Amended and Restated MedPartners, Inc. 1993 Stock Option Plan is an amendment and restatement of that Plan and was adopted by the Committee on May 12, 1997. 9 EX-10.17 6 1995 STOCK OPTION PLAN 1 EXHIBIT (10)-17 AMENDED AND RESTATED MEDPARTNERS, INC. 1995 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purposes of this Amended and Restated MedPartners, Inc. ("MedPartners" or the "Company") 1995 Stock Option Plan (the "Plan") are to: 1.1 furnish incentives to individuals or entities chosen to receive options because they are considered capable of responding by improving operations and increasing profits; 1.2 encourage selected employees to accept or continue employment with the Company or its Affiliates; and 1.3 increase the interest of selected employees, officers, directors and consultants in the Company's welfare through their participation in the growth in value of the common stock, $.001 par value, of the Company ("Common Stock"). To accomplish the foregoing objectives, this Plan provides a means whereby individuals and entities may receive options to purchase Common Stock. Options granted under this Plan ("Options") will be either nonqualified options ("NQOs") or incentive stock options ("ISOs"). 2. ELIGIBLE PERSONS 2.1 General. Every person who at the date on which an Option granted to such person becomes effective (the "Grant Date") is a full-time employee, officer, director or consultant of the Company or of any Affiliate or any individual or entity subject to an acquisition or management agreement with the Company is eligible to receive Options under this Plan. 2.2 Definition of Affiliate. The term "Affiliate," as used in this Plan, means a "parent corporation" or "subsidiary corporation," as defined in Section 424 of the Internal Revenue Code of 1986 (as amended, the "Code"). The term "employee" shall have the meaning ascribed for purposes of Section 3401(c) of the Code and the Treasury Regulations promulgated thereunder and shall include an officer or a director who is also an employee. 1 2 3. STOCK SUBJECT TO THIS PLAN The total number of shares of stock reserved for issuance upon the exercise of Options as of December 31, 1997 is 8,687,941 shares of Common Stock. The shares covered by the portion of any grant that expires unexercised under this Plan shall become available again for grants under this Plan. The number of shares reserved for issuance under this Plan is subject to adjustment in accordance with the provisions for adjustment in this Plan. 4. ADMINISTRATION 4.1 General. This Plan shall be administered by the Compensation Committee of the Board of Directors or by any other committee appointed by the Board of Directors (the "Committee"), which Committee shall consist solely of two or more Non-Employee Directors ("Non-Employee Directors") as such are defined in Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision. The Committee shall have the authority to select the persons to receive Options under this Plan, to fix the number of shares that each optionee may purchase, to set the terms and conditions of each Option, and to determine all other matters relating to this Plan; provided, however, that any Options granted to management of the Company, the Board of Directors or other insiders shall comply with Rule 16b-3 of the Exchange Act. Any act approved in writing by a majority of the members of the Committee shall be a valid act of the Committee. All questions of interpretation, implementation and application of this Plan shall be determined by the Committee. Such determinations shall be final and binding on all persons. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under the Plan. 5. GRANTING OF RIGHTS 5.1 Ten Year Limitation on Grants of ISOs. No ISOs shall be granted under this Plan after ten years from the date the Board of Directors first adopts the Plan. 5.2 Written Agreement; Effect. Each Option shall be evidenced by a written agreement (the "Option Agreement"), in form satisfactory to the Committee, executed by the Company and by the person to whom such Option is granted. The Option Agreement shall specify whether each Option it evidences is a NQO or an ISO. Failure of the grantee to execute an Option Agreement shall not void or invalidate the grant of an Option; the Option may not be exercised, however, until the Option Agreement is executed. 5.3 Annual $100,000 Limitation on ISOs. To the extent required by Section 422(d) of the Code, the aggregate fair market value of shares of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year shall not exceed $100,000. For this purpose, fair market value shall be the fair market value of the shares covered by the ISOs when the ISOs were granted. If by their terms, such ISOs taken together would first become exercisable at a faster rate, this $100,000 limitation shall be applied by deferring the 2 3 exercisability of those ISOs or portions of ISOs which have the highest per share exercise prices. The ISOs or portions of ISOs, the exercisability of which are so deferred, shall become exercisable on the first day of the first subsequent calendar year during which they may be exercised, as determined by applying these same principles of this Section and all other provisions of this Section and all other provisions of this Plan, including those relating to the expiration and termination of ISOs. 5.4 Advance Approvals. The Committee may approve the grant of Options to persons who are expected to become employees, consultants or members of the Board of Directors, of the Company, but are not employees, consultants or members of the Board of Directors at the date of approval. In such cases, the Option shall be deemed granted, without further approval, on the date the grantee becomes an employee, and must satisfy all requirements of this Plan for Options granted on that date. 6. TERMS AND CONDITIONS OF OPTIONS Each Option shall be designated as an ISO or a NQO and shall be subject to the terms and conditions set forth in Section 6.1. NQOs shall also be subject to the terms and conditions set forth in Section 6.2, but not those set forth in Section 6.3. ISOs shall also be subject to the terms and conditions set forth in Section 6.3, but not those set forth in Section 6.2. 6.1 Terms and Conditions to Which All Options Are Subject. All Options shall be subject to the following terms and conditions: (a) Changes in Capital Structure. Subject to Section 6.1(b), if the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, or recapitalization, or converted into or exchanged for other securities as a result of a merger, consolidation, or reorganization, appropriate adjustments shall be made in (1) the number and class of shares of stock subject to this Plan and each outstanding Option, and (2) the exercise price of each outstanding Option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustment. Each such adjustment shall be determined by the Committee in its sole discretion, which determination shall be final and binding on all persons. (b) Corporate Transactions. New option rights may be substituted for Options granted, or the Company's obligations as to outstanding Options may be assumed, by an employer corporation other than the Company, or an Affiliate thereof, in connection with any merger, consolidation, acquisition, separation, reorganization, dissolution, liquidation, sale, or like occurrence in which the Company is involved and which the Committee determines, in its absolute discretion, would materially alter the structure. Substitution shall be done in such manner that the then outstanding Options which are ISOs will continue to be "incentive stock options" within the meaning of Section 422 of the Code to the full extent permitted thereby. Notwithstanding the foregoing or the provisions of Section 6.1(a), if such an event occurs and if such employer corporation, or an Affiliate thereof, does not substitute new option rights for, and substantially equivalent to, the outstanding Options granted hereunder, or assume the outstanding Options granted hereunder, or if there is no employer 3 4 corporation, or if the Committee determines, in its sole discretion, that outstanding Options should not then continue to be outstanding, the Committee may upon ten days prior written notice to optionees in its absolute discretion (1) shorten the period during which Options are exercisable (provided they remain exercisable, to the extent otherwise exercisable, for at least ten days after the date the notice is given), or (2) cancel Options upon payment to the optionee in cash, with respect to each Option to the extent then exercisable, of an amount which, in the absolute discretion of the Committee, is determined to be equivalent to any excess of the fair market value (at the effective time of the dissolution, liquidation, merger, consolidation, acquisition, separation, reorganization, sale or other event) of the consideration that the optionee would have received if the Option had been exercised before the effective time, over the exercise price of the Option; provided, however, if there is a successor corporation and replacement options are not granted by the successor corporation, all outstanding Options shall become exercisable prior to the consummation of the transaction such that the optionees shall have not less than ten days to exercise their Options and become stockholders of record entitled to receive the consideration paid to the other stockholders of the Company. If an optionee fails to exercise his Option within any exercise period described in this paragraph and the dissolution, liquidation, merger, consolidation, sale or other event is consummated, his Option shall no longer be exercisable. Any unexercised Option shall be canceled and terminated. Notwithstanding anything herein to the contrary, nothing shall extend an optionee's right to exercise an ISO after the expiration of ten years from the date it is granted. The actions described in this Section may be taken without regard to any resulting tax consequences to the optionee. (c) Option Grant Date. Each Option Agreement shall specify the date as of which it shall be effective, which date shall be the Grant Date (determined pursuant to Section 5.4 in the case of advance approvals). (d) Fair Market Value. Except as otherwise determined by the Committee, the "Fair Market Value" of a share of Common Stock as of any date shall be equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on The New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) (the "Composite Tape"), on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). (e) Transfer of Option Rights. (1) Incentive Stock Options. No ISO granted under the Plan may be sold, trans ferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to an optionee under the Plan shall be exercisable during his or her lifetime only by such optionee. 4 5 (2) Nonqualified Stock Options. The Committee may, in its discretion, authorize all or a portion of NQOs granted to an optionee to be on terms which permit transfer by such optionee to (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the Option Agreement pursuant to which such NQOs are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred NQOs shall be prohibited except those by will or the laws of descent and distribution. Following transfer, any such NQOs shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of this Plan, the term "optionee" shall be deemed to refer to the transferee. The events of termination of employment shall continue to be applied with respect to the original optionee, following which the NQOs shall be exercisable by the transferee only to the extent, and for the periods specified in Section 6.1(g). Notwithstanding the foregoing, should the Committee provide that NQOs granted be transferable, the Company by such action incurs no obligation to notify or otherwise provide notice to a transferee of early termination of the NQO. In the event of a transfer, as set forth above, the original optionee is and will remain subject to and responsible for any applicable withholding taxes upon the exercise of such NQOs. (f) Payment. No shares of Common Stock shall be issued on the exercise of an Option unless paid for in full at the time of exercise. Payment shall be made in cash, which may be paid by check or other instrument acceptable to the Company. In addition, subject to compliance with applicable laws and regulations and such conditions as the Committee may impose, the Committee may elect to accept payment in shares of Common Stock of the Company which are already owned by the optionee, valued at the Fair Market Value thereof on the date of exercise. The Committee may also allow an optionee to exercise an Option by use of proceeds to be received from the sale of Common Stock issuable pursuant to the Option being exercised. (g) Termination. (1) Any Option or portion thereof which has not expired or been exercised on or before the date on which an optionee ceases to be an employee, officer, consultant or member of the Board of Directors or otherwise affiliated with the Company ("Termination") for cause, shall expire upon Termination. (2) Any Option or portion thereof which has not expired or been exercised on or before the date of Termination without cause, shall expire ninety days after the date of Termination. A leave of absence duly authorized by the Company, shall not be deemed a Termination or a break in continuous employment. (3) Notwithstanding the foregoing, if Termination is due to the permanent disability or death of the optionee, the optionee, the optionee's personal representative or any other 5 6 person who acquires option rights from the optionee by will or the applicable laws of descent and distribution, may, within twelve months after the date of Termination, exercise such Option rights to the extent they were exercisable on the date of Termination. (h) Other Provisions. Each Option Agreement may contain such other terms, provisions, and conditions not inconsistent with this Plan, including rights of repurchase, as may be determined by the Committee, and each ISO granted under this Plan shall include such provisions and conditions as are necessary to qualify such option as an "incentive stock option" within the meaning of Section 422 of the Code. (i) Withholding and Employment Taxes. At the time of exercise of an Option, the optionee shall remit to the Company in cash all applicable federal and state withholding and employment taxes. If and to the extent authorized and approved by the Committee in its sole discretion, an optionee may elect, by means of a form of election to be prescribed by the Committee, to have shares which are acquired upon exercise of an Option withheld by the Company or tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time the amount of such taxes is determined in order to pay the amount of such tax obligations, subject to the following limitations: (1) such election shall be irrevocable; and (2) such election shall be subject to the disapproval of the Committee at any time. Any Common Stock or other securities so withheld or tendered will be valued by the Company as of the date they are withheld or tendered. Unless the Committee otherwise determines, the optionee shall pay to the Company in cash, promptly when the amount of such obligations become determinable, all applicable federal and state withholding taxes resulting from the lapse of restrictions imposed on exercise of an Option, from a transfer or other disposition of shares acquired upon exercise of an Option or otherwise related to the Option or the shares acquired upon exercise of the Option. 6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted under this Plan which are designated as NQOs shall be subject to the following terms and conditions: (a) Option Term. Unless a different expiration date is specified by the Committee at the Grant Date in the Option Agreement, each NQO shall expire ten years from its Grant Date. 6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted under this Plan which are designated as ISOs shall be subject to the following terms and conditions: (a) Exercise Price. The exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the fair market value of the 6 7 stock covered by the ISO at the Grant Date; provided, however, that the exercise price of an ISO granted to any person who owns, directly or indirectly (or is treated as owning by reason of attribution rules, currently set forth in Section 424 of the Code), stock of the Company constituting more than 10% of the total combined voting power of all classes of outstanding stock of the Company or of any Affiliate of the Company, shall in no event be less than 110% of such fair market value. (b) Option Term. Unless an earlier expiration date is specified by the Committee at the Grant Date in the Option Agreement, each ISO shall expire ten years from its Grant Date; except that an ISO granted to any person who owns, directly or indirectly (or is treated as owning by reason of applicable attribution rules currently set forth in Section 424 of the Code) stock of the Company constituting more than 10% of the total combined voting power of the Company's outstanding stock, or the stock of any Affiliate of the Company, shall expire five years from its Grant Date. (c) Disqualifying Dispositions. If stock acquired by exercise of an ISO is disposed of within two years from the Grant Date or within one year after the transfer of the stock to the optionee, the holder of the stock immediately prior to the disposition shall promptly notify the Company in writing of the date and terms of the disposition and shall provide such other information regarding the disposition as the Company may reasonably require. Such holder shall pay to the Company any withholding and employment taxes which the Company in its sole discretion deems applicable. The Company may instruct its stock transfer agent by appropriate means, including placement of legends on stock certificates, not to transfer stock acquired by exercise of an ISO unless it has been advised by the Company that the requirements of this Section have been satisfied. 7. MANNER OF EXERCISE An optionee wishing to exercise an Option shall give proper notification to the Company at its principal executive office, to the attention of the Corporate Secretary, accompanied by a notice of exercise in form and substance satisfactory to the Company, by payment of the exercise price for such shares in a form and manner as the Committee may from time to time approve and by such other documents as the Committee may request. The date the Company receives proper notification of an exercise hereunder accompanied by payment of the exercise price and all such other documents will be considered the date the Option was exercised. Promptly after receipt of proper notification of exercise of an Option, the Company shall, without stock issue or transfer taxes to the optionee or any other person entitled to exercise the Option, deliver to the optionee or such other person a certificate or certificates for the requisite number of shares of stock. An optionee or transferee of an Option shall not have any privileges as stockholder with respect to any stock covered by the Option until the date of issuance of a stock certificate. 7 8 8. RELATIONSHIP WITH THE COMPANY Nothing in this Plan or any Option granted hereunder shall interfere with or limit in any way the right of the Company to terminate any optionee's employment, affiliation or other relationship with the Company at any time, nor confer upon any optionee any right to continue in the employ of, as a consultant to, as a director of, or otherwise affiliated in any way with, the Company. 9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN The Committee may, at any time and in any manner, amend, suspend, or terminate this Plan or any award outstanding under this Plan; provided, however, that no such amendment or discontinuance shall: (a) be made without stockholder approval; (1) to the extent such approval is required by law, agreement or the rules of any exchange or automated quotation system upon which the Common Stock is listed or quoted or (2) to the extent that any outstanding Option is canceled and regranted or repriced; (b) adversely alter or impair the rights of Participants with respect to awards previously made under this Plan without the consent of the holder thereof; or (c) make any change that would disqualify any provision of this Plan intended to be so qualified, from the exemption provided by Rule 16b-3. 10. LIABILITY AND INDEMNIFICATION OF COMMITTEE No member of the Committee shall be liable for any act or omission on such member's own part, including but not limited to the exercise of any power or discretion given to such member under this Plan, except for those acts or omissions resulting from such member's own gross negligence or willful misconduct. The Company shall indemnify each present and future member of the Committee against, and each member of the Committee shall be entitled without further act on his or her part to indemnity from the Company for, all expenses (including attorneys' fees and the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by such person in connection with or arising out of any action, suit, or proceeding to which the Committee or any member of the Committee may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted or not granted under the Plan to the full extent permitted by law and by the Certificate of Incorporation and Bylaws of the Company, as amended. The right of indemnity described in this Section 10 shall be in addition to such other rights of indemnification as the members of the Committee shall otherwise be entitled because of their serving on the Board of Directors of the Company or as an employee of the Company. 8 9 11. EFFECTIVE DATE OF THIS PLAN This Plan first became effective upon adoption by the Board of Directors on February 1, 1995. This Amended and Restated MedPartners, Inc. 1995 Stock Option Plan is an amendment and restatement of that Plan and was adopted by the Committee on May 12, 1997. 9 EX-10.18 7 1997 LONG TERM INCENTIVE COMPENSATION PLAN 1 EXHIBIT (10)-18 MEDPARTNERS, INC. 1997 LONG TERM INCENTIVE COMPENSATION PLAN 2 CONTENTS
Page ---- Article 1. Establishment, Objectives and Duration.................... 5 1.1 Establishment of the Plan................................. 5 1.2 Objectives of the Plan.................................... 5 1.3 Duration of the Plan...................................... 5 Article 2. Definitions............................................... 5 2.1 "Affiliate"............................................... 5 2.2 "Award"................................................... 6 2.3 "Award Agreement"......................................... 6 2.4 "Beneficial Owner" or "Beneficial Ownership".............. 6 2.5 "Board" or "Board of Directors"........................... 6 2.6 "Cause"................................................... 6 2.7 "Change in Control"....................................... 6 2.8 "Code".................................................... 7 2.9 "Committee"............................................... 7 2.10 "Company"................................................. 8 2.11 "Director"................................................ 8 2.12 "Disability".............................................. 8 2.13 "Effective Date".......................................... 8 2.14 "Eligible Person"......................................... 8 2.15 "Employee"................................................ 8 2.16 "Exchange Act"............................................ 8 2.17 "Fair Market Value"....................................... 8 2.18 "Immediate Family Members"................................ 8 2.19 "Incentive Stock Option" or "ISO"......................... 9 2.20 "Insider"................................................. 9 2.21 "Nonemployee Director".................................... 9 2.22 "Nonqualified Stock Option" or "NQSO"..................... 9 2.23 "Option".................................................. 9 2.24 "Option Price"............................................ 9 2.25 "Participant"............................................. 9 2.26 "Period of Restriction"................................... 9 2.27 "Person".................................................. 9 2.28 "Plan".................................................... 9 2.29 "Restricted Stock"........................................ 9 2.30 "Retirement".............................................. 9 2.31 "Shares".................................................. 10 2.32 "Subsidiary".............................................. 10 Article 3. Administration............................................ 10
3 3.1 The Committee............................................. 10 3.2 Authority of the Committee................................ 10 3.3 Decisions Binding......................................... 10 3.4 Costs of Plan............................................. 10 Article 4. Shares Subject to the Plan and Maximum Awards............. 11 4.1 Number of Shares Available for Grants..................... 11 4.2 Adjustments in Authorized Shares.......................... 11 Article 5. Eligibility and Participation............................. 12 5.1 Eligibility............................................... 12 5.2 Actual Participation...................................... 12 Article 6. Stock Options............................................. 12 6.1 Grant of Options.......................................... 12 6.2 Award Agreement........................................... 12 6.3 Option Price.............................................. 12 6.4 Duration of Options....................................... 12 6.5 Exercise of Options....................................... 12 6.6 Payment................................................... 13 6.7 Restrictions on Share Transferability..................... 13 6.8 Termination of Employment................................. 13 6.9 Nontransferability of Options............................. 13 (a) Incentive Stock Options.......................... 13 (b) Nonqualified Stock Options....................... 14 Article 7. Restricted Stock.......................................... 14 7.1 Grant of Restricted Stock................................. 14 7.2 Restricted Stock Agreement................................ 14 7.3 Transferability........................................... 14 7.4 Other Restrictions........................................ 15 7.5 Voting Rights............................................. 15 7.6 Dividends and Other Distributions......................... 15 7.7 Termination of Employment................................. 15 Article 8. Beneficiary Designation................................... 16 Article 9. Deferrals................................................. 16 Article 10. Rights of Employees....................................... 16 10.1 Employment................................................ 16 10.2 Participation............................................. 16 Article 11. Change in Control......................................... 16 11.1 Treatment of Outstanding Awards........................... 16
4 11.2 Termination, Amendment, and Modifications of Change-in-Control Provisions.............................. 17 Article 12. Amendment, Modification, and Termination.................. 17 12.1 Amendment, Modification, and Termination.................. 17 12.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events............................ 17 12.3 Awards Previously Granted................................. 17 Article 13. Withholding............................................... 17 13.1 Tax Withholding........................................... 17 13.2 Share Withholding......................................... 18 Article 14. Indemnification........................................... 18 Article 15. Successors................................................ 18 Article 16. Legal Construction........................................ 18 16.1 Gender and Number......................................... 18 16.2 Severability.............................................. 18 16.3 Requirements of Law....................................... 19 16.4 Securities Law Compliance................................. 19 16.5 Governing Law............................................. 19
5 MEDPARTNERS, INC. 1997 LONG TERM INCENTIVE COMPENSATION PLAN ARTICLE 1. ESTABLISHMENT, OBJECTIVES AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. MedPartners, Inc., a Delaware corporation (hereinafter referred to as the "Company"), hereby establishes an incentive compensation plan to be known as the "MedPartners, Inc. 1997 Long Term Incentive Compensation Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Incentive Stock Options, Nonqualified Stock Options and Restricted Stock. The Plan shall become effective as of February 25, 1997 (the "Effective Date") and shall remain in effect as provided in Section 1.3 hereof. 1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the profitability and growth of the Company through the use of incentives which are consistent with the Company's objectives and which link the interests of Participants to those of the Company's stockholders; to provide Participants with an incentive for excellence in individual performance; and to promote teamwork among Participants. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants who make significant contributions to the Company's success and to allow Participants to share in the success of the Company. 1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of Directors or the Committee to amend or terminate the Plan at any time pursuant to Article 12 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Incentive Stock Option be granted under the Plan on or after February 25, 2007. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized: 2.1 "AFFILIATE" means a "parent corporation" or "subsidiary corporation" as defined in Section 424 of the Code. 5 6 2.2 "AWARD" means, individually or collectively, a grant under this Plan of Incentive Stock Options, Nonqualified Stock Options or Restricted Stock. 2.3 "AWARD AGREEMENT" means an agreement entered into by the Company and each Participant setting forth the terms and provisions applicable to Awards granted under this Plan. 2.4 "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. 2.5 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company. 2.6 "CAUSE" shall be determined by the Committee, exercising good faith and reasonable judgment, and shall mean the occurrence of any one or more of the following: (a) The willful and continued failure by the Participant to substantially perform his duties (other than any such failure resulting from the Participant's Disability) after a written demand for substantial performance is delivered by the Committee to the Participant that specifically identifies the manner in which the Committee believes that the Participant has not substantially performed his duties, and the Participant has failed to remedy the situation within 30 calendar days of receiving such notice; or (b) The Participant's conviction for committing an act of fraud, embezzlement, theft or another act constituting a felony; or (c) The willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company, as determined by the Committee. However, no act or failure to act on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. 2.7 "CHANGE IN CONTROL" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (a) The acquisition by any Person of Beneficial Ownership of 20% or more of either (i) the then outstanding shares of Common Stock of the Company, or (ii) the combined voting power of the outstanding voting securities of the Company entitled to vote generally in the selection of Directors; provided, however, that for purposes of this subsection, the following transactions shall not constitute a Change of Control: (A) any acquisition directly from the Company through a public offering of shares of Common Stock of the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (C) below; 6 7 (b) The cessation, for any reason, of the individuals who constitute the Company's Board of Directors as of the date hereof ("Incumbent Board") to constitute at least a majority of the Company's Board of Directors; provided, however, that any individual becoming a Director following the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs because of an actual or threatened election contest with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Company's Board of Directors; (c) The consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination") unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the Beneficial Owners, respectively, of the outstanding shares of Common Stock of the Company and the outstanding voting securities of the Company immediately before such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of Common Stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of Directors, as the case may be, of the Company resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately before such Business Combination of the outstanding shares of Common Stock and the outstanding voting securities of the Company, as the case may be; (ii) no party (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed before the Business Combination; and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Company's Board of Directors at the time of the execution of the initial agreement, or of the action of the Company's Board of Directors, providing for such Business Combination; or (d) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 2.8 "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 2.9 "COMMITTEE" means the Compensation Committee of the Board, as specified in Article 3 herein, or such other Committee appointed by the Board to administer the Plan with respect to grants of Awards. 7 8 2.10 "COMPANY" means MedPartners, Inc., and also means any corporation of which a majority of the voting capital stock is owned directly or indirectly by MedPartners, Inc. or by any of its Subsidiaries, and any other corporation designated by the Committee as being a Company hereunder (but only during the period of such ownership or designation). 2.11 "DIRECTOR" means any individual who is a member of the Board of Directors of the Company. 2.12 "DISABILITY", as applied to a Participant, means that the Participant (a) has established to the satisfaction of the Committee that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than 12 months (all within the meaning of Section 22(e)(3) of the Code), and (b) has satisfied any requirement imposed by the Committee in regard to evidence of such disability. 2.13 "EFFECTIVE DATE" shall have the meaning ascribed to such term in Section 1.1 hereof. 2.14 "ELIGIBLE PERSON" shall mean all Employees, Directors or consultants of the Company or any Affiliate; provided, however, that no Award may be granted to anyone who is not an "employee" as that term is defined in General Instruction A.(1)(a) of Form S-8, as such definition may be amended from time to time, without first receiving advice and guidance from the Company's outside counsel as to the effect of such grant. 2.15 "EMPLOYEE" means any officer or employee of the Company. 2.16 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.17 "FAIR MARKET VALUE" Except as otherwise determined by the Committee, the "Fair Market Value" of a share of Common Stock as of any date shall be equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on The New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) (the "Composite Tape"), on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). 2.18 "IMMEDIATE FAMILY MEMBERS" means the spouse, children and grandchildren of a Participant. 8 9 2.19 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares granted under Article 6 herein and which is designated as an Incentive Stock Option and which is intended to meet the requirements of Code Section 422. 2.20 "INSIDER" shall mean an individual who is, on the relevant date, a Director, a 10% Beneficial Owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act or an officer of the Company, as defined under Section 16 of the Exchange Act and as determined by the Board of Directors from time to time. 2.21 "NONEMPLOYEE DIRECTOR" means an individual who is a member of the Board of Directors of the Company but who is not an Employee of the Company. 2.22 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase Shares granted under Article 6 herein and which is not intended to meet the requirements of Code Section 422. 2.23 "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein. 2.24 "OPTION PRICE" means the price at which a Share may be purchased by a Participant pursuant to an Option. 2.25 "PARTICIPANT" means an Eligible Person who has outstanding an Award granted under the Plan. 2.26 "PERIOD OF RESTRICTION" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance objectives, or upon the occurrence of other events as determined by the Committee, at its discretion), and the Shares of Restricted Stock are subject to a substantial risk of forfeiture, as provided in Article 7 herein. 2.27 "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. 2.28 "PLAN" means the MedPartners, Inc. 1997 Long Term Incentive Compensation Plan. 2.29 "RESTRICTED STOCK" means an Award granted to a Participant pursuant to Article 7 herein. 2.30 "RETIREMENT" as applied to a Participant, means the Participant's termination of employment in a manner which qualifies the Participant to receive immediately payable retirement benefits under the applicable retirement plan maintained by the Company (the "Retirement Plan"), under the successor or replacement of such Retirement Plan if it is then no longer in effect, or under any other retirement plan maintained or adopted by the Company which is determined by 9 10 the Committee to be the functional equivalent of such Retirement Plan; or, with respect to a Participant who may not or has not participated in a retirement plan maintained by the Company or an Affiliate, "Retirement" shall have the meaning determined by the Committee from time to time. 2.31 "SHARES" means Common Stock of MedPartners, Inc., par value $.001 per share. 2.32 "SUBSIDIARY" means any corporation, partnership, joint venture or other entity in which the Company has a majority voting interest. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Committee, or by any other committee appointed by the Board, which Committee shall consist solely of two or more "Nonemployee Directors" within the meaning of Rule 16b-3 under the Exchange Act, or any successor provision. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. 3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions herein, the Committee shall have full power to select Employees who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan as they apply to Employees; establish, amend, or waive rules and regulations for the Plan's administration as they apply to Employees; alter, amend, suspend or terminate the Plan in whole or in part; and (subject to the provisions of Article 12 herein) amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan, as the Plan applies to Employees. As permitted by law, the Committee may delegate its authority as identified herein. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Employees, Participants and their estates and beneficiaries. 3.4 COSTS OF PLAN. The costs and expenses incurred in the operation and administration of the Plan shall be borne by the Company. 10 11 ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS 4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as provided in Section 4.2 herein, the number of Shares hereby reserved for issuance to Participants under the Plan shall be 6,725,000. The number of Shares reserved for issuance under the Plan shall automatically increase on the first day of each calendar year during the term of this Plan, beginning with the 1998 calendar year, by an amount equal to 1% of the Shares outstanding on December 31 of the immediately preceding year. However, such additional Shares shall not be available for grants of Incentive Stock Options, unless and until the increase in the number of Shares provided for herein is subsequently approved by the stockholders of the Company in accordance with Section 422 of the Code. Shares issued upon exercise of Options or Awards of Restricted Stock under the Plan may be either authorized but unissued Shares or Shares re-acquired by the Company. If, on or prior to the termination of the Plan, an Award granted thereunder expires or is terminated for any reason without having been exercised or vested in full, the unpurchased or unvested Shares covered thereby will again become available for the grant of Awards under the Plan. Shares of Common Stock covered by Options surrendered in connection with the exercise of other Options shall not be deemed to have been exercised and shall again become available for the grant of awards under the Plan. Notwithstanding the foregoing, the maximum number of Shares of Restricted Stock granted pursuant to Article 7 herein shall be an amount equal to one-fifth of the total number of Shares reserved for issuance under the Plan. 4.2 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares which may be delivered under Section 4.1, in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and in the Award limits set forth in Section 4.1, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. 11 12 ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. All Eligible Persons are eligible to participate in this Plan. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from all Eligible Persons, those to whom Awards shall be granted and shall determine the nature and amount of each Award. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. 6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Code Section 422, or an NQSO whose grant is intended not to fall under the provisions of Code Section 422. 6.3 OPTION PRICE. The Option Price for each grant of an Option under this Plan shall be at least equal to 100% of the Fair Market Value of a Share on the date the Option is granted; provided, however, that the exercise price of an ISO granted to any person who owns, directly or indirectly, (or is treated as owning by reason of attribution rules, currently set forth in Code Section 424), stock of the Company constituting more than 10% of the total combined voting power of the Company's outstanding stock, or the stock of any of its corporate subsidiaries, shall in no event be less than 110% of the Fair Market Value of such shares. 6.4 DURATION OF OPTIONS. Each Option granted to an Employee shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Incentive Stock Option shall be exercisable later than the tenth anniversary date of its grant. Furthermore, each Stock Option granted to any person who owns, directly or indirectly (or is treated as owning by reason of attribution rules, currently set forth in Internal Revenue Code Section 424), stock of the Company constituting more than 10% of the total combined voting power of the Company's outstanding stock, or the stock of any of its corporate subsidiaries, is not exerciseable after the expiration of five years from the date such option is granted. 6.5 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. Notwithstanding any contrary provisions contained in this Plan, the aggregate Fair Market Value (determined as of the 12 13 time each ISO is granted) of the shares of Common Stock with respect to which ISO's issued to any one person thereunder are exercisable for the first time during any calendar year shall not exceed $100,000. 6.6 PAYMENT. Options granted under this Article 6 shall be exercised by the delivery of a proper notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised. No shares of Common Stock shall be issued on the exercise of an Option unless the Option Price is paid for in full at the time of exercise. Payment shall be made in cash, which may be paid by check or other instrument acceptable to the Company. In addition, subject to compliance with applicable laws and regulations and such conditions as the Committee may impose, the Committee may elect to accept payment in shares of Common Stock of the Company which are already owned by the Participant, valued at the Fair Market Value thereof on the date of exercise. The Committee may also allow a Participant to exercise an Option by use of proceeds to be received from the sale of Common Stock issuable pursuant to the Option being exercised. As soon as practicable after receipt of proper notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 6.8 TERMINATION OF EMPLOYMENT. Each Option, to the extent it has not been previously exercised, shall terminate upon the earliest to occur of: (a) the expiration of the Option period set forth in the Option Award Agreement; (b) for ISOs, the expiration of three months following the Participant's Retirement (following the Participant's Retirement, NQSOs shall terminate upon the expiration of the Option period set forth in the Option Award Agreement); (c) the expiration of 12 months following the Participant's death or Disability; (d) immediately upon termination for Cause; or (e) the expiration of 90 days following the Participant's termination of employment for any reason other than Cause, Change in Control, death, Disability, or Retirement. Upon a termination of employment related to a Change in Control, Options shall be treated in the manner set forth in Article 11. 6.9 NONTRANSFERABILITY OF OPTIONS. (a) INCENTIVE STOCK OPTIONS. No ISO granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of 13 14 descent and distribution. Further, all ISOs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. (b) NONQUALIFIED STOCK OPTIONS. The Committee may, in its discretion, authorize all or a portion of NQSOs granted to a Participant to be on terms which permit transfer by such Participant to (i) Immediate Family Members, (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (A) there may be no consideration for any such transfer, (B) the Award Agreement pursuant to which such Options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section, and (C) subsequent transfers of transferred Options shall be prohibited except those by will or the laws of descent and distribution. Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of this Plan, the term "Participant" shall be deemed to refer to the transferee. The events of termination of employment shall continue to be applied with respect to the original Participant, following which the Options shall be exercisable by the transferee only to the extent, and for the periods specified in this Section 6.9. Notwithstanding the foregoing, should the Committee provide that Options granted be transferable, the Company by such action incurs no obligation to notify or otherwise provide notice to a transferee of early termination of the Option. In the event of a transfer, as set forth above, the original Participant is and will remain subject to and responsible for any applicable withholding taxes upon the exercise of such Options. ARTICLE 7. RESTRICTED STOCK 7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Participants in such amounts as the Committee shall determine. Without limiting the generality of the foregoing, Restricted Shares may be granted in connection with payouts under other compensation programs of the Company. 7.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 7.3 TRANSFERABILITY. Except as provided in this Article 7, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant. 14 15 7.4 OTHER RESTRICTIONS. Subject to Article 8 herein, the Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance objectives (Company-wide, business unit, and/or individual), time-based restrictions on vesting following the attainment of the performance objectives, and/or restrictions under applicable federal or state securities laws. At the discretion of the Committee, the Company may retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. Except as otherwise provided in this Article 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction. 7.5 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 7.6 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may be credited with regular cash dividends paid with respect to the underlying Shares while they are so held. Such dividends may be paid currently, accrued as contingent cash obligations, or converted into additional shares of Restricted Stock, upon such terms as the Committee establishes. The Committee may apply any restrictions to the dividends that the Committee deems appropriate. In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend shall be subject to a vesting period equal to the remaining vesting period of the Shares of Restricted Stock with respect to which the dividend is paid. 7.7 TERMINATION OF EMPLOYMENT. Upon a Participant's death, Disability, or Retirement, all Restricted Shares shall vest immediately. Each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to retain unvested Restricted Shares following termination of the Participant's employment with the Company in all other circumstances. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment. 15 16 ARTICLE 8. BENEFICIARY DESIGNATION A Participant under the Plan may make written designation of a beneficiary on forms prescribed by and filed with the Corporate Secretary of the Company. Such beneficiary, or if no such designation of any beneficiary has been made, the legal representative of such Participant or such other person entitled thereto as determined by a court of competent jurisdiction, may exercise, in accordance with and subject to the provisions of Article 6, any unterminated and unexpired Option granted to such Participant to the same extent that the Participant himself could have exercised such Option were he alive or able; provided, however, that no Option granted under the Plan shall be exercisable for more Shares than the Participant could have purchased thereunder on the date his employment by, or other relationship with, the Company and its Subsidiaries was terminated. ARTICLE 9. DEFERRALS The Committee may permit or require a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option, the lapse or waiver of restrictions with respect to Restricted Stock, or the satisfaction of any requirements or objectives with respect to performance measures, if any. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 10. RIGHTS OF EMPLOYEES 10.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. 10.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. ARTICLE 11. CHANGE IN CONTROL 11.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges: (a) Any and all Options granted hereunder shall become immediately exercisable, and shall remain exercisable throughout their entire term; and 16 17 (b) Any restriction periods and restrictions imposed on Shares of Restricted Stock shall lapse; provided, however, that the degree of vesting associated with Restricted Stock which has been conditioned upon the achievement of performance conditions pursuant to Section 7.4 herein shall be determined in the manner set forth in Section 7.7 herein. 11.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL PROVISIONS. Notwithstanding any other provision of this Plan or any Award Agreement provision, the provisions of this Article 11 may not be terminated, amended, or modified on or after the date of a Change in Control to affect adversely any Award theretofore granted under the Plan without the prior written consent of the Participant with respect to said Participant's outstanding Awards. ARTICLE 12. AMENDMENT, MODIFICATION, AND TERMINATION 12.1 AMENDMENT, MODIFICATION, AND TERMINATION. Subject to Section 11.2 herein, the Board or the Committee may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part, except that, without approval of the stockholders of the Company, no such revision or amendment shall increase the number of shares available for grants of ISOs under the Plan or alter the class of participants in the Plan. Notwithstanding the foregoing, neither the Company nor the Board or Committee on its behalf may cancel outstanding Awards and issue substitute Awards in replacement thereof or reduce the exercise price of any outstanding Options without stockholder approval. 12.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR NONRECURRING EVENTS. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.2 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. 12.3 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. ARTICLE 13. WITHHOLDING 13.1 TAX WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and 17 18 local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan. 13.2 SHARE WITHHOLDING. To the extent provided by the Committee, a Participant may elect to have any distribution to be made under this Plan to be withheld or to surrender to the Company shares of Common Stock already owned by the Participant to fulfill any tax withholding obligation. ARTICLE 14. INDEMNIFICATION Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE 15. SUCCESSORS All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, of all or substantially all of the business and/or assets of the Company, or a merger, consolidation or otherwise. ARTICLE 16. LEGAL CONSTRUCTION 16.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular; and, the singular shall include the plural. 16.2 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 18 19 16.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 16.5 GOVERNING LAW. To the extent not preempted by federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the state of Delaware. 19 EX-10.19 8 CONSENT OF NATIONS BANK 1 [NATIONSBANK LETTERHEAD] EXHIBIT (10)-19 March 27, 1998 To: MedPartners, Inc. From: NationsBank, N.A., as Agent Re: Consent to waiver of Section 8.1 and Section 8.4(h)(1) of the Credit Agreement Dear MedPartners, Inc.: Effective March 27, 1998, the Required Lenders consented to the extension of the waiver of Section 8.1 and 8.4 (h)(1) of the Credit Agreement through May 29, 1998. Thank you again for all your efforts. Regards, /s/ William D. Duke - --------------------- William D. Duke Vice President cc: P. Clemens, MedPartners, Inc. EX-21 9 CORPORATION SUBSIDIARIES 1 EXHIBIT (21) CORPORATION SUBSIDIARIES MedGP, Inc. - Delaware corporation MedPartners Acquisition Corporation - Delaware corporation MedPartners Aviation, Inc. - Delaware corporation Bay Area Practice Management Group, Inc. - California corporation CHS Management, Inc. - Delaware corporation Caremark International Inc. - Delaware corporation Caremark Inc. - California corporation Caremark Physician Services of Texas Inc. - Delaware corporation MCS Holdings Corporation - Delaware corporation Prescription Health Services, Inc. - California corporation Strategic Healthcare Management, Inc. - California corporation MP Indemnity Ltd. - Bermuda corporation Caremark International Holdings Inc. - Delaware corporation Caremark Holdings N.V. - The Netherlands corporation Caremark S.A. - France corporation Caremark Distribution S.A. - France corporation Caremark Ltd. - Japan corporation Caremark Limited - New Zealand corporation Caremark Limited - England and Wales, United Kingdom corporation Caremark Services Limited - England and Wales, United Kingdom corporation CPSL Limited - England and Wales, United Kingdom corporation Caremark Pty. Ltd. - New South Wales, Australia corporation MedPartners Physician Services Inc. - Delaware corporation Caremark Nephrology Services Inc. - Delaware corporation Caremark Resources Corporation - Delaware corporation Friendly Hills Healthcare Network Inc. - Delaware corporation North Suburban Clinic Ltd. - Illinois corporation Greeley Clinic, Inc. - Oregon corporation LFMG, Inc. - California corporation Pacific Medical Group, Inc. - Oregon corporation Pacific Physician Services, Inc. - Delaware corporation PPS East, Inc. - Delaware corporation PPS North Carolina Medical Management, Inc. - North Carolina corporation PPS Riverside Division Acquisition and Management Corp. I - Delaware corporation PPS Valley Management, Inc. - California corporation Pacific Indemnity, Ltd. - British Virgin Islands corporation Pacific Physician Services Arizona, Inc. - Delaware corporation Pacific Physician Services Nevada, Inc. - Delaware corporation Physicians' Hospital Management Corporation - Delaware corporation Reliant Healthcare Systems, Inc. - California corporation Team Health, Inc. - Tennessee corporation Clinic Management Services, Inc. - Tennessee corporation Daniel & Yeager, Inc. - Alabama corporation Drs. Sheer, Ahearn & Associates, Inc. - Florida corporation The Emergency Associates for Medicine, Inc. - Florida corporation Emergency Coverage Corporation - Tennessee corporation Emergency Physician Associates, Inc. - New Jersey corporation Emergency Professional Services, Inc. - Ohio corporation Hospital Based Physician Services, Inc. - Tennessee corporation Med: Assure Systems, Inc. - Tennessee corporation Northwest Emergency Physicians, Inc. - Washington corporation Southeastern Emergency Physicians, Inc. - Tennessee corporation Southeastern Emergency Physicians of Memphis, Inc. - Tennessee corporation Emergicare Management Incorporated - Tennessee corporation Team Radiology, Inc. - North Carolina corporation MedPartners Provider Network, Inc. - California corporation St. Johns Clinic, Inc. - Oregon corporation The Tigard Clinic, Inc. - Oregon corporation MedPartners East, Inc. - Delaware corporation MedPartners Integrated Network-Chandler, Inc. - Arizona corporation Reich, Seidelmann & Janicki Co. - Ohio corporation Charles L. Springfield, Inc. - California corporation Karl G. Mangold, Inc. - California corporation Herschel Fischer, Inc. - California corporation Georgia MedPartners Management, Inc. - Georgia corporation MedPartners of New Mexico, Inc. - Delaware corporation MedPartners-Texas, Inc. - Texas non-profit corporation Aetna Professional Management Corporation - Connecticut corporation ADS Health Management, Inc. - California corporation Healthways, Inc. - Illinois corporation HealthSpring, Inc. - Delaware corporation HealthSpring of Illinois, Inc. - Delaware corporation HealthSpring of Pennsylvania, Inc. - Delaware corporation InPhyNet Medical Management, Inc. - Delaware corporation InPhyNet Administrative Services, Inc. - Florida corporation InPhyNet Managed Care, Inc. - Florida corporation Acute Care Medical Management, Inc. - Ohio corporation BGS Healthcare, Inc. - Florida corporation Health Services of Pembroke Lakes, Inc. - Florida corporation Home Health Agency of Greater Miami, Inc. - Florida corporation InPhyNet Managed Care Contracting Services, Inc. - Florida corporation InPhyNet Managed Care Contracting Services of Century Village, Inc. - Florida corporation InPhyNet Managed Care of South Broward, Inc. - Florida corporation InPhyNet Medical Management of Ohio, Inc. - Florida corporation Sachs, Morris & Sklaver, Inc. - Florida corporation EMSA South Broward, Inc. - Florida corporation InPhyNet Hospital Services, Inc. - Florida corporation EMSA Contracting Services, Inc. - Florida corporation EMSA Louisiana, Inc. - Florida corporation InPhyNet Anesthesia of West Virginia, Inc. - West Virginia corporation Metroamerican Radiology, Inc. - North Carolina corporation Neo-Med, Inc. - Florida corporation Paragon Anesthesia, Inc. - Florida corporation Paragon Contracting Services, Inc. - Florida corporation Paragon Imaging Consultants, Inc. - Florida corporation Rosendorf, Margulies, Borushok, Schoenbaum Radiology Associates of Hollywood, Inc. - Florida corporation Virginia Emergency Physicians, Inc. - Virginia corporation InPhyNet Government Services, Inc. - Florida corporation EMSA Correctional Care, Inc. - Florida corporation EMSA Military Services, Inc. - Florida corporation IMBS, Inc. - Florida corporation InPhyNet Medical Management Institute, Inc. - Delaware corporation Acute Care Specialists, Co. - Pennsylvania corporation Occucare, Inc. - Ohio corporation PPS Indemnity, Inc. - Hawaii corporation Quantum Plus, Inc. - California corporation MedPartners/Talbert Medical Management Corporation - Delaware corporation Talbert Medical Management Corporation - Delaware corporation Talbert Health Services Corporation - Delaware corporation NON-CORPORATE SUBSIDIARIES MedOhio, L.P. - Delaware limited partnership MedTen, L.P. - Delaware limited partnership MedTex, L.P. - Delaware limited partnership MedPartners Physician Services of Illinois L.L.C. - Illinois limited liability company Cerritos Investment Group - California general partnership Cerritos Investment Group II - California general partnership Family Medical Center - Oregon general partnership 5000 Airport Plaza, L.P. - California limited partnership KS-PSI of Texas L.P. - Delaware general partnership MPI/Memorial IPA, LLC - California limited liability company PPS Medical Management and Consulting, L.L.C. - Delaware limited liability company Sierra Meadows Associates, Ltd. - Nevada limited partnership Fischer Mangold - California general partnership MedPartners Administration, L.P. - Delaware limited partnership MedPartners Physician Management, L.P. - Delaware limited partnership EMSA Limited Partnership - Florida limited partnership Paragon Healthcare Limited Partnership - Florida limited partnership EX-23 10 CONSENT OF ERNST AND YOUNG 1 EXHIBIT (23) CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements of MedPartners, Inc. and in the related Prospectus of our report dated March 13, 1998, with respect to the Consolidated Financial Statements of MedPartners, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997 as follows: Form S-8 No. 033-86806 pertaining to the 1993 Stock Option Plan; Form S-8 No. 333-11875 pertaining to MedPartners' Incentive Compensation Plan; Form S-8 No. 333-11127 pertaining to the 1995 Stock Option Plan; Form S-8 No. 333-05703 pertaining to MedPartners' Employee Savings Plan; Form S-8 No. 333-14159 pertaining to Caremark's Employee Savings Plan; Form S-8 No. 333-14163 pertaining to Caremark's Non-Employee/Director Stock Option Plan and Caremark's Stock Purchase Plan; Form S-8 No. 333-38835 pertaining to MedPartners' 1997 Long Term Incentive Compensation Plan; Form S-8 No. 333-16863 pertaining to MedPartner's Employee Stock Purchase Plan; Form S-3 No. 333-17339 pertaining to the resale of common stock by certain selling stockholders; Form S-8 No. 333-30145 pertaining to MedPartner's 1994 Non-Employee Director Stock Option Plan and 1994 Stock Incentive Plan; and Form S-8 No. 333-42967 pertaining to the Amended and Restated 1995 Stock Option Plan. ERNST & YOUNG LLP March 31, 1998 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 215,801 0 967,800 (204,249) 164,049 1,313,041 530,033 0 2,890,529 1,237,294 1,470,622 0 0 198 90,656 2,890,529 0 6,331,151 0 7,047,185 0 0 55,748 (771,782) (78,040) (693,742) (95,988) 0 (30,885) (820,615) (4.42) (4.42)
EX-99.1 12 PENDING LITIGATION 1 EXHIBIT 99-1 (1) Lauriello v. MedPartners, Inc., et al., No. CV98-98 (Cir. Ct. of Jefferson County, Ala., filed January 9, 1998); (2) Rubino v. MedPartners, Inc., et al., No. CV98-B-0067-S (U.S.D.C. Northern District, Alabama, filed January 13, 1998); (3) Loomis v. MedPartners, Inc., et al., No. CV98-G-0086-S (U.S.D.C. Northern District, Alabama, filed January 14, 1998); (4) Marsh v. MedPartners, Inc., et al., No. CV98-TMP-0096-S (U.S.D.C. Northern District, Alabama, filed January 15, 1998); (5) Smith v. House, et al., No. CV98-B-0095-S (U.S.D.C. Northern District, Alabama, filed January 15, 1998); (6) Buettler v. MedPartners, Inc., et al., No. CV98-AR-0119-S (U.S.D.C. Northern District, Alabama, filed January 20, 1998); (7) Schacter v. MedPartners, Inc., et al., No. CV98-00297, (Cir. Ct. of Jefferson County, Ala., filed January 16, 1998); (8) Susser v. MedPartners, Inc., et al., No. CV98-N-0177-S, (U.S.D.C. Northern District, Alabama, filed January 26, 1998); (9) ZSA Asset Allocation Fund v. MedPartners, Inc., et al., No. CV98-B-0274-S (U.S.D.C. Northern District, Alabama, filed February 6, 1998); (10) Bishop v. House, et al., No. CV98-P-0316-S ((U.S.D.C. Northern District, Alabama, filed February 10, 1998); (11) Mizraji v. MedPartners, Inc., et al., No. CV98-P-0351-S (U.S.D.C. Northern District, Alabama, filed February 13, 1998); (12) Rudolf v. MedPartners, Inc., et al., No. CV98-B-0409-S (U.S.D.C. Northern District, Alabama, filed February 20, 1998); (13) Sorrentino v. MedPartners, Inc., et al., No. CV98-N-0358-S (U.S.D.C. Northern District, Alabama, filed February 13, 1998); (14) Steiner v. MedPartners, Inc., et al., No. CV98-P-0317-S (U.S.D.C. Northern District, Alabama, filed February 10, 1998); (15) Kosseff v. MedPartners, Inc., et al., No. CV98-G-0558-S (U.S.D.C. Northern District, Alabama, filed March 10, 1998); (16) Wisinski v. MedPartners, Inc., et al., No. CV98-P-0528-S (U.S.D.C. Northern District, Alabama, filed March 5, 1998); -----END PRIVACY-ENHANCED MESSAGE-----