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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: December 5, 1996
MedPartners, Inc.
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(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
Delaware 0-27276 63-1151076
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(State or Other (Commission (I.R.S. Employer
Jurisdiction of Incorporation File Number) Identification No.)
or Organization)
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, (205) 733-8996
Including Area Code:
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ITEM 5. OTHER EVENTS
In September 1996, MedPartners, Inc., a Delaware corporation ("MedPartners"
or the "Company"), acquired Caremark International Inc., a publicly traded
physician practice management ("PPM") and prescription benefit management
("PBM") company, in exchange for approximately 90.6 million shares of the
Company's Common Stock having a total value of approximately $1.8 billion (the
"Caremark Acquisition"), creating the largest PPM business in the United
States. As a result of the Caremark Acquisition and certain other acquisitions,
the Company believes that much of the information and disclosure previously
reported by the Company pursuant to the requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), should be updated and amended to
reflect the Company's current situation. Accordingly, the Company is filing
this Current Report on Form 8-K which contains an updated version of "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of the
Company.
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RISK FACTORS
In addition to the other information contained in this Current Report
on Form 8-K, the factors listed below should be considered carefully. Unless
the context otherwise requires, as used herein, the term "MedPartners" or the
"Company" refers collectively to MedPartners, Inc. and its predecessor, also
named MedPartners, Inc. (the "Original Predecessor") and their respective
subsidiaries and affiliates.
RISKS RELATING TO THE COMPANY'S GROWTH STRATEGY
The Company intends to continue to pursue an aggressive growth strategy
through acquisition and internal development for the foreseeable future. The
Company's ability to pursue new growth opportunities successfully will depend
on many factors, including, among others, the Company's ability to identify
suitable growth opportunities and successfully integrate acquired businesses
and practices. There can be no assurance that the Company will anticipate all
of the changing demands that expanding operations will impose on its
management, management information systems and physician network. Any failure
by the Company to adapt its systems and procedures to those changing demands
could have a material adverse effect on the operating results and financial
condition of the Company.
Competition for Expansion Opportunities. The Company is subject to the
risk that it will be unable to identify and recruit suitable acquisition
candidates in the future. The Company competes for acquisition, affiliation and
other expansion opportunities with national, regional and local PPM companies
and other physician management entities. In addition, certain companies,
including hospitals and insurers, are expanding their presence in the PPM
market. The Company's failure to compete successfully for expansion
opportunities or to attract and recruit suitable acquisition candidates
could have a material adverse effect on the operating results and financial
condition of the Company. The Company is also subject to the risk that it will
be unable to recruit and retain qualified physicians and other healthcare
professionals to serve as employees or independent contractors of the Company
and its affiliates. See "Business -- Competition".
Integration Risks. Acquisitions of PPM companies and physician practices
entail the risk that such acquisitions will fail to perform in accordance with
expectations and that the Company will be unable to successfully integrate such
acquired businesses and physician practices into its operations. The
profitability of the Company is largely dependent on its ability to develop and
integrate networks of physicians, to manage and control costs and to realize
economies of scale from acquisitions of PPM companies and physician practices.
The histories, geographic location, business models, including emphasis on
managed care and fee-for-service, and cultures of acquired PPM businesses and
physician practices may differ from the Company's past experiences. Dedicating
management resources to the integration process may detract attention from the
day-to-day business of the Company. Moreover, the integration of the acquired
businesses and physician practices may require substantial capital and financial
investments. These, together with other risks described herein, could result in
the incurrence of substantial costs in connection with acquisitions that may
never achieve revenue and profitability levels comparable to the Company's
existing physician network which could have a material adverse effect on the
operating results and financial condition of the Company.
The major acquisitions carried out by the Company since January 1995 have
been structured as poolings of interests. As a result, the operating income of
the Company has been reduced by the merger expenses incurred in connection with
those acquisitions, resulting in a net loss for the nine months ended September
30, 1996. The expenses of the Caremark Acquisition are expected to result in a
net loss for the year ended December 31, 1996. There can be no assurance that
future merger expenses will not result in further net losses. Nor can there be
any assurance that there will not be substantial future costs associated with
integrating acquired companies; that the Company will be successful in
integrating such companies; or that the anticipated benefits of such
acquisitions will be realized fully. See "-- Risks Relating to Capital
Requirements".
Dependence on HMO Enrollee Growth. The Company is also largely dependent
on the continued increase in the number of HMO enrollees who use its physician
networks. This growth may come from development or acquisition of other PPM
entities, affiliation with additional physicians, increased enrollment in HMOs
currently contracting with the Company through its affiliated physicians and
additional agreements with HMOs. There can be no assurance that the Company will
be successful in identifying, acquiring and integrating additional medical
groups or other PPM companies or in increasing the number of enrollees. A
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decline in enrollees in HMOs could have a material adverse effect on the
operating results and financial condition of the Company. The Company is
statutorily and contractually prohibited from controlling any medical decisions
made by a healthcare provider. Accordingly affiliated physicians may decline
to enter into HMO agreements that are negotiated for them by the Company or may
enter into contracts for the provision of medical services or make other
financial commitments that are not intended to benefit the Company and which,
accordingly, could have a material adverse effect on the operating results and
financial condition of the Company. See "Business -- Operations".
Risks Relating to Capital Requirements. The Company's growth strategy
requires substantial capital for the acquisition of PPM businesses and assets of
physician practices, and for their effective integration, operation and
expansion. Affiliated physician practices may also require capital for
renovation, expansion and additional medical equipment and technology.
The Company believes that its existing cash resources, the use of Common Stock
for selected practice and other acquisitions, and available borrowings under
the $1.0 billion credit facility (the "Credit Facility") with NationsBank,
National Association (South), as administrative bank to a group of lenders, or
any successor credit facility, will be sufficient to meet the Company's
anticipated acquisition, expansion and working capital needs for the next
twelve months. The Company expects from time to time to raise additional
capital through the issuance of long-term or short-term indebtedness or the
issuance of additional equity securities in private or public transactions, at
such times as management deems appropriate and the market allows in order to
meet the capital needs of the Company. There can be no assurance that
acceptable financing for future acquisitions or for the integration and
expansion of existing networks can be obtained. Any of such financings could
result in increased interest and amortization expense, decreased income to fund
future expansion and dilution of existing equity positions.
RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTHCARE COSTS
A substantial portion of the Company's revenue is derived from agreements
with HMOs that provide for the receipt of capitated fees. Under these
agreements, the Company, through its affiliated physicians, is generally
responsible for the provision of all covered outpatient benefits, regardless of
whether the affiliated physicians directly provide the medical services
associated with the covered benefits. The Company is statutorily and
contractually prohibited from controlling any medical decisions made by any
healthcare provider. To the extent that enrollees require more care than is
anticipated or require supplemental medical care that is not otherwise
reimbursed by the HMO, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If revenue is insufficient
to cover costs, the operating results and financial condition of the Company
could be materially adversely affected. As a result, the Company's success will
depend in large part on the effective management of healthcare costs through
various methods, including utilization management, competitive pricing for
purchased services and favorable agreements with payors. Recently, many
providers, including the Company, have experienced pricing pressures with
respect to negotiations with HMOs. In addition, employer groups are becoming
increasingly successful in negotiating reductions in the growth of premiums paid
for their employees' health insurance, which tends to depress the reimbursement
for healthcare services. At the same time, employer groups are demanding higher
accountability from payors and providers of healthcare services with respect to
measurable accessibility, quality and service. If these trends continue, the
cost of providing physician services could increase while the level of
reimbursement could grow at a lower rate or could decrease. There can be no
assurance that these pricing pressures will not have a material adverse effect
on the operating results and financial condition of the Company. In addition,
changes in healthcare practices, inflation, new technologies, major epidemics,
natural disasters and numerous other factors affecting the delivery and cost of
healthcare could have a material adverse effect on the operating results and
financial condition of the Company.
The Company's financial statements include estimates of costs for covered
medical benefits incurred by HMO enrollees, but not yet reported. While these
estimates are based on information available at the time of calculation, there
can be no assurance that actual costs will approximate the estimates of such
amounts. If the actual costs significantly exceed the amounts estimated and
accrued, such additional costs could have a material adverse effect on the
operating results and financial condition of the Company.
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The HMO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital and non-professional services by HMO enrollees.
The Company's financial statements contain accruals for estimates of shared-risk
amounts receivable from or payable to the HMOs that contract with their
affiliated physicians. These estimates are based upon inpatient utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually. This may cause fluctuations from amounts previously
accrued. To the extent that HMO enrollees require more care than is anticipated
or require supplemental care that is not otherwise reimbursed by the HMOs,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. Any such insufficiency could have a material
adverse effect on the operating results and financial condition of the Company.
Physician groups that render services on a fee-for-service basis (as
opposed to a capitated plan) typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients. A
significant portion of the revenue of the Company is derived from payments made
by these third-party payors. There can be no assurance that payments under
governmental programs or from other third-party payors will remain at present
levels. In addition, third-party payors can deny reimbursement if they determine
that treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or was experimental or for other reasons. Any
material decrease in payments received from such third-party payors could have a
material adverse effect on the operating results and financial condition of
the Company.
RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS
OIG Settlement and Related Claims. Caremark agreed in June 1995 to settle
with the Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS"), the Department of Justice
("DOJ"), the Veteran's Administration, the Federal Employee Health Benefits
Program ("FEHBP"), 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 a four-year-long investigation of Caremark (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 -- resulting in the
payment of civil penalties and criminal fines. The basis of these guilty pleas
was Caremark's failure to provide certain information to CHAMPUS, FEHBP and
federally funded healthcare benefit programs concerning financial relationships
between Caremark and a physician in each of Minnesota and Ohio. See
"Business -- Legal Proceedings".
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.
In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, various private suits and claims (including stockholder
derivative actions and an alleged class action suit) being asserted in
connection with matters relating to the OIG Settlement by Caremark's
stockholders, patients who received healthcare services from Caremark and such
patients' insurers. See "Business -- Legal Proceedings", Note 14 to the
consolidated financial statements of the Company and Note 5 of the unaudited
consolidated financial statements of the Company. In May 1996, three
pharmacies, purporting to represent a class consisting of all of Caremark's
competitors in the alternate site infusion therapy industry, filed a complaint
against Caremark, a subsidiary of Caremark, and two other corporations in the
United States District Court for the District of Hawaii alleging violations of
the federal conspiracy laws, the antitrust laws and of
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California's unfair business practices statute. The complaint seeks unspecified
treble damages, and attorneys' fees and expenses. The Company intends to
defend this case vigorously. Although management believes, based on information
currently available, that the ultimate resolution of this matter is not likely
to have a material adverse effect on the operating results and financial
condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the
Company.
Private Payor Settlements. In March 1996, Caremark agreed to settle all
disputes with a number of private payors. These disputes relate to businesses
that were covered by the OIG Settlement. The settlements resulted in an
after-tax charge of approximately $42.3 million. In addition, the Company will
pay $23.3 million after-tax to cover the private payors' pre-settlement and
settlement-related expenses. An after-tax charge for the above amounts was
recorded in first quarter 1996 discontinued operations. The Company paid the
settlement amounts in September 1996.
As of June 30, 1996, the pre-tax reserve for the costs of settlement of the OIG
Settlement and the settlement with the private payors referred to above and
related matters was approximately $110.0 million. This reserve represented
management's estimate of the ultimate costs relating to the disposition of
these matters. The Company cannot determine at this time what costs may be
incurred in connection with future disposition of non-governmental claims or
litigation. Therefore there can be no assurance that the ultimate costs of
these matters will not exceed such reserve or that additional costs, claims and
damages will not occur. Such additional costs, if incurred, could have a
material adverse effect on the operating results and financial condition
of the Company. See "Business -- Legal Proceedings", Note 14 to the
consolidated financial statements of the Company and Note 5 to the unaudited
consolidated financial statements of the Company.
Coram Litigation. On September 11, 1995, Coram Healthcare Corporation
("Coram") filed a complaint in the San Francisco Superior Court against Caremark
and its subsidiary, Caremark Inc., and 50 unnamed individual defendants. The
complaint, which arises from Caremark's sale to Coram of Caremark's home
infusion therapy business in April 1995, for approximately $209.0 million in
cash and $100.0 million in securities, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint includes specific performance, declaratory relief,
injunctive relief and damages of $5.2 billion. Caremark filed counterclaims
against Coram in this lawsuit and also filed a lawsuit in the United States
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremark's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase. 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.
Integrated Health Services, Inc. ("IHS") has entered into an agreement
to acquire Coram, which the Company understands has been approved by the
Boards of Directors of both IHS and Coram. In connection with this agreement,
the Company has entered into an agreement with IHS pursuant to which the Coram
Litigation is to be settled, contingent upon the acquisition of Coram by IHS.
Under the agreement, all of the approximately $111 million in Coram promissory
notes held by the Company will be cancelled and replaced by a new two year
note in the principal amount of approximately $57.5 million, and the Company
and Coram will enter into long-term preferred provider agreements pursuant to
which IHS/Coram will provide services to the patients served by the Company's
integrated delivery systems on a national basis. The Company understands that
the acquisition of Coram by IHS is subject to the usual conditions found in
transactions of this type, including approval of the stockholders of both
companies, and is expected to be consummated early in the first quarter of
1997. The Company has no control over the conduct of the IHS/Coram transaction,
and there can be no assurance that it will be consummated.
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Caremark Acquisition Litigation. In May 1996, two stockholders, each
purporting to represent a class, filed complaints against Caremark and each of
its directors in the Court of Chancery of the State of Delaware alleging
breaches of the directors' fiduciary duty in connection with Caremark's then
proposed merger with the Company. The complaints seek unspecified damages,
injunctive relief, and attorneys' fees and expenses. The Company believes these
complaints will not have a material adverse effect on the operating results and
financial condition of the Company.
RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Although the Company does
not engage in the practice of medicine or provide medical services, or control
the practice of medicine by its affiliated physicians or the compliance with
regulatory requirements directly applicable to the affiliated physicians and
physician groups, there can be no assurance that the Company will not become
involved in such litigation in the future. Through the Company's ownership and
operation of Pioneer Hospital ("Pioneer Hospital"), U.S. Family Care Medical
Center ("USFMC") and Friendly Hills Hospital ("Friendly Hills"), the Company
could be subject to allegations of negligence and wrongful acts arising out of
providing nursing care, emergency room services, credentialing of medical staff
members and other activities incident to the operation of acute care hospitals.
In addition, through its management of clinic locations and provision of
non-physician healthcare personnel, the Company could be named in actions
involving care rendered to patients by physicians employed by or contracting
with affiliated medical organizations and physician groups.
The Company maintains professional and general liability insurance.
Nevertheless, certain types of risks and liabilities are not covered by
insurance and there can be no assurance that the limits of coverage will be
adequate to cover losses in all instances. In addition, the Company's practice
management agreements require the affiliated physicians to maintain professional
liability insurance coverage on their practice and on each employee and agent of
the practice, and the Company generally is indemnified under each of the
practice management agreements by the affiliated physicians for liabilities
resulting from the performance of medical services. There can be no assurance
that a future claim or claims will not exceed the limits of available insurance
coverages or that indemnification will be available for all such claims. See
"Business -- Corporate Liability and Insurance".
GOVERNMENT REGULATION
Federal and state laws regulate the relationships among providers of
healthcare services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes which prohibit
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to
the Company's affiliated physicians, could result in significant loss of
reimbursement
Moreover, the laws of many states, including California (from which a
significant portion of the Company's revenues are derived), prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. As stated in Note 1 to the consolidated financial statements of the
Company, the Company believes that it has perpetual and unilateral control
over the assets and operations of the various affiliated professional
corporations. 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
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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.
In addition to the regulations referred to above, significant aspects of
the Company's operations are subject to state and federal statutes and
regulations governing workplace health and safety, the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances and the
disposal of medical waste. The Company's operations may also be affected by
changes in ethical guidelines and operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association and the Joint Commission on Accreditation of Healthcare
Organizations. Accordingly, changes in existing laws and regulations, adverse
judicial or administrative interpretations of such laws and regulations or
enactment of new legislation could have a material adverse effect on the
operating results and financial condition of the Company. See "-- Risks
Relating to Pharmacy Licensing and Operation".
As of September 30, 1996, approximately 5% of the revenues of the
Company's affiliated physician groups is derived from payments made by
government-sponsored healthcare programs (principally, Medicare and state
reimbursed programs). As a result, any change in reimbursement regulations,
policies, practices, interpretations or statutes could adversely affect the
operations of the Company. There are also state and federal civil and criminal
statutes imposing substantial penalties (including civil penalties and criminal
fines and imprisonment) on healthcare providers that fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
Company believes it is in material compliance with such laws, but there can be
no assurance that the Company's activities will not be challenged or
scrutinized by governmental authorities or that any such challenge or scrutiny
would not have a material adverse effect on the operating results and financial
condition of the Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss of reimbursement for the Company, up to a maximum of the
approximately 5% of revenues derived from such programs, which could have a
material adverse effect on the operating results and financial condition of
the Company. Although the Company believes that it is not in violation of the
Anti-kickback Statute or similar state statutes, its operations do not fit
within any of the existing or proposed federal safe harbors.
Significant prohibitions against physician referrals were enacted by the
federal Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups. Some
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states have also enacted similar self-referral laws, and the Company believes
it is likely that more states will follow. The Company believes that its
practices fit within exemptions contained in such statutes. Nevertheless,
expansion of the operations of the Company into certain jurisdictions may
require structural and organizational modifications of the Company's
relationships with physician groups 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.
The Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
and the regulations promulgated thereunder subject entities which are licensed
as healthcare service plans in California to substantial regulation by the
California Department of Corporations ("the DOC"). In addition, licensees under
the Knox-Keene Act are required to file periodic financial data and other
information (which 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 by
law to take enforcement actions against licensees that fail to comply with such
requirements. On March 5, 1996, the DOC issued to Pioneer Provider Network, Inc.
("PPN"), a wholly-owned subsidiary of the Company, a healthcare service plan
license (the "Restricted License"). PPN is a recently created organization
without an operating history, and there is no assurance that the DOC will view
PPN's operations to be fully in compliance with applicable laws, including the
Knox-Keene Act, and regulations. Any material non-compliance could have a
material adverse effect on the operating results and financial condition of
the Company.
RISKS RELATING TO PHARMACY LICENSING AND OPERATION
The Company is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require the Company to register
its pharmacies with the United States Drug Enforcement Administration and comply
with security, record-keeping, inventory control and labeling standards in order
to dispense controlled substances. State controlled substance laws require
registration and compliance with the licensing, registration or permit standards
of the state pharmacy licensing authority. State pharmacy licensing,
registration and permit laws impose standards on the qualifications of the
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 must also satisfy state
licensing requirements. Any failure to satisfy such pharmacy licensing statutes
and regulations could have a material adverse effect on the operating results
and financial condition of the Company.
RISKS RELATING TO HEALTHCARE REFORM
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been, and other proposals 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.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the the Company's Second Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation"), the
Company's Second Amended and Restated By-laws (the "By-laws") and the Delaware
General Corporation Law ("DGCL") could, together or separately, discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and limit the price that certain investors might be willing to pay in
the future for shares of the Company's Common Stock. These provisions include a
classified Board of Directors and the issuance, without further shareholder
approval, of preferred stock with rights and privileges which could be senior
to the Company's Common Stock. The Company also is subject to Section 203 of
the DGCL which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with any
"interested stockholder" for a period of three years following the date that
such stockholder became an interested shareholder. In addition, the Company's
Stockholders' Rights Plan, which provides for discount purchase rights to
certain stockholders of the Company upon certain acquisitions
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of 10% or more of the outstanding shares of the Company's Common Stock, may
also inhibit a change in control of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE
There may be significant volatility in the market price for the Company's
Common Stock. Quarterly operating results of the Company, changes in general
conditions in the economy, the financial markets or the health care industry, or
other developments affecting the Company or its competitors, could cause the
market price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years, the stock market and, in particular, the health care
industry segment, has experienced significant price and volume fluctuations.
This volatility has affected the market prices of securities issued by many
companies for reasons unrelated to their operating performance.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Current Report on Form 8-K. Unless the context otherwise requires, as used
herein, the term "MedPartners" or the "Company" refers collectively to
MedPartners, Inc. and its predecessor, also named MedPartners, Inc. (the
"Original Predecessor") and their respective subsidiaries and affiliates.
GENERAL
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. The
Company is the result of the business combination between the Original
Predecessor and MME, which was consummated in November 1995. In February and
September of 1996, the Company combined with Pacific Physician Services, Inc.
("PPSI") and Caremark International Inc. ("Caremark"), respectively. These
business combinations were accounted for as poolings of interests. The financial
information referred to in this discussion reflects the combined operations of
these entities and several additional entities accounted for as immaterial
poolings of interests.
MedPartners is the largest physician practice management ("PPM") company in
the United States. The Company develops, consolidates and manages integrated
healthcare delivery systems. Through its network of affiliated group and
independent practice association ("IPA") physicians, the Company provides
primary and specialty healthcare services to prepaid managed care enrollees and
fee-for-service patients. The Company also operates one of the largest
independent prescription benefit management ("PBM") programs in the United
States and provides disease management services and therapies for patients with
certain chronic conditions.
The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. MedPartners' PPM revenue is derived from the
provision of fee-for-service medical services and from contracts with HMOs that
compensate MedPartners and its affiliated physicians on a prepaid basis. In the
prepaid arrangements, MedPartners, through its affiliated physicians, typically
is paid by the HMO a fixed amount per member ("enrollee") per month
("professional capitation") or a percentage of the premium per member per month
("percent of premium") paid by employer groups and other purchasers of
healthcare coverage to the HMOs. In return, MedPartners, through its affiliated
physicians, is responsible for substantially all of the medical services
required by enrollees. In many instances, MedPartners and its affiliated
physicians accept financial responsibility for hospital and ancillary healthcare
services in return for payment from HMOs on a capitated or percent of premium
basis ("institutional capitation"). In exchange for these payments
(collectively, "global capitation"), MedPartners, through its affiliated
physicians, provides the majority of covered healthcare services to enrollees
and contracts with hospitals and other healthcare providers for the balance of
the covered services. These relationships provide physicians with the
opportunity to operate under a variety of payor arrangements and increase their
patient flow.
The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements with the affiliated
physicians that provide for the management of their practices by the Company
while at the same time providing for the clinical independence of the
physicians.
11
<PAGE> 12
The Company also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 53,000 retail pharmacies. The Company is in
the process of integrating its PBM program with the PPM business by providing
pharmaceutical services to the affiliated physicians, clinics and HMOs. The
Company's disease management services are intended to meet the healthcare needs
of individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs that comprise drug
therapies, physician support and patient education. The Company currently
provides therapies and services for individuals with such conditions as
hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic
fibrosis and multiple sclerosis.
RESULTS OF OPERATIONS
Through the Company's network of affiliated group and IPA physicians,
MedPartners provides primary and specialty healthcare services to prepaid
managed care enrollees and fee-for-service patients. The Company also provides
prescription benefit services to more than 15 million people in all 50 states
and provides services and therapies to patients with certain chronic conditions,
primarily hemophilia and growth disorders. The following table sets forth the
earnings summary by service area for the periods indicated (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Physician Services
Net revenue............... $688,405 $1,008,194 $1,613,761 $1,160,514 $1,839,021
Operating income.......... 23,901 26,670 75,847 53,358 90,203
Margin.................... 3.5% 2.6% 4.7% 4.6% 4.9%
Pharmaceutical Services
Net revenue............... $631,200 $1,097,315 1,432,250 $1,049,050 $1,303,790
Operating income.......... 31,600 46,236 56,022 37,169 53,401
Margin.................... 5.0% 4.2% 3.9% 3.5% 4.1%
Specialty Services
Net revenue............... $437,157 $ 487,820 $ 487,399 $ 366,582 $ 352,906
Operating income.......... 73,600 75,139 70,762 54,425 42,242
Margin.................... 16.8% 15.4% 14.5% 14.8% 12.0%
Corporate Services
Operating (loss).......... $(32,349) $ (35,212) $ (24,668) $ (19,496) $ (17,179)
Percentage of total net
revenue................ (1.8%) (1.4%) (0.6%) (0.8%) (0.5%)
</TABLE>
The following table sets forth the breakdown of net revenue for physician
services for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Prepaid healthcare............ $455,299 $ 620,701 $ 982,128 $ 638,899 $1,040,100
Fee-for-service............... 219,586 363,507 612,007 507,460 788,418
Other......................... 13,520 23,986 19,626 14,155 10,503
-------- ---------- ---------- ---------- ----------
Net revenue......... $688,405 $1,008,194 $1,613,761 $1,160,514 $1,839,021
======== ========= ========= ========= =========
</TABLE>
Enrollment
The Company's prepaid healthcare revenue is reflective of the number of HMO
enrollees for whom it receives monthly capitation payments. Enrollment is
categorized as either "commercial enrollment" (enroll-
12
<PAGE> 13
ees generally under the age of 65 whose health coverage is sponsored by
employers) or "senior enrollment" (enrollees over the age of 65 who are retired
and whose coverage is sponsored by Medicare). 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 institutional capitation.
<TABLE>
<CAPTION>
COMMERCIAL SENIOR TOTAL
ENROLLEES ENROLLEES OTHER ENROLLEES
---------- --------- ------- ---------
<S> <C> <C> <C> <C>
PROFESSIONAL CAPITATION:
December 31, 1995............................... 514,266 32,231 36,838 583,335
December 31, 1994............................... 507,396 38,051 3,374 548,821
December 31, 1993............................... 420,700 37,329 1,239 459,268
September 30, 1996.............................. 824,182 54,150 47,324 925,662
September 30, 1995.............................. 585,672 37,132 32,244 655,048
INSTITUTIONAL CAPITATION:
December 31, 1995............................... 417,879 53,511 22,922 494,312
December 31, 1994............................... 235,174 20,014 -- 255,188
December 31, 1993............................... 227,561 11,431 -- 238,992
September 30, 1996.............................. 430,871 55,179 115,001 601,051
September 30, 1995.............................. 342,374 51,316 14,668 408,358
TOTAL CAPITATION:
December 31, 1995............................... 932,145 85,742 59,760 1,077,647
December 31, 1994............................... 742,570 58,065 3,374 804,009
December 31, 1993............................... 648,261 48,760 1,239 698,260
September 30, 1996.............................. 1,255,059 109,329 162,325 1,526,713
September 30, 1995.............................. 928,046 88,448 46,912 1,063,406
</TABLE>
Results of Operations -- Nine Months Ended September 30, 1996 and 1995
The following discussion of the results of operations for the nine months
ended September 30, 1996 and 1995, respectively, is based upon the unaudited
consolidated financial statements for such periods as reported in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
For the nine months ended September 30, 1996, net revenue was $3,496
million, compared to $2,576 million for the same period in 1995, an increase of
35.7%. The increase in net revenue primarily resulted from the affiliation with
new physician practices and the increase in pharmaceutical services net revenue,
which accounted for $263.7 million and $254.7 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 88% of the new practice revenue. 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.
Operating income grew 69.1% and 43.7% for the nine months ended September
30, 1996, as compared to the same period of 1995, for the physician services and
pharmaceutical services areas, respectively. This growth is 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 physician services areas. Operating income and
margins declined in the corresponding periods for the specialty services area as
a result of lower volumes in the hemophilia business and continued pricing
pressures for growth hormone products.
Included in pre-tax loss for the nine months ended September 30, 1996 were
merger expenses totaling $297.4 million relating to the business combinations
with Caremark, PPSI and several other entities. The major components of the
$297.4 million are listed in Note 3 of the unaudited consolidated interim
financial statements included in the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
13
<PAGE> 14
Discontinued Operations
During 1995 Caremark divested its clozaril patient management system, home
infusion business, oncology management services business and Caremark Orthopedic
Services, Inc. subsidiary. In accordance with APB 30, which addresses the
reporting for disposition of business segments, the Company's consolidated
financial statements present the operating income and net assets of these
discontinued operations separately from continuing operations. Prior periods
have been restated to conform with this presentation. Discontinued operations
for the nine months ended September 30, 1995 reflects the net after-tax gain on
the disposal of the clozaril patient management system, the home infusion
business, and a $145.0 million after-tax charge for the settlement discussed in
Note 5 of the unaudited consolidated interim financial statements (included in
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996) related to the OIG investigation. Discontinued operations for the nine
months ended September 30, 1996 reflects a $65.6 million after-tax charge
related to the settlements with private payors discussed in Note 5 and an
after-tax gain on disposition of the nephrology services business, net of
disposal costs, of $2.1 million.
Years Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 was $3,533.4 million, an
increase of $940.1 million, or 36.3%, over the year ended December 31, 1994. The
increase in net revenue primarily resulted from affiliation with new physician
practices, the increase in prepaid enrollees at existing affiliated physician
practices and the increase in pharmaceutical services net revenue, which
accounted for $240.1 million, $295.8 million, and $334.9 million of the increase
in net revenue, respectively. The most significant physician practice
acquisition affecting this period was Friendly Hills which was acquired in May
1995. This acquisition accounted for 53% of the new practice revenue. The
increase in pharmaceutical services net revenue resulted from increases in
covered lives due to new payor contracts and greater penetration from existing
contracts.
Operating income grew 184.4% and 21.2% for 1995, as compared to 1994, for
the physician services and pharmaceutical services areas, respectively. This
growth is the result of higher net revenues in both areas. The physician
services area also had a significant increase in operating margin from 2.6% in
1994 to 4.7% in 1995, resulting from the leveraging of fixed overhead expenses
over a substantially larger revenue base, integration of operations and the
impact of the varying margins of new affiliations. Operating income and margins
declined in the corresponding periods for the specialty services area as a
result of pricing pressures for growth hormone products.
Including merger expenses, income from continuing operations for the year
ended December 31, 1995 was $23.3 million compared to $54.1 million for 1994.
Included in operating expenses for 1995 are merger expenses totaling $66.6
million related to business combinations accounted for as poolings of interests.
Approximately $55.6 million related to the business combination with MME and its
real estate partnerships. The major components of the total $66.6 million charge
are listed in Note 13 of the consolidated financial statements.
As of December 31, 1995, the Company had a cumulative net operating loss
carryforward for federal income tax purposes of approximately $57.0 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 2010.
In 1994, the Company established a valuation allowance of $14.6 million
because it was more likely than not that the deferred tax asset would not be
utilized in future periods. The valuation allowance was decreased by $14.2
million in 1995 because the realization of the deferred tax asset is now more
likely than not. The primary factor in the determination of the realization of
the deferred tax asset is the profitability of the ongoing business of the
Company.
Years Ended December 31, 1994 and 1993
For the year ended December 31, 1994, net revenue was $2,593.3 million
compared to $1,756.8 million for the year ended December 31, 1993. The increase
in net revenue resulted from the increase in net revenue for pharmaceutical
services of $466.1 million, the increase in revenue for specialty services of
$50.7 million,
14
<PAGE> 15
the increase in prepaid enrollment at existing affiliated physician practices
which generated an additional $165.4 million in revenue and the affiliation with
new physician practices during 1994. Net revenues in the pharmaceutical services
area grew due to expanded covered lives, incremental sales from retail drug
benefits management services and additional revenues from mid-year alliances
formed during 1994 with four major pharmaceutical companies. The increase in
specialty services revenue was due primarily to growth in the hemophilia
business, which had new patient gains, greater utilization per patient and
greater sales of the higher priced recombinant factor therapies.
Operating income grew 11.6% and 73.8% for 1994, as compared to 1993, for
the physician services and pharmaceutical services areas, respectively, due to
increased net revenue generated in each area. The physician services area,
however, experienced a decline in operating margin from 3.5% in 1993 to 2.6% in
1994, primarily due to the decreasing margins experienced by MME and PPSI prior
to affiliation with the Company. The decline in operating margins for
pharmaceutical services from 5.0% in 1993 to 4.2% in 1994 reflects a higher
amount of lower-margin retail sales in 1994. The margins for the specialty
services area decreased from 16.8% in 1993 to 15.4% in 1994. This was primary
due to a decrease in operating income from the growth hormone business.
Partially offsetting these declines were results from the hemophilia business,
which grew 27% from 1993 to 1994.
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. Additionally, the future operating results and financial condition of
the Company may be affected by a number of other 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. See "Risk Factors".
The Company completed the Caremark Acquisition in early 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 "Risk Factors -- Risks Relating to Certain
Caremark Legal Matters", "Business -- Legal Proceedings" and the footnotes to
the consolidated financial statements of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of $104.4
million, including cash and cash equivalents of $79 million. For the first nine
months of 1996, cash flow from operations was $100.5 million. For the year ended
December 31, 1995, cash flow from operations was $100.5 million. For the years
ending December 31, 1993 and 1994, cash flow provided by operations was $72.4
million and $43.5 million, respectively. Cash flow from continuing operations
for the first nine months of 1996 has been negatively impacted by the build up
of accounts receivable in the physician services area relative to the growth of
the existing practices. Various factors affect this build up including
conversion of billing systems and the initial build up of accounts receivable
for new providers and contracts.
For the nine months ended September 30, 1996, the Company invested $116.2
million in acquisitions of the assets of physician practices and $106.0 million
in property and equipment. For the year ended December 31, 1995, the Company
invested $205.1 million in acquisitions of the assets of physician practices
and $122.8 million in property and equipment. For the year ended December 31,
1994, the Company's investing activities totaled $248.0 million, which
primarily was composed of $126.7 million related to practice acquisitions and
$102.3 million related to the purchase of property and equipment. These
expenditures were funded by approximately $128.1 million from equity proceeds
and $232.3 million in net incremental borrowings. For the year ended December
31, 1993, the Company's investing activities totaled $91 million of which $17.4
million related to practice acquisitions and $65.9 million related to the
purchase of property and
15
<PAGE> 16
equipment. These expenditures were funded by $51.8 million derived from equity
proceeds and $65.1 in net incremental borrowings. Investments in acquisitions
and property and equipment are anticipated to continue to be substantial uses of
funds in future periods.
In February 1995, the Original Predecessor completed a public offering of
5.1 million shares of Common Stock. Net proceeds of the offering were
approximately $60.4 million, $30.4 million of which was applied to reduce the
indebtedness then outstanding under the Original Predecessor's credit facility.
In March 1996, the Company completed a public offering of 6.6 million shares of
Common Stock. Net proceeds of the offering were approximately $194.0 million,
$70.0 million of which was applied to reduce the indebtedness then outstanding
under the Company's then-existing credit facility and $69.0 million of which was
used to repay the outstanding convertible subordinated debentures of the
Company.
The Company entered into a $1 billion Revolving Credit and Reimbursement
Agreement (the "Bank Credit Facility"), which became effective simultaneously
with the closing of the Caremark acquisition on September 5, 1996, replacing its
then existing credit facility. At the Company's option, pricing on the Bank
Credit Facility is based on either a debt to cash flow test or the Company's
senior debt ratings. No principal is due on the facility until its maturity date
of September 2001. As of September 30, 1996, there was $445 million outstanding
under the facility. The Bank Credit Facility contains affirmative and negative
covenants which, among other things, require the Company to maintain certain
financial ratios (including minimum net worth, minimum fixed charge coverage
ratio, maximum indebtedness to cash flow), and set certain restrictions on
investments, mergers and sales of assets. Additionally, the Company is required
to obtain bank consent for acquisitions with an aggregate purchase price in
excess of $75 million and which have more than half of the consideration paid in
cash. The Bank Credit Facility is unsecured but provides a negative pledge on
substantially all assets of the Company. As of September 30, 1996, the Company
was in compliance with the covenants in the Bank 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%. 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 generally unsecured obligations of
the Company ranking senior in right of payment to all existing and future
subordinated indebtedness of the Company and pari passu in right of payment with
all existing and future unsubordinated and unsecured obligations of the Company.
The notes are effectively subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. The notes are rated
BBB/Baa3 by Standard & Poors and Moody's Investor Services, respectively. Net
proceeds from the offering were used to reduce amounts under the Bank Credit
Facility. The notes are pari passu to the Bank Credit Facility. On October 30,
1996 the Company completed its tender offer for Caremark's $100 million 6 7/8%
notes due August 15, 2003. Of the $100 million principal amount of such notes
outstanding, $99.9 million principal amount were tendered and purchased. The
total consideration for each $1,000 principal amount of outstanding notes
tendered was $1,017.72.
The Company intends to acquire the assets of additional physician
practices and to fund this growth with existing cash and cash equivalents, the
use of the Company's Common Stock for selected practice and other
acquisitions, and borrowings under the Bank Credit Facility. The Company
believes that its existing cash resources, the use of the Company's Common
Stock for selected practice and other acquisitions, and available borrowings
under the Bank Credit Facility, will be sufficient to meet the Company's
anticipated acquisition, expansion and working capital needs for the next
twelve months. The Company may raise additional capital through the issuance
of long-term or short-term indebtedness or the issuance of additional equity
securities in private or public transactions, at such times and terms as
management deems appropriate and the market allows, in order to meet the
capital needs of the Company on a long-term basis (i.e., for a period in
excess of 12 months).
16
<PAGE> 17
QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and 1996. In the opinion of the Company's management, this
unaudited information has been prepared on the same basis as the audited
information and includes all adjustments (consisting of normal recurring items)
necessary to present fairly the information set forth therein. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1995 1995 1996 1996 1996
------------ --------- --------- ------------- ------------ ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............... $722,288 $794,611 $ 874,489 $ 907,046 $ 957,264 $1,134,479 $1,179,223 $ 1,182,015
Operating expenses:
Affiliated physician
services.............. 112,761 136,473 156,032 168,306 170,596 229,419 231,528 234,925
Outside medical
expenses.............. 30,316 27,318 37,238 41,929 42,700 63,656 82,041 82,373
Clinic expenses......... 112,554 136,072 169,659 181,512 197,019 253,816 248,671 250,917
Non-clinic goods and
services.............. 368,031 410,477 419,204 415,180 443,214 477,264 508,267 498,145
General and
administrative
expenses.............. 40,372 36,453 37,041 35,744 35,628 38,665 31,981 33,001
Depreciation and
amortization.......... 17,475 12,434 14,440 15,178 15,600 19,309 21,938 21,134
-------- -------- --------- -------- --------- ---------- ---------- ----------
Operating income.......... 40,779 35,384 40,875 49,197 52,507 52,350 54,797 61,520
Non-operating expenses:
Net interest expense.... 4,701 6,263 2,187 5,344 3,762 7,431 4,712 5,725
Merger expenses......... -- -- 1,051 3,473 62,040 34,448 -- 263,000
Losses on investments... -- -- -- -- 86,600 -- -- --
Other, net.............. (864) (406) 5 (27) 236 (144) (229) (37)
-------- -------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
continuing operations
before taxes............ 36,942 29,527 37,632 40,407 (100,131) 10,615 50,314 (207,168)
Income tax expense
(benefit)............. 15,479 10,886 13,888 15,140 (55,773) 6,598 17,321 (55,634)
-------- -------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
continuing operations... 21,463 18,641 23,744 25,267 (44,358) 4,017 32,993 (151,534)
Discontinued operations:
Income (loss) from
discontinued
operations............ 8,113 (2,605) (144,011) (5,791) (15,935) (68,879) -- --
Net gains on sales of
discontinued
operations............ -- 10,895 (3,810) -- 24,729 2,080 -- --
-------- -------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
discontinued
operations............ 8,113 8,290 (147,821) (5,791) 8,794 (66,799) -- --
-------- -------- --------- -------- --------- ---------- ---------- ----------
Net income
(loss).......... $ 29,576 $ 26,931 $(124,077) $ 19,476 $ (35,564) $ (62,782) $ 32,993 $ (151,534)
======== ======== ========= ======== ========= ========== ========== ==========
</TABLE>
The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to September
30, 1996, that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q were filed prior to
the Mergers and thus, differ from the amounts for the quarters included herein.
The differences caused solely by the operation of the merged companies are
summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 MARCH 31, 1996 JUNE 30, 1996
------------------- ------------------- ------------------- --------------------- ---------------------
AS AS AS AS AS
FORM 10-Q RESTATED FORM 10-Q RESTATED FORM 10-Q RESTATED FORM 10-Q RESTATED FORM 10-Q RESTATED
--------- -------- --------- -------- --------- -------- --------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.......... $45,667 $794,611 $57,272 $874,489 $76,019 $907,046 $332,549 $1,134,479 $360,398 $1,179,223
Income (loss) from
continuing
operations before
income taxes....... 765 29,527 820 37,632 2,265 40,407 (21,435) 10,615 16,153 50,314
Income tax expense
(benefit).......... 291 10,886 260 13,888 770 15,140 (5,935) 6,598 6,129 17,321
Income (loss) from
discontinued
operations......... -- 8,290 -- (147,821) -- (5,791) -- (66,799) -- --
Net income (loss).... 474 26,931 560 (124,077) 1,495 19,476 (15,500) (62,782) 10,024 32,993
</TABLE>
17
<PAGE> 18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF MEDPARTNERS, INC.
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
MEDPARTNERS, INC.
Report of Independent Auditors...................................................... 19
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ 20
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995.......................................................................... 21
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995............................................................... 22
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995.......................................................................... 23
Notes to Consolidated Financial Statements.......................................... 24
</TABLE>
18
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MedPartners, Inc.
We have audited the accompanying consolidated balance sheets of
MedPartners, Inc. as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. 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, 1994 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
October 10, 1996
19
<PAGE> 20
MEDPARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 98,778 $ 84,460
Marketable securities............................................. 27,400 84,067
Accounts receivable, less allowances for bad debts of $50,204,000
and $80,077,000................................................ 349,556 500,710
Inventories....................................................... 181,040 122,279
Prepaid expenses and other current assets......................... 25,030 39,583
---------- ----------
Total current assets...................................... 681,804 831,099
Property and equipment, net......................................... 290,323 454,658
Intangible assets, net.............................................. 180,233 370,939
Deferred tax asset.................................................. -- 72,392
Other assets........................................................ 23,997 39,611
Net assets of discontinued operations............................... 399,900 36,300
---------- ----------
Total assets.............................................. $1,576,257 $1,804,999
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 215,051 $ 278,240
Other accrued expenses and liabilities............................ 142,086 214,538
Accrued medical claims payable.................................... 47,851 52,434
Notes payable..................................................... 109,300 81,900
Current portion of long-term liabilities.......................... 15,370 13,173
---------- ----------
Total current liabilities................................. 529,658 640,285
Long-term debt, net of current portion.............................. 382,829 528,921
Other long-term liabilities......................................... 42,294 42,053
Deferred income taxes............................................... 8,133 --
Commitments and Contingencies (Note 14)
Redeemable convertible preferred stock:
Series A $.001 par value; 4,500,000 shares authorized, 4,001,000
shares issued.................................................. 8,001 --
Series B $.001 par value; 3,500,000 shares authorized, 3,000,000
shares issued.................................................. 12,000 --
Stockholders' equity:
Common stock, $.001 par value; 200,000,000 shares authorized,
issued -- 115,122,000 in 1994 and 142,017,000 in 1995.......... 115 142
Additional paid-in capital........................................ 201,953 476,472
Notes receivable from stockholders................................ (2,349) (1,930)
Unrealized gain (loss) on marketable equity securities, net of
deferred taxes................................................. 14 (7)
Unamortized deferred compensation................................. (3,552) (2,682)
Shares held in trust, 9,317,000 in 1995........................... -- (150,200)
Retained earnings................................................. 397,161 271,945
---------- ----------
Total stockholders' equity................................ 593,342 593,740
---------- ----------
Total liabilities and stockholders' equity................ $1,576,257 $1,804,999
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenue................................................ $1,756,762 $2,593,329 $3,533,410
Operating expenses:
Affiliated physician services............................ 272,128 412,075 631,407
Outside medical expenses................................. 70,427 102,496 149,185
Clinic expenses.......................................... 284,509 413,969 684,262
Non-clinic goods and services............................ 884,014 1,365,203 1,688,075
General and administrative expenses...................... 123,468 145,937 144,866
Depreciation and amortization............................ 25,464 40,816 57,652
---------- ---------- ----------
Operating income................................. 96,752 112,833 177,963
Non-operating expenses (income):
Net interest expense..................................... 7,021 14,885 17,556
Merger expenses.......................................... -- -- 66,564
Losses on investments.................................... -- -- 86,600
Other income, net........................................ (1,574) (143) (192)
---------- ---------- ----------
Income from continuing operations before income
taxes and cumulative effect of change in method
of accounting for income taxes................. 91,305 98,091 7,435
Income tax expense (benefit) (Note 1)...................... 43,126 44,022 (15,859)
Cumulative effect of change in method of accounting for
income taxes............................................. 298 -- --
---------- ---------- ----------
Income from continuing operations................ 47,881 54,069 23,294
Discontinued operations:
Income (loss) from discontinued operations net of income
taxes (benefits) of $20,700, $18,000 and $(72,100) in
1993, 1994 and 1995, respectively..................... 30,808 25,902 (168,342)
Net gain on sales of discontinued operations, net of
income taxes of $21,200............................. -- -- 31,814
---------- ---------- ----------
Income (loss) from discontinued operations....... 30,808 25,902 (136,528)
---------- ---------- ----------
Net income (loss).......................................... $ 78,689 $ 79,971 $ (113,234)
========== ========== ==========
Earnings per common and common equivalent shares
outstanding:
Income from continuing operations........................ $ 0.40 $ 0.42 $ 0.17
Income (loss) from discontinued operations............... 0.26 0.21 (1.00)
---------- ---------- ----------
Net income (loss).......................................... $ 0.66 $ 0.63 $ (0.83)
========== ========== ==========
Weighted average common and common equivalent shares
outstanding.............................................. 119,380 127,409 135,990
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Common Stock:
Balance, beginning of year................................... $ 102 $ 107 $ 115
Common stock issued and capital contributions............. 5 8 9
Redemption of shares at par on September 1, 1993.......... (1) -- --
Conversion of preferred stock............................. -- -- 7
Stock issued under employee benefit plans................. 1 -- --
Stock issued in connection with acquisitions.............. -- -- 2
Contributions to employee benefit trust................... -- -- 9
-------- -------- --------
Balance, end of year......................................... 107 115 142
Additional Paid-In-Capital:
Balance, beginning of year................................... 116,780 153,692 201,953
Common stock issued and capital contributions............. 42,625 61,852 98,581
Capital distributions..................................... (8,060) (18,743) (30,970)
Stock options............................................. 2,287 802 1,124
Deferred compensation on issuance of options.............. -- 4,350 --
Balances for immaterial pooling-of-interest entities...... -- -- 2
Conversion of preferred stock............................. -- -- 19,994
Stock issued in connection with acquisitions.............. 60 -- 35,598
Contribution to employee benefit trust.................... 150,190
-------- -------- --------
Balance, end of year......................................... 153,692 201,953 476,472
Notes Receivable From Stockholders:
Balance, beginning of year................................... (2,042) (2,396) (2,349)
Net change in notes receivable from stockholders.......... (354) 47 419
-------- -------- --------
Balance, end of year......................................... (2,396) (2,349) (1,930)
Unrealized Gain (Loss) on Marketable Securities:
Balance, beginning of year................................... -- (166) 14
Unrealized gain (loss) on marketable securities, net of
deferred taxes.......................................... (166) 180 (21)
-------- -------- --------
Balance, end of year......................................... (166) 14 (7)
Unamortized Deferred Compensation:
Balance, beginning of year................................... (11) -- (3,552)
Amortization of deferred compensation..................... 11 798 870
Deferred compensation on issuance of options.............. (4,350)
-------- -------- --------
Balance, end of year......................................... -- (3,552) (2,682)
Shares Held in Trust:
Balance, beginning of year................................... -- -- --
Contribution to employee benefit trust.................... -- -- (150,200)
-------- -------- --------
Balance, end of year......................................... -- -- (150,200)
Retained Earnings:
Balance, beginning of year................................... 259,877 324,919 397,161
Net income (loss)......................................... 78,689 79,971 (113,234)
Dividends and distributions paid.......................... (18,685) (10,008) (11,674)
Pro forma tax provision of pooled entities................ 5,038 2,279 --
Balance for immaterial pooling-of-interests entities...... -- -- (308)
-------- -------- --------
Balance, end of year......................................... 324,919 397,161 271,945
-------- -------- --------
Total stockholders' equity........................... $476,156 $593,342 $593,740
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from continuing operations:
Income from continuing operations...................... $ 47,881 $ 54,069 $ 23,294
Adjustments for non-cash items:
Depreciation and amortization....................... 25,464 40,816 57,652
Provision for deferred taxes........................ 29,767 10,515 (47,571)
Merger expenses..................................... -- -- 66,564
Loss on sale of investments......................... -- -- 86,600
Other............................................... 1,503 6,755 1,683
Changes in operating assets and liabilities, net of
effects of acquisitions............................. (32,369) (68,703) (87,744)
-------- --------- ---------
Net cash and cash equivalents provided by
continuing operations........................ 72,246 43,452 100,478
Investing activities:
Net cash used to fund acquisitions..................... (17,413) (126,697) (205,051)
Purchase of property and equipment..................... (65,927) (102,282) (122,825)
Net proceeds (purchases) of marketable securities...... (8,212) (17,560) 1,636
Other.................................................. 595 (1,305) (6,689)
-------- --------- ---------
Net cash and cash equivalents used in investing
activities................................... (90,957) (247,844) (332,929)
Financing activities:
Common stock issued and capital contributions.......... 51,813 128,098 83,392
Capital distributions.................................. (10,037) (21,045) (37,771)
Proceeds from debt..................................... 128,434 266,375 151,996
Repayment of debt...................................... (63,340) (34,125) (84,626)
Dividends and distributions paid....................... (13,114) (7,453) (9,355)
Other.................................................. (3,188) 68 (3)
-------- --------- ---------
Net cash and cash equivalents provided by
financing activities......................... 90,568 331,918 103,633
Cash flow from discontinued operations, net of
divestiture proceeds................................... 25,500 (180,000) 114,500
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents..... 97,357 (52,474) (14,318)
Cash and cash equivalents at beginning of year........... 53,895 151,252 98,778
-------- --------- ---------
Cash and cash equivalents at end of year................. $151,252 $ 98,778 $ 84,460
======== ========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest............................................ $ 7,262 $ 18,241 $ 33,150
======== ========= =========
Income taxes........................................ $ 27,027 $ 28,436 $ 14,820
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 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 business combination
between the Original Predecessor and MME, which was consummated in November
1995. 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 refereed to as the "Company" or "MedPartners") in conjunction with the
business combination with Caremark. The financial information referred to in
this discussion reflects the combined operations of these entities and several
additional entities accounted for as immaterial poolings-of-interests.
MedPartners is the largest physician practice management ("PPM") company in
the United States. The Company develops, consolidates and manages integrated
healthcare delivery systems. Through its network of affiliated group and
independent practice association ("IPA") physicians, the Company provides
primary and specialty healthcare services to prepaid managed care enrollees and
fee-for-service patients. The Company also operates one of the largest
independent prescription benefit management ("PBM") programs in the United
States and provides disease management services and therapies for patients with
certain chronic conditions.
The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. The Company's physician services revenue is
derived from the provision, through its affiliated physicians, of
fee-for-service medical services and from contracts with health maintenance
organizations and other third-party payors which compensate the Company and its
affiliated physicians on a prepaid basis (collectively, "HMOs"). These
relationships provide physicians with the opportunity to operate under a variety
of payor arrangements and increase their patient flow.
The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements with the affiliated
physicians that provide for the management of their practices by the Company
while at the same time providing for the clinical independence of the
physicians.
The Company also manages outpatient prescription drug benefit programs for
more than 1,200 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 53,000 retail pharmacies. The Company is in
the process of integrating its PBM program with the PPM business by providing
pharmaceutical services to the affiliated physicians, clinics and HMOs. The
Company's disease management services are intended to meet the healthcare needs
of individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs that comprise drug
therapies, physician support and patient education. The Company currently
provides therapies
24
<PAGE> 25
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. ACCOUNTING POLICIES -- (CONTINUED)
and services for individuals with such conditions as hemophilia, growth
disorders, immune deficiencies, genetic emphysema, cystic fibrosis and multiple
sclerosis.
Basis of Presentation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly-owned
subsidiaries. Through the 20- to 40-year practice management agreements between
the Company's wholly-owned subsidiaries and the various professional
corporations (PCs), the Company has assumed full responsibility for the
operating expenses in return for the assignment of the revenue of the PCs. The
Company believes it has, as opposed to affiliates of the Company, perpetual,
unilateral control over the assets and operations of the various PCs, and
notwithstanding the lack of technical majority ownership of the stock of such
entities, consolidation of the various PCs is necessary to present fairly the
financial position and results of operations of the Company because there exists
a parent-subsidiary relationship by means other than record ownership of a
majority of voting stock. Control by the Company is perpetual rather than
temporary because of (i) the length of the original terms of the agreements,
(ii) the continuing investment of capital by the Company, (iii) the employment
of the majority of the nonphysician personnel, and (iv) the nature of the
services provided to the PCs by the Company. The Company's financial
relationship with each practice offers the physicians access to capital,
management expertise, sophisticated information systems, and managed care
contracts. The Company's revenue is derived from medical services provided by
physicians under the practice management agreements, which revenue has been
assigned to the Company. The Company contracts directly with the HMOs to provide
medical services to HMO enrollees who have chosen the Company's affiliated
physicians, or, in some cases, physicians who are members of the Company's IPAs.
The Company also contracts with hospitals to provide medical staff for various
hospital departments. The Company's profitability depends on enhancing operating
efficiency, expanding healthcare services provided, increasing market share and
assisting affiliated physicians in managing the delivery of medical care.
Nature of Physician Compensation Arrangements
The Company compensates PCs with which it has contracted to provide
healthcare services to the Company's clinics primarily under four basic
arrangements. In all circumstances, the Company is responsible for the billing
and collection of the revenue related to services provided at the Company's
clinics as well as for paying all expenses of the clinic including physician
compensation. The Company records all such revenue for services performed by the
physicians at the clinics. In no instance is the Company paid a fixed fee to
cover clinic operating expenses. The Company always remains at risk for the
expenses of the clinics earnings. In the four types of arrangements described
below, the Company is not sharing revenue with the PCs or its physician owners.
Approximately 28% of the Company's revenue at December 31, 1995 is received
under capitation arrangements. Under these arrangements, the Company contracts
with licensed HMOs for a broad range of health care services and in turn
subcontracts for the delivery of health care with hospitals, ancillary
providers, and professional medical organizations, including PCs that are
affiliated with the Company through management agreements. Pursuant to these
arrangements, the PC is paid on a per member per month basis by the Company.
From this amount, the PC pays liability insurance premiums and compensates its
physician owners. The PCs do not have the authority to participate in the
negotiations of contracts with HMOs.
Under the second type of arrangement, which represents approximately 9% of
the Company's revenue at December 31, 1995, the Company pays the PC for the
health care services provided at MedPartners' clinics at a negotiated fixed
dollar amount. At the Company's sole discretion, the physicians are eligible to
receive a bonus based on performance criteria and goals. The amount of the
discretionary bonus is determined solely by
25
<PAGE> 26
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. ACCOUNTING POLICIES -- (CONTINUED)
the Company's management and is not directly correlated to clinic revenue and
gross profit. In these arrangements, the Company is responsible for the billing
and collection of all revenues for the services provided at its clinics as well
as paying all expenses, including physicians compensation.
Under the third type of arrangement, which represents approximately 8% of
the Company's revenue at December 31, 1995, the PC is compensated on a
negotiated fee-for-service basis for health care services performed at the
Company's clinics. In these arrangements the Company bills and collects for all
services rendered at its clinics and pays all expenses of the clinics, including
physicians' compensation, which is based on the fee for service revenue
generated at the clinics (which typically represents between 40 to 70 percent of
the clinic's net revenues). Again, the Company is not reimbursed for the clinic
expenses, rather it is responsible and at risk for all such expenses.
Under the fourth type of arrangement, representing approximately 7% of the
Company's revenue at December 31, 1995, the PC receives a salary plus bonus and
a profit sharing payment of 50% of consolidated clinic earnings before taxes
("clinic earnings"). Clinic earnings in these arrangements include all expenses,
management fees paid to the Company and physician compensation.
The fee retained by the Company includes direct management expenses of
operating the clinics plus additional amounts which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation (including discretionary bonuses, if any), other medical costs and
management expenses. Under the four basic arrangements discussed above, these
additional amounts (representing clinic earnings) retained by MedPartners take
the following forms: (1) 100% of clinic earnings (as defined above); (2) 100% of
clinic earnings; (3) 100% of clinic earnings, and (4) a variable percentage of
the clinic's earnings (as defined above).
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
of all cash and cash equivalents approximate fair value.
Marketable Securities
Effective August 1, 1994, the Company adopted Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires that investments in equity securities
that have readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as 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 operations. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity.
26
<PAGE> 27
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. ACCOUNTING POLICIES -- (CONTINUED)
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, 5 to 20 years for leasehold improvements and 5 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 $5.1 million were capitalized in 1995. The Company also
capitalizes purchased and internally developed software costs to the extent they
are expected to benefit future operations. Capitalized software costs included
in construction-in-progress approximated $67.8 million at December 31, 1995.
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 three to five year
period. 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 the following entities during 1995 and the nine
months ended September 30, 1996 in transactions that were accounted for as
poolings of interests. Accordingly, the financial statements for all periods
prior to the effective dates of these mergers have been restated to include the
results of these entities. The Company issued 123.9 million shares of its common
stock in these and other insignificant poolings-of-interests transactions.
<TABLE>
<CAPTION>
EFFECTIVE DATE OF
ENTITY NAME MERGER
- ------------------------------------------------------------------------- ------------------
<S> <C>
Mullikin Medical Enterprises, L.P. and related real estate
partnerships........................................................... November 29, 1995
Pacific Physician Services, Inc.......................................... February 22, 1996
Caremark International Inc............................................... September 5, 1996
</TABLE>
27
<PAGE> 28
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
The Company is a corporation subject to federal and state income taxes.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting relating primarily to net operating losses which must
be carried forward to future periods for income tax reporting purposes.
Prior to the poolings noted previously, several entities were S
Corporations and MME and related real estate entities were partnerships and were
therefore not subject to federal and state income taxes. Proforma income tax
provisions are reflected in income tax expense in the consolidated statements of
operations for 1993 and 1994 to provide for additional federal and state income
taxes which would have been incurred had these entities been taxed as C
Corporations. The pro forma income tax expense included in 1993 and 1994
operations was $5.0 and $2.3 million, respectively.
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 1993, 1994 and 1995, approximately 5% of net revenue was received
from governmental programs. Governmental programs pay physician services based
on fee schedules which are determined by the related government agency.
The Company has contracts with various managed care organizations to
provide physician services based on negotiated fee schedules. Under various
contracts with HMOs, capitation is received to cover all physicians and hospital
services needed by the HMO members. Capitation payments are recognized as
revenue on the accrual basis, and represent approximately 26%, 24% and 28% of
the Company's total net revenue in 1993, 1994 and 1995, respectively.
Liabilities for physician services provided and hospital services incurred are
accrued in the month services are rendered. The provision for accrued claims
payable which represents the amount payable for services incurred by patients
not yet paid is validated by actuarial review. Management believes that the
provision at December 31, 1995 is adequate to cover claims which will ultimately
be paid.
Fiscal Year
At December 31, 1993, MME changed its fiscal year-end from January 31 to
December 31. As a result, the consolidated financial statements for the year
ended December 31, 1993 contain only eleven months of operations for MME. PPSI's
financial statements are for twelve month periods ending October 31. Beginning
January 1, 1996, PPSI adopted a December 31, fiscal year end.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant and the
number of shares are fixed, no compensation expense is recognized.
28
<PAGE> 29
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. ACCOUNTING POLICIES -- (CONTINUED)
Impairment of Long-Lived Assets
Effective December 31, 1995, the Company adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
No. 121 is applicable for most long-lived assets, identifiable intangibles, and
goodwill related to those assets; it does not apply to financial instruments and
deferred taxes. Management has determined that long-lived assets are fairly
stated in the accompanying balance sheet, and that no indicators of impairment
are present.
NOTE 2. DISCONTINUED OPERATIONS
During 1995, Caremark divested of several non-strategic businesses. In
accordance with APB No. 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 patient management
system to Health Management, Inc. for $23.3 million in cash and notes. This
business involved managing the care of schizophrenia patients nationwide through
the distribution of the clozaril drug and related testing services to monitor
patients for potentially serious side effects. Net revenues of this business for
the three months ended March 31, 1995 were $12.3 million and were $78.5 and
$84.0 million for the years 1993 and 1994, respectively. 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 14 -- Commitments and
Contingencies). Net revenue of this business for the three months ended April 1,
1995 was $96.1 million and was $420.5 and $441.9 million for the years 1993 and
1994, respectively. 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 14.
Effective September 15, 1995, Caremark sold its oncology management
services business to Preferred Oncology Networks of America, Inc., for
securities valued at $3.6 million. The business provides management services to
single-specialty oncology practices. Net revenues of this business for the 1995
period up to the date of sale were $8.9 million and were $30.6 and $29.4 million
for the years 1993 and 1994, respectively. 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 revenues of this business for the 1995 period
up to the date of sale were $69.1 million and were $47.0 and $55.8 million for
the years 1993 and 1994, respectively. The after-tax gain on disposition of this
business was $24.7 million.
Effective February 29, 1996, Caremark sold its nephrology services business
to Total Renal Care, Inc. for $49.0 million in cash, subject to certain
post-closing adjustments. The after-tax gain on disposition of this business,
net of disposal costs, was $2.1 million, which was included in 1995 discontinued
operations.
29
<PAGE> 30
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and equivalents,
investments in marketable and non-marketable securities, and debt obligations.
The carrying value of marketable and non-marketable securities, which
approximated fair value, was $64.8 and $44.1 million at December 31, 1994 and
1995, respectively. The carrying value of debt obligations was $168.5 and $168.6
million at December 31, 1994 and 1995, respectively. The fair value of these
obligations approximated $141.6 and $156.4 million at December 31, 1994 and
1995, respectively. The fair value of marketable securities is determined using
market quotes and rates. The fair value of nonmarketable securities, which are
made up primarily of investments in and notes from non-public companies, are
estimated based on information provided by these companies. The fair value of
long-term debt has been estimated using market quotes.
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 $9.6, $21.2 and $30.5 million in 1993, 1994 and
1995, respectively. Interest income totaled $2.9, $6.6 and $13.4 million in
1993, 1994 and 1995, respectively.
NOTE 4. INTANGIBLE ASSETS
Goodwill, which totaled $145.8 and $327.0 million at December 31, 1994 and
1995, respectively, represents the excess of consideration paid for companies
acquired in purchase transactions over the fair value of net assets acquired.
Also included in intangible assets for the years ended December 31, 1994 and
1995 were $8.1 and $20.3 million of organizational costs, respectively. As of
December 31, 1994 and 1995, intangible assets, including goodwill, are stated
net of accumulated amortization of $21.3 and $26.8 million, respectively.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................... $ 27,737 $ 38,498
Buildings and leasehold improvements........................... 122,138 189,828
Equipment...................................................... 195,304 297,311
Construction-in-progress....................................... 61,305 81,879
-------- --------
406,484 607,516
Less accumulated depreciation and amortization................. (116,161) (152,858)
-------- --------
$290,323 $454,658
======== ========
</TABLE>
The net book value of capitalized lease property approximated $13.1 and
$9.8 million at December 31, 1994 and 1995, respectively.
30
<PAGE> 31
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances under Bank Credit Facility............................ $142,900 $290,000
6 7/8% senior notes due 2003, less unamortized discount of $0.4
million...................................................... 99,500 99,600
Convertible subordinated debentures with interest at 5.50%,
interest only paid semi-annually, due in 2003................ 69,000 69,000
Notes payable to banks, collateralized by deeds of trust
including interest, at rates ranging from 6.5% to 10.5%,
payable in monthly installments through 2002................. 12,595 10,611
Notes payable to lenders secured by deeds of trust payable in
monthly installments, bearing interest at rates ranging from
8.75% to 10.25%.............................................. 10,271 7,778
Notes payable to physicians and stockholders in annual
installments through 2001, interest rates ranging from 5% to
12%.......................................................... 22,131 14,261
Other long-term notes payable.................................. 34,464 40,297
Capital lease obligations...................................... 7,338 10,547
-------- --------
398,199 542,094
Less amounts due within one year............................... (15,370) (13,173)
-------- --------
$382,829 $528,921
======== ========
</TABLE>
On November 29, 1995, the Company entered into a Revolving Credit and
Reimbursement Agreement with a syndicate of banks which provides a revolving
credit facility of up to $150 million. Advances under the revolving credit
facility initially bear interest based on the London Interbank Offered Rate
("LIBOR"). The rate approximated 7.9% at December 31, 1995. The credit facility
had an expiration date of May 10, 1998 and was renewable for two additional
one-year periods. In conjunction with the credit facility, the Company granted
the banks a first priority security interest in all shares of stock of its
subsidiaries and provided a negative pledge on substantially all assets.
During 1995, Caremark entered into revised credit facilities aggregating
$380 million as of December 31, 1995 ($135 million expiring September 1996, $225
million expiring September 1998 and a $20 million letter of credit agreement),
enabling Caremark to borrow funds on an unsecured basis at variable interest
rates, typically determined by reference to the corporate base rate announced by
First National Bank of Chicago or the Eurodollar interbank rate. Borrowings
under these facilities were $200.0 million at December 31, 1995.
In December 1993, PPSI issued $69 million of convertible subordinated
debentures for net proceeds of approximately $66.5 million. Subsequent to the
acquisition of PPSI in February 1996, the Company paid off these debentures.
The Company entered into a $1 billion Revolving Credit and Reimbursement
Agreement (the "Bank Credit Facility"), which became effective simultaneously
with the closing of the Caremark acquisition on September 5, 1996, replacing its
then existing credit facility. At the Company's option, pricing on the Bank
Credit Facility is based on either a debt to cash flow test or the Company's
senior debt ratings. No principal is due on the facility until its maturity date
of September 2001. As of September 30, 1996, there was $445 million outstanding
under the facility. The Bank Credit Facility contains affirmative and negative
covenants which, among other things, require the Company to maintain certain
financial ratios (including minimum net worth, minimum fixed charge coverage
ratio, maximum indebtedness to cash flow), and set certain restrictions on
investments, mergers and sales of assets. Additionally, the Company is required
to obtain bank consent for
31
<PAGE> 32
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. LONG-TERM DEBT -- (CONTINUED)
acquisitions with an aggregate purchase price in excess of $75 million and which
have more than half of the consideration paid in cash. The Bank Credit Facility
is unsecured but provides a negative pledge on substantially all assets of the
Company. As of September 30, 1996, the Company was in compliance with the
covenants in the Bank 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
offering were used to reduce amounts under the Bank Credit Facility. On October
30, 1996 the Company completed its tender offer for Caremark's $100 million
6 7/8% notes due August 15, 2003. Of the $100 million principal amount of such
notes outstanding, approximately $99.9 million principal amount were tendered
and purchased. The total consideration for each $1,000 principal amount of
outstanding notes tendered was $1,017.72.
The following is a schedule of principal maturities of long-term debt as of
December 31, 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996........................................................................... $ 13,173
1997........................................................................... 18,811
1998........................................................................... 301,811
1999........................................................................... 10,991
2000........................................................................... 4,866
Thereafter..................................................................... 193,642
Amounts representing interest and discounts.................................... (1,200)
--------
Total................................................................ $542,094
========
</TABLE>
Operating Leases: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are located
and administrative office space. These leases generally have five-year terms
with renewal options. The following is a schedule of future minimum lease
payments under noncancelable operating leases as of December 31, 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996........................................................................... $ 63,288
1997........................................................................... 55,526
1998........................................................................... 49,475
1999........................................................................... 41,258
2000........................................................................... 32,588
Thereafter..................................................................... 166,810
--------
$408,945
========
</TABLE>
NOTE 7. INCOME TAXES
At December 31, 1995, the Company had a cumulative net operating loss
carryforward for federal income tax purposes of approximately $57 million
available to reduce future amounts of taxable income. If not utilized
32
<PAGE> 33
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES -- (CONTINUED)
to offset future taxable income, the net operating loss carryforwards will
expire on various dates through 2010. Approximately $1 million of the total $57
million net operating loss carryforward (which was generated in 1993), is
available at a reduced rate due to certain tax limitations.
In 1994, the Company established a valuation allowance of $17.5 million
because it was more likely than not that the deferred tax asset would not be
utilized in future periods. The valuation allowance was decreased by $14.2
million in 1995 because the realization of the deferred tax asset is now more
likely than not.
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 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating losses........................................... $ 11,319 $ 26,292
Purchase reserves and restructuring............................ -- 14,724
Accrued payroll and vacation................................... 2,129 3,470
Accrued and deferred compensation benefits..................... 12,564 9,675
Bad debts...................................................... 18,010 14,974
Legal settlement costs......................................... -- 26,800
Loss on investments............................................ -- 33,700
Other.......................................................... 15,863 5,770
-------- --------
Gross deferred tax assets........................................ 59,885 135,405
Valuation allowance for deferred tax assets...................... (17,471) (3,631)
Deferred tax liabilities
Goodwill....................................................... 16,900 8,590
Excess tax depreciation........................................ 24,593 35,358
Prepaid expenses............................................... 504 2,419
Accrual to cash adjustment..................................... 1,863 273
Shared risk receivable......................................... 4,041 7,182
Other.......................................................... 2,646 5,560
-------- --------
Gross deferred tax liabilities................................... 50,547 59,382
-------- --------
Net deferred tax asset (liability)............................... $ (8,133) $ 72,392
======== ========
</TABLE>
33
<PAGE> 34
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES -- (CONTINUED)
Income tax expense (benefit) on income from continuing operations for the
years ended December 31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $19,909 $24,554 $ 44,573
State.............................................. 6,268 7,017 8,841
------- ------- --------
26,177 31,571 53,414
Deferred:
Federal............................................ 15,175 10,722 (59,602)
State.............................................. 1,774 1,729 (9,671)
------- ------- --------
16,949 12,451 (69,273)
------- ------- --------
$43,126 $44,022 $(15,859)
======= ======= ========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income from
continuing operations before taxes were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate........................ $32,044 $36,116 $ 2,609
Add (deduct):
State income tax, net of federal tax benefit....... 4,808 5,284 (2,037)
Tax rate changes................................... (1,000) -- --
Decrease in valuation allowance.................... -- -- (14,240)
Other.............................................. 7,274 2,622 (2,191)
------- ------- --------
$43,126 $44,022 $(15,859)
</TABLE>
NOTE 8. CAPITALIZATION
The Company's Second Amended and 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 200 million shares of Common
Stock, par value $0.001 per share. As of December 31, 1995 no shares of the
preferred stock were outstanding.
On September 1, 1993, the Company committed to sell 4 million shares of
Series A Convertible Preferred Stock at $2.00 per share. The Company received,
net of expenses, $7.2 million in 1993 and $0.7 million on February 1, 1994.
During 1994, the Company sold 3.0 million shares of Series B Convertible
Preferred Stock at $4.00 per share. The Company received, net of expenses,
$12.0 million. Upon consummation of the Company's initial public offering on
February 28, 1995, all of the issued and outstanding shares of Series A and
Series B Convertible Preferred Stock were converted into 7.0 million shares of
the Company's Common Stock.
On February 28, 1995, the Company completed an initial public offering of
5.1 million shares of its common stock. Gross and net proceeds of the offering
were $65.8 million and $60.4 million, respectively. Proceeds of the offering
were used to pay outstanding indebtedness under the bank credit facility. Net
proceeds were also used to fund acquisitions of certain assets of physician
practices, expansion of physician services, working capital and other general
corporate purposes.
On March 13, 1996, the Company completed a secondary public offering of 6.6
million shares of its common stock. The net proceeds of the offering were $194.0
million. Proceeds of the offering were used to pay
34
<PAGE> 35
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. CAPITALIZATION -- (CONTINUED)
outstanding indebtedness under the bank credit facility. In April 1996, $69
million of the proceeds were used to pay-off 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.
On October 31, 1995, Caremark's Board of Directors declared a dividend of
four cents per share on all outstanding common stock to stockholders of record
on November 30, 1995. The dividend was paid on December 15, 1995.
In June 1995, Caremark issued 7.7 million common shares (at $19.50 per
share) into a trust established to fund employee benefits over the next 10
years, including pension plan contributions, 401(k) matching contributions, and
stock issued under option and employee purchase plans. The value of the common
stock contributed has been reflected in the Balance Sheet in "common stock"
($7.7 million) and "additional contributed capital" ($142.5 million), with a
corresponding offset of these amounts in the "shares held in trust" component of
stockholders' equity. These shares will be issued from the trust over time as
necessary to meet the company's benefit obligations and will have no impact on
the weighted average common and common equivalent shares outstanding for
earnings per share purposes until they are issued from the trust.
NOTE 9. EMPLOYEE STOCK PURCHASE PLAN
Caremark sponsors employee stock purchase plans that promote the sale of
its common stock to employees. The purchase price to employees is the lower of
85% of the closing market price on the date of subscription or 85% of the
closing market price on the date funds are actually used to purchase stock for
employees. Stock purchase plan transactions for the indicated years are
summarized below. Number of shares and per share amounts disclosed below have
been converted to MedPartners equivalent shares based on a 1.21 exchange ratio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995
-------------- ---------------
<S> <C> <C>
Shares subscribed:
Beginning of year......................................... 901,214 776,853
Subscriptions.......................................... 803,482 501,741
Purchases.............................................. (743,291) (582,132)
Cancellations.......................................... (184,552) (289,440)
-------------- ---------------
End of year............................................... 776,853 407,022
============ =============
Subscription price per share at end of year................. $8.88 - $18.26 $11.40 - $18.26
</TABLE>
Expiration dates for outstanding subscriptions extend through 1997. The
weighted average subscription price was $13.14 at December 31, 1995.
NOTE 10. STOCK OPTIONS
The Company's Board of Directors adopted and a majority of the Company's
stockholders approved the 1993 and 1995 Stock Option Plans (the Plans), covering
a maximum of 1.6 million and 5.9 million shares of Common Stock, respectively.
The number of shares covered under the 1995 Stock Option Plan was increased to
7.1 million at the Annual Shareholders' Meeting on April 25, 1996. The Plans,
under which both incentive stock options and non-qualified stock options may be
issued, provide that options may be granted to officers, directors, consultants
and employees of the Company. Options granted under the Plans generally vest
equally over five years from the date of grant and terminate ten years from the
date of grant. All stock options were granted prior to the initial public
offering of the Company at estimated fair market value. As of December 31,
35
<PAGE> 36
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTIONS -- (CONTINUED)
1995, the Company had granted options to acquire 4.4 million shares of its
Common Stock under the Plans at option prices ranging from $.20 to $28.25. All
stock options granted in 1995 were granted at fair market value. During 1995
options to acquire 0.7 million shares of the Company's Common Stock were
exercised at prices ranging from $.20 to $22.00 per share. Gross proceeds from
the exercise of these options totaled $0.4 million.
In connection with the Caremark acquisition, the Company assumed and
adopted the Caremark International, Inc. 1992 Incentive Compensation Plan (the
"Caremark Incentive Plan"), renaming it the MedPartners Incentive Compensation
Plan (the "Incentive Plan"). The number of shares and per share amounts
disclosed below have been converted to MedPartners equivalent shares based on a
1.21 exchange ratio. A total of 13.8 million shares of MedPartners Common Stock
are covered by the Incentive Plan. The Incentive plan authorizes the grant of
options to purchase Common Stock, stock appreciation rights, restricted stock
and performance shares. The price of each option shall not be less than the fair
market value of the Common Stock on the date of the grant. The term of each
option is fixed by the terms of its grant and may not exceed ten years from the
date of grant.
As of December 31, 1995, options to acquire 10.5 million shares were
outstanding under the Incentive Plan at prices ranging from $5.33 - $18.08 per
share. During 1995, 2.2 million options to purchase shares were granted under
the Incentive Plan, options to acquire 2.4 million were either canceled or
expired and options to acquire 1.0 million shares were exercised at prices
ranging from $5.33 - $15.60 per share. There were 4 million options exercisable
at December 31, 1995. Expiration dates for outstanding options range from 1996
to 2005.
NOTE 11. ACQUISITIONS
During the year ended December 31, 1993, 1994 and 1995, 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 practice management agreements which
generally have 20-40 year terms. Pursuant to the practice management agreements,
the Company manages all aspects of the affiliated practice other than the
provision of medical services, which is controlled by the physician groups. For
providing services under the practice management agreement, the physicians
receive a fixed percentage of the accrual net revenue of the practice. The
percentage varies from practice to practice and is based upon the overhead
structure of the practice at the time of affiliation.
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 $65.0 million in cash and $78.2 million in stock and notes for
other acquisitions in 1995. Results of operations would not have been materially
different in 1993, 1994 and 1995 had these transactions occurred as of the
beginning of the respective years.
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"). The transaction has been
accounted for by the purchase method of accounting. During the nine months ended
September 30, 1996, $116.2 million in cash and 0.8 million shares of stock
valued at $15.5 million were given in exchange for the net assets of CIGNA and
other entities.
All of the aforementioned acquisitions have been (or will be) 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.
36
<PAGE> 37
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. RETIREMENT PLANS
Effective April 4, 1994, the Company adopted the MedPartners, Inc. and
Subsidiaries Employee Retirement Savings Plan (the "Plan"). The Plan is a Code
Section 401(k) Plan which requires the attainment of age 21 and one year of
service, with a minimum of 1,000 hours worked, to become a participant in the
Plan. Service for a predecessor employer will be considered for participation
requirements in the Plan for all employees employed through acquisition
activities. The Company, at its sole discretion, may contribute an amount which
it designates as a qualified nonelective contribution. The Company made a
required contribution of approximately three percent of non-key employee
salaries for the Plan year ended December 31, 1995, however, no additional
contributions are anticipated at this time. Company contributions are gradually
vested over a six-year service period. The various entities that were acquired
or merged into the Company during 1995 also had varying employee retirement
plans, that will or have been incorporated into the Company's Plan. Participants
of Caremark's 401(k) Plan may contribute up to 12% of their annual compensation
(limited in 1995 to $9,240 per individual) to the plan and Caremark matches the
participants' contributions up to 3% of compensation. Matching contributions
made by Caremark were $5.7, $6.0 and $2.8 million in 1993, 1994 and 1995,
respectively. The expenses related to all plans (excluding Caremark's) during
the years ended December 31, 1993, 1994 and 1995 were approximately $1.5
million, $1.9 million and $3.2 million, respectively.
Caremark sponsored retirement plans for substantially all qualifying
employees. Benefits are typically based on years of service and the employee's
compensation during five of the last 10 years of employment as defined by the
plans. Caremark's funding policy is to make contributions that meet or exceed
the minimum requirements of the Employee Retirement Income Security Act of 1974,
based on the projected unit credit actuarial cost method, and to limit such
contributions to amounts currently deductible for tax reporting purposes.
The following table summarizes the components of net pension expense and
related actuarial assumptions used at the January 1 valuation date for the
respective years:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Assumptions:
Discount rate.............................................. 8.0% 8.75% 7.25%
Increase in compensation levels(1)......................... 6.5% 5.0% 5.0%
Expected long-term return on assets........................ 10.5% 10.5% 9.5%
Components (in thousands):
Service cost-benefits earned............................... $3,800 $4,600 $2,100
Interest cost on projected obligation...................... 1,600 2,300 2,200
Actual return on assets.................................... (900) (1,300) (1,700)
Net amortizations.......................................... 500 700 100
------ ------ ------
Net pension expense........................................ $5,000 $6,300 $2,700
====== ====== ======
</TABLE>
- ---------------
(1) The assumed annual rate of increase in compensation levels for 1993 was 4.0%
for the Puerto Rico plans, which were merged into the U.S. plan as of
December 31, 1993.
37
<PAGE> 38
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. RETIREMENT PLANS -- (CONTINUED)
The following table presents the funded status of the Caremark plans, the
net pension liability recognized in the consolidated balance sheets and related
actuarial assumptions as of December 31:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Assumptions:
Discount rate.................................................... 8.75% 7.25%
Increase in compensation levels.................................. 5.0% 5.0%
Funded status and net pension liability (in thousands):
Actuarial present value of benefit obligations:
Vested benefits............................................... $15,000 $22,200
Accumulated benefits.......................................... 17,000 25,000
Effect of future salary increases............................. 6,600 7,200
------- -------
Projected benefits............................................ 23,600 32,200
Less: plan assets at fair value(1)................................. 15,000 20,900
------- -------
Projected benefit obligations in excess of plan assets............. 8,600 11,300
Less: unrecognized net loss........................................ 1,700 4,800
------- -------
Net pension liability.............................................. $ 6,900 $ 6,500
======= =======
</TABLE>
- ---------------
(1) Primarily equity and fixed income securities.
Pension expense under non-U.S. pension plans sponsored by Caremark for the
benefit of foreign employees is not significant.
Caremark has provided post-retirement health benefits to qualified
employees and accrued for those costs over the service years of the employees in
accordance with Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The cost of this
plan and related liability have not been significant to Caremark or the Company.
In 1994, Caremark adopted Statement of Financial Accounting Standards No.
112 ("FAS 112"), "Employers' Accounting for Postemployment Benefits," which
requires employers to accrue the cost of postemployment benefits (including
salary continuation, severance and disability benefits, job training and
counseling and continuation of benefits such as health care and life insurance
coverage) to former or inactive employees. The adoption and ongoing impact of
FAS 112 have not been material to the company's financial statements.
38
<PAGE> 39
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. MERGERS
The Company merged with the following entities in transactions that were
accounted for as poolings-of-interests. Accordingly, the Company's historical
financial statements for all periods have been restated to include the results
of all transactions accounted for as poolings-of-interests.
<TABLE>
<CAPTION>
MME AND
RELATED
REAL OTHER
ESTATE POOLINGS
MEDPARTNERS PARTNERSHIPS PPSI CAREMARK OF INTERESTS COMBINED
----------- ------------ -------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Net revenue................ $ 1,277 $298,415 $187,612 $1,204,000 65,458 $1,756,762
Net (loss) income.......... (1,206) (1,495) 7,114 77,700 (3,424) 78,689
Year ended December 31, 1994
Net revenue................ 77,432 370,798 308,226 1,775,200 61,673 2,593,329
Net (loss) income.......... (1,601) (4,647) 7,598 80,400 (1,779) 79,971
Year ended December 31, 1995
Net revenue................ 238,887 431,875 411,132 2,374,300 77,216 3,533,410
Net (loss) income.......... 3,022 (9,412) 10,205 (116,300) (749) (113,234)
</TABLE>
Included in pre-tax loss for the year ended December 31, 1995 are merger
costs totaling $66.6 million. Approximately $55.6 million relates to the merger
with MME and related real estate partnerships. The components of this cost are
as follows (in thousands):
<TABLE>
<S> <C>
Investment banking fees.................................................... $ 8,771
Professional fees.......................................................... 7,267
Other transaction costs.................................................... 5,029
Restructuring charges:
Severance costs for identified employees................................. 19,626
Impairment of assets..................................................... 8,095
Abandonment of facilities................................................ 6,401
Noncompatible technology................................................. 2,602
Unamortized loan costs................................................... 2,324
Conforming of accounting policies........................................ 2,249
Restructuring of benefits................................................ 1,889
Other restructuring charges.............................................. 2,311
-------
Total............................................................ $66,564
=======
</TABLE>
The PPSI and Caremark mergers were effective February 22, 1996 and
September 5, 1996, respectively, therefore, the merger costs related to these
transactions are not included in the amounts above. They will be included in the
results of operations for 1996.
NOTE 14. COMMITMENTS AND CONTINGENCIES
On September 11, 1995, Coram Healthcare Corporation ("Coram") filed a
complaint in the San Francisco Superior Court against Caremark International
Inc. and its subsidiary, Caremark Inc., and 50 unnamed individual defendants.
The complaint, which arises from Caremark's sale to Coram of Caremark's home
infusion therapy business in April 1995 for approximately $209.0 million in cash
and $100.0 million in securities, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended on April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint
39
<PAGE> 40
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
includes specific performance, declaratory relief, injunctive relief, and
damages of $5.2 billion. In October 1996, Coram agreed to merge with Integrated
Health Services, Inc. ("IHS"). In connection with the merger agreement, IHS and
the Company have agreed to a settlement of the Coram litigation, contingent upon
consummation of the proposed merger, expected to be completed in the first
quarter of 1997. Under the settlement proposal, the notes that are now payable
by Coram to Caremark will be canceled and replaced with a new two-year note in
the principal amount of $57.5 million. Caremark had previously established a
reserve for a portion of the $100 million in securities, and, therefore, the
terms of the new note will not require any additional charge against earnings by
the Company.
In June 1995, Caremark agreed to settle an investigation of Caremark with
the U.S. Department of Justice, the Office of the Inspector General of the U.S.
Department of Health and Human Services, the Veterans Administration, the
Federal Employees Health Benefits Program, the Civilian Health and Medical
Program of the Uniformed Services and related state investigative agencies in
all 50 states and the District of Columbia (the "OIG investigation"). Under the
terms of the OIG Settlement, which covered allegations dating back to 1986, a
subsidiary of Caremark pled guilty to two counts of mail fraud- one each in
Minnesota and Ohio - resulting in the payment of civil penalties and criminal
fines. The basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS, FEHBP and federal funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. Caremark took an after-tax charge to discontinued operations
of $154.8 million in 1995 for these settlement payments, costs to defend ongoing
derivative, security and related lawsuits, and other associated costs.
In March 1996, Caremark agreed to settle all disputes with a number of
private payors. The settlements resulted in an after-tax charge of $42.3
million. These disputes related to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark agreed to pay $23.3 million after-tax to cover the private
payors' pre-settlement and settlement-related expenses. An after-tax charge for
the above amounts has been recorded in first quarter 1996 discontinued
operations. During the nine months ended September 30, 1996 Caremark paid $101.8
million, with an additional $6.6 million plus interest to be paid over the next
nine months, related to the settlements.
The Company cannot determine at this time what costs may be incurred in
connection with future disposition of non-governmental claims or litigation. The
Company does not believe that the above-referenced settlements will materially
affect its ability to pursue its long-term business strategy. There can be no
assurances, however, that additional costs, claims and damages will not occur or
that the ultimate costs related to such non-governmental claims or litigation
will not exceed these estimates.
In May 1996, three pharmacies, purporting to represent a class consisting
of all of Caremark's competitors in the alternate site infusion therapy
industry, filed a complaint against Caremark International Inc., Caremark, Inc.
and two other corporations in the United States District Court for the District
of Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practice statute. The complaint seeks
unspecified treble damages, and attorneys' fees and expenses. The Company
intends to defend this case vigorously. Management is unable at this time to
estimate the impact, if any, of the ultimate resolution of this matter.
In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934, and fraud and negligence in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation discussed above. The complaints seek unspecified
damages, declaratory and equitable relief, and attorneys' fees and expenses. In
June 1996, the complaint filed
40
<PAGE> 41
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
by one group of stockholders alleging violations of the Securities Exchange Act
of 1934 only, was certified as a class. The parties to all of the complaints
continue to engage in discovery proceedings. The Company intends to defend these
cases vigorously. Management is unable at this time to estimate the impact, if
any, of the ultimate resolution of these matters.
In August 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark in the Court of Chancery of the State of Delaware, the United
States District Court for the Northern District of Illinois and the Circuit
Court of Cook County in Chicago, Illinois alleging breaches of fiduciary duty,
negligence in connection with Caremark's conduct of the business and lack of
corporate controls, and seeking unspecified damages, attorneys' fees and
expenses. In June 1996, the parties entered into a Stipulation and Agreement of
Compromise and Settlement which established proposed terms for the settlement of
the case. The Delaware court conducted a hearing on August 16, 1996 to consider
the proposed settlement and entered an order on September 26, 1996 approving the
settlement. The settlement does not provide for the payment of any damages by
any defendant, although plaintiffs were awarded $869,500 in attorneys fees and
expenses in conjunction with approval of the settlement. The actions in the
northern District of Illinois and Cook County, which had been stayed pending
revolution of the Delaware Case, have now been dismissed.
In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of a health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys' fees and expenses. In July 1996, these plaintiffs also
served (but have not yet filed) a separate lawsuit in the Minnesota State Court
in the County of Hennepin against a subsidiary of Caremark purporting to be on
behalf of a class and alleging all of the claims contained in the complaint
filed with the Minnesota federal court other than the federal claims contained
therein. The complaint seeks unspecified damages, attorneys' fees and expenses
and an award of punitive damages. In July 1995, another patient of the same
physician filed a separate complaint in the District of South Dakota against the
physician, Caremark and another corporation alleging violations of the federal
laws prohibiting payment of remuneration to induce referral of Medicare and
Medicaid beneficiaries, and the federal mail fraud and conspiracy statutes. The
complaint also alleges the intentional infliction of emotional distress and
seeks trebling of at least $15.9 million in general damages, attorneys' fees and
costs, and an award of punitive damages. In August 1995, the parties to the case
filed in South Dakota agreed to a stay of all proceedings until final judgment
has been entered in a criminal case that is presently pending against this
physician. The Company intends to defend these cases vigorously. Management is
unable at this time to estimate the impact, if any, of the ultimate resolution
of these matters.
Beginning in September 1994, Caremark was named as a defendant in a series
of new lawsuits added to a pending group of actions brought in 1993 under the
antitrust laws by local and chain retail pharmacies against brand name
pharmaceutical manufacturers, wholesalers and prescription benefit managers
other than Caremark. The new lawsuits, filed in federal district courts in at
least 38 states (including the United States District Court for the Northern
District of Illinois), allege that at least 24 pharmaceutical manufacturers
provided unlawful price and service discounts to certain favored buyers and
conspired among themselves to deny similar discounts to the complaining retail
pharmacies (approximately 3,900 in number). The complaints charge that certain
defendant prescription benefit managers, including Caremark, were favored buyers
who knowingly induced or received discriminatory prices from the manufacturers,
in violation of the Robinson-Patman Act. Each complaint seeks unspecified treble
damages, declaratory and equitable relief, and attorneys' fees and expenses. All
of these actions have been transferred by the Judicial Panel for Multidistrict
Litigation
41
<PAGE> 42
MEDPARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
to the United States District Court for the Northern District of Illinois for
coordinated pretrial procedures. Caremark was not named in the class action. In
April 1995, the Court entered a stay of pretrial proceedings as to certain
Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act
claims brought against Caremark, pending the conclusion of a first trial of
certain of such claims brought by a limited number of plaintiffs against five
defendants not including Caremark. On July 1, 1996, the district court directed
entry of a partial final order in the class action approving an amended
settlement with certain of pharmaceutical manufacturers. The amended settlement
provides for a cash payment of approximately $351.0 million to class members in
settlement of conspiracy claims as well as a commitment from the settling
manufacturers to abide by certain injunctive provisions. All class action claims
against non-settling manufacturers as well as all opt out and other claims
generally, including all Robinson-Patman Act claims against Caremark, remain
unaffected by the settlement. The district court also certified to the court of
appeals for interlocutory review certain orders relating to non-settled
conspiracy claims against the pharmaceuticals manufacturers and wholesalers.
These interlocutory orders do not relate to any of the claims brought against
Caremark. The Company intends to defend these cases vigorously. Although
management believes, based on information currently available, that the ultimate
resolution of this matter is not likely to have a material adverse effect on the
operating results and financial condition of the Company, there can be no
assurance, that the ultimate resolution of this matter, if adversely determined,
would not have a material adverse effect on the operating results and financial
condition of the Company.
In December 1994, Caremark was notified by the Federal Trade Commission
(the "FTC") that it was conducting a civil investigation of the industry
concerning whether acquisitions, alliances, agreements or activities between
pharmacy benefit managers and pharmaceutical manufacturers, including Caremark's
alliance agreements with certain drug manufacturers, violate Sections 3 or 7 of
the Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of this investigation are not currently
determinable. Under the statutes, if violations are found, the FTC could seek
remedies in the form of injunctive relief to set aside or modify Caremark's
alliance agreements and an order to cease and desist from certain marketing
practices and from entering into or continuing with certain types of agreements.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.
In May 1996, two stockholders, each purporting to represent a class, filed
complaints against Caremark and each of its directors in the Court of Chancery
of the State of Delaware alleging breaches of the directors' fiduciary duty in
connection with Caremark's then proposed merger with the Company. The complaints
seek unspecified damages, injunctive relief, and attorneys' fees and expenses.
The Company believes these complaints will not have a material adverse effect on
the operating results and financial condition of the Company.
Although the Company cannot predict with certainty the outcome of
proceedings described above, based on information currently available,
management believes that the ultimate resolution of such proceedings,
individually and in the aggregate is not likely to have a material adverse
effect on the Company.
The Company is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Management does not
believe that the result of such commitments, claims and litigation, individually
or in the aggregate, will have a material adverse effect on the Company's
business or its results of operations, cash flows or financial condition.
42
<PAGE> 43
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following are filed as Exhibits to this Report:
Exhibit (23)-1 Consent of Ernst & Young LLP.
Exhibit (27) Financial Data Schedule (for SEC use only).
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 5, 1996
MedPartners, Inc.
By /s/ Harold O. Knight, Jr.
----------------------------------
Harold O. Knight, Jr.
Executive Vice President
and Chief Financial Officer
<PAGE> 1
EXHIBIT (23)-1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated October 10, 1996, relating to the
financial statements of MedPartners, Inc., in the Current Report on Form 8-K of
MedPartners, Inc.
ERNST & YOUNG LLP
Birmingham, Alabama
December 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDPARTNERS, INC. FOR THE YEAR ENDED DECEMBER 31, 1995,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 84,460
<SECURITIES> 84,067
<RECEIVABLES> 580,787
<ALLOWANCES> 80,077
<INVENTORY> 122,279
<CURRENT-ASSETS> 831,099
<PP&E> 454,658
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,804,999
<CURRENT-LIABILITIES> 640,285
<BONDS> 528,921
0
0
<COMMON> 142
<OTHER-SE> 593,598
<TOTAL-LIABILITY-AND-EQUITY> 1,804,999
<SALES> 0
<TOTAL-REVENUES> 3,533,410
<CGS> 0
<TOTAL-COSTS> 3,355,447
<OTHER-EXPENSES> 152,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,556
<INCOME-PRETAX> 7,435
<INCOME-TAX> (15,859)
<INCOME-CONTINUING> 23,294
<DISCONTINUED> (136,528)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,234)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
